Tax Information Guide 2025/26
1. Benefits of Paying Taxes
Taxes fund infrastructure projects, education, healthcare, and public services that benefit society. By paying your taxes, you contribute to national development and enjoy the benefits of a functioning society.
Why It Matters
Your tax contributions directly support the development and maintenance of public services that everyone uses, from roads and hospitals to schools and emergency services.
2. Tax Categories Based on Job Type
Different employment types have different tax obligations and payment schedules. Understanding your category is crucial for proper tax compliance.
Local Employee
- Tax Deduction: PAYE / APIT deducted monthly by employer
- Payment: Tax deducted at source each month
- Filing: Employer handles most filings, but you must submit final return
- Documents: Receive Form T10 (tax deduction certificate) from employer
Foreign Employee
- Tax Deduction: No automatic tax deduction by employer
- Payment: Self-assessment required
- Timing: After first 1.8 million income, tax due on 15th of following month
- Filing: Must file final annual return
Foreign ISP/Freelancer
- Tax Payment: Self-assessment with quarterly installments
- Due Dates: 15th Aug, Nov, Feb, May
- Income Period: For income earned April-June 2025, first payment due Aug 15, 2025
- Expenses: Can deduct expenses directly involved in earnings
- Assets: Can claim depreciation on business assets
Key Distinction
The main difference between categories is who handles tax payments: employer (local employee), self monthly (foreign employee), or self quarterly (freelancer/ISP). Make sure you know which category applies to your situation.
3. Updated Tax Rules
From April 1, 2025, freelancers and independent service providers in Sri Lanka are subject to updated income tax rules, particularly concerning foreign currency income. Whether you offer digital services, work remotely, or run a side business, understanding how the Inland Revenue Department (IRD) classifies your income is crucial for staying compliant.
Key Change
The new rules specifically address foreign currency income earned by freelancers and digital service providers, requiring proper declaration and taxation.
4. Basic Terms of Tax Filing
Understanding these key terms is essential for proper tax compliance:
- IRD - Inland Revenue Department of Sri Lanka
- RAMIS - Revenue Administration Management Information System (digital tax platform)
- TIN - Taxpayer Identification Number
- PIN - Personal Identification Number (for RAMIS access)
- Tax Type - For ISP it should be IIT (Individual Income Tax)
- Taxable Year / Financial Year / Fiscal Year - 1st April 2025 to 31st March 2026
- T10 - Local employee tax deduction certificate issued by employer
- DIN - Document Identification Number to make payments
- WHT - Withholding Tax (tax deducted at source)
- Tax computation - Summary of your tax calculation
- Draft return - Preview before final submission (review before submitting)
- Final return - Final submission to IRD
- Acknowledgement - Reference number issued for each submission (save as PDF)
How to Check Your Tax Type
For Independent Service Providers, your tax type should be IIT (Individual Income Tax). You can verify your tax type through the RAMIS system.
How to check tax type - Step by step guide5. Details Required for IRD Submission
When filing your tax return, you need to provide comprehensive information to the IRD. Here are the key details required:
1. Tax Computation
A summary of your tax calculation including:
- Total income from all sources
- Allowable deductions
- Taxable income
- Tax already paid (if any)
- Balance tax payable
2. Assets and Liabilities
Immovable Assets:
- Land
- House/Buildings
- Commercial properties
Movable Assets:
- Vehicles
3. Financial Information
Liabilities:
- Credit card balances
- Loans
- Lease agreements
Income Sources:
- Bank account balances
- Interest income
- Dividend income
- Rental income
Documentation Requirement
Maintain proper documentation for all assets, liabilities, and income sources. The IRD may request proof during an audit. Keep records for at least 5 years.
6. Available Tax Deductions
Tax deductions reduce your taxable income, thereby lowering your tax liability. Here are the main deductions available:
1. Personal Relief
Amount: LKR 1.8 million per year
Details: First LKR 1.8 million of your total assessable income (local + foreign) is completely tax-exempt.
Applies to: All taxpayers regardless of income source.
2. Solar Installation
Amount: Up to LKR 600,000 per year
Details: Deduction for installation of solar power systems.
Requirements: Proper documentation and certification required.
3. Rent Income Deduction
Amount: 25% of rental income
Details: Can deduct 25% of rental income as maintenance and repair allowance.
Documentation: Keep receipts for actual expenses if they exceed 25%.
4. Approved Donations
Amount: Varies based on donation
Details: Donations to approved charitable organizations are tax-deductible.
