Sources of Income for Income Tax

•   Employment
•   Business
•   Investment
•   Other Sources

EMPLOYMENT INCOME

•   Income from employment of an individual should be accounted for income tax purpose on cash basis.
•   Deductions are not allowed in ascertaining employment income.
•   When an Employee gets more than Rs. 150,000/- per month the Employer can deduct PAYE and send it to IRD.
•   Cash and non-cash benefits will be treated as Employment Income.

BUSINESS INCOME

Business includes a trade & profession (Doctors, Lawyers etc).

Main deductions (Business / Investment)

Expenses relevant with the production of income shall be allowed and follow the following rules:

• 1. Capital expenses shall not be allowed as expense. capital nature shall include the expense that benefits over 12 months.
• 2. Interest expense that is incurred for the Production of income or incurred for the purchase of asset, which contributes for the production of income in the year of     assessment shall be allowed.
• 3. Cost of sales shall be allowed. The values of Closing Stocks are lower of cost or market value whichever is less.
• 4. Repairs or improvements on depreciable assets, whether they are of a capital nature or not, are deductible, If Building