List: Check approved organizations at:
IRD Approved Charity ListCombined Deduction Example
If you earn LKR 3,000,000 and have:
- Personal relief: LKR 1,800,000
- Solar installation: LKR 600,000
- Total deductions: LKR 2,400,000
- Taxable income: LKR 600,000
- Tax payable: 6% of LKR 600,000 = LKR 36,000
Without deductions, tax would be LKR 90,000 (saving of LKR 54,000).
7. Penalties for Non-Compliance
Failure to comply with tax regulations can result in significant penalties. Here are the key penalties to be aware of:
1. Failure to register or notify changes in taxpayer (Sec. 177)
Summary
Small Summary: Must register within 30 days after basis period ends. Failure to register or notify changes results in Rs. 50,000 penalty.
A person with taxable income must register with CGIR (commissioner general of inland revenue) within 30 days after the basis period ends and notify any changes (name, address, business location). Failure results in Rs. 50,000 penalty.
Example
Mr. A has taxable income of Rs. 750,000 for Y/A 2020/21 but fails to register by 30th April 2021.
Penalty: Rs. 50,000
2. Late filing of tax returns (Sec. 178)
Summary
Small Summary: Greater of: 5% tax + 1% per month OR Rs. 50,000 + Rs. 10,000 per month. Capped at Rs. 400,000.
The greater of:
- 5% of tax owed + 1% for each month of continued non-compliance
- Rs. 50,000 + Rs. 10,000 for each month after November 30, 2025
Capped at: Rs. 400,000
Example
Mr. B (wholesale/retail trader) filed return on 31st March 2022 instead of 30th Nov 2021. Tax due: Rs. 2,000,000
- 5% penalty: Rs. 100,000
- 4 months late: 4 × 1% = Rs. 80,000
- Total penalty: Rs. 180,000
Plus interest at 1.5% per month on total tax
3. Late Payments (Sec. 179)
Summary
Small Summary: 20% penalty for late tax payments, 10% for late instalments after 14 days grace period.
- Tax payment delay: 20% of tax due but not paid (if unpaid within 14 days of due date)
- Instalment payment delay: 10% of tax due but not paid (if unpaid within 14 days of due date)
- No penalty if extension granted and paid within extension period
Example
If you fail to pay Rs. 100,000 tax by due date + 14 days:
Penalty: 20% of Rs. 100,000 = Rs. 20,000
4. Negligent or Fraudulent under payment (Sec. 180)
Summary
Small Summary: 25% penalty for underpayment, 75% if underpayment > Rs. 10M or >25% of tax liability.
Penalty for underpayment due to incorrect statement or material omission:
- Standard: 25% of underpayment
- Enhanced (if underpayment > Rs. 10M or >25% of tax liability): 75% of underpayment
Example
Mr. X declared tax payable Rs. 200,000, actual Rs. 500,000 (underpayment Rs. 300,000)
25% of tax liability = Rs. 50,000
Underpayment Rs. 300,000 > 25% of liability
Penalty: 75% of Rs. 300,000 = Rs. 225,000
5. False or misleading statements (Sec. 181)
Summary
Small Summary: Greater of Rs. 50,000 OR amount by which tax reduced/refund increased due to false statement.
Penalty for false/misleading statements to tax officials:
- Greater of Rs. 50,000 OR the amount by which tax would have been reduced/refund increased
- Applies to documents, information, replies to questions
- No penalty if person didn't know statement was false
Example
Mr. D understated debtors by Rs. 100,000, reducing tax by Rs. 28,000
Penalty: Rs. 50,000 (greater than Rs. 28,000)
6. Failure to maintain documents or provide facilities (Sec. 182)
Summary
Small Summary: Rs. 1,000 daily for not keeping records, Rs. 10,000 max for not assisting officials. Warning given first.
- Document maintenance failure: Rs. 1,000 per day until compliance
- Facilities/assistance failure: Up to Rs. 10,000
- Warning notice issued before penalty assessment
- No penalty if compliance within warning period
Example
If you fail to maintain documents for 30 days after warning:
Penalty: 30 days × Rs. 1,000 = Rs. 30,000
7. Failure to comply with 3rd party notice (Sec. 183)
Summary
Small Summary: 25% penalty for third parties who fail to pay tax on behalf of defaulters when notified by CGIR.
Failure to comply with section 170 notice (third party payment):
Penalty: 25% of difference between amount payable and amount paid by due date
Example
Mr. X (third-party debtor) asked to pay Rs. 300,000 on behalf of defaulter but fails to comply
Penalty: 25% of Rs. 300,000 = Rs. 75,000
8. Transfer pricing penalties (Sec. 184)
Summary
Small Summary: Various penalties from 1-2% of transaction value to Rs. 100,000-250,000 for transfer pricing violations.
Failure to comply with transfer pricing documentation:
- No documentation maintained: Up to 1% of transaction value
- Documents not submitted: Up to Rs. 250,000
- Non-disclosure of information: Up to 2% of transaction value
- Late submission: Up to Rs. 100,000
- Concealment/evasion: 200% of additional tax
Example
Transaction value: Rs. 50,000,000 with no documentation:
Penalty: Up to 1% of Rs. 50,000,000 = Rs. 500,000
9. Failure to comply with notice to give information (Sec. 185)
Summary
Small Summary: Up to Rs. 1,000,000 penalty for not providing requested information. Warning with 30-day compliance period.
- Penalty: Up to Rs. 1,000,000 for failure to provide requested information
- Warning notice issued with 30-day compliance period
- No penalty if compliance within warning period
- CGIR may waive penalty for reasonable cause
- 5-year limitation period for penalty assessment
Example
Failure to provide requested documents after warning:
Penalty: Up to Rs. 1,000,000 as determined by Commissioner-General
More Penalty Details
For complete details on all penalties, refer to the official Inland Revenue Act:
Download Full Inland Revenue Act (PDF) සිංහල (PDF) தமிழ் (PDF)8. What Part of Your Income Is Tax-Free?
The first LKR 1,800,000 of your total assessable income (local + foreign) is completely tax-exempt. This exemption applies regardless of whether the income is earned locally or from abroad.
Key Point
This tax-free threshold applies to your total income from all sources, not per source. If you have multiple income streams, they are combined before applying the exemption.
9. Tax Slabs
After the tax-free allowance, your income is taxed according to the following slabs:
Tax-Free Allowance
First LKR 1,800,000
0% Tax
Next Tier
Next LKR 1,000,000
6% Tax
Balance Income
Remaining Amount
15% Tax
Example Calculation
If your total foreign income is LKR 3,000,000:
- LKR 1,800,000 – Exempt
- Next LKR 1,000,000 – 6% = LKR 60,000
- Remaining LKR 200,000 – 15% = LKR 30,000
- Total Tax Payable: LKR 90,000
10. Can You Deduct Expenses?
Yes, if you're a freelancer or service provider, you can deduct business-related expenses from your foreign income before calculating tax.
Asset Depreciation
You can claim depreciation on business assets over five years, with 20% depreciation each year. However, the depreciation period cannot exceed 5 years from the original purchase date.
Example: If you purchase a laptop for LKR 150,000 for your freelance business:
- Year 1: 20% = LKR 30,000 deduction
- Year 2: 20% = LKR 30,000 deduction
- Year 3: 20% = LKR 30,000 deduction
- Year 4: 20% = LKR 30,000 deduction
- Year 5: 20% = LKR 30,000 deduction
- Total: LKR 150,000 fully depreciated over 5 years
Documentation Requirement
Maintain proper documentation and receipts for all claimed deductions, including purchase receipts for depreciating assets. The IRD may request proof of these expenses during an audit.
11. When Do You Need to Pay?
You must make quarterly installment payments as follows:
1st Installment
Due Date: 15th August 2025
First payment of the tax year for freelancers and independent service providers.
2nd Installment
Due Date: 15th November 2025
Second quarterly payment for the tax year.
3rd Installment
Due Date: 15th February 2026
Third quarterly payment as we approach the end of the tax year.
4th Installment
Due Date: 15th May 2026
Final payment for the 2025-26 tax year, after the year ends.
Balance Payment Due Date
If there's any balance tax payable after the installments, it must be paid on or before 30th September 2026.
Final Return Deadline
The final tax return must be submitted by 30th November 2026.
12. Q&A Session
Have Questions?
If you have any personal tax-related questions or need clarification on any topic discussed, we're here to help!
Visit our Q&A platform where you can find answers to common questions or ask your own:
Visit TeLiAsk Q&A PlatformThank You!
We sincerely thank the Swivel Group for allowing us to present this important tax information. We hope this presentation has been informative and helpful for understanding your tax obligations as professionals in Sri Lanka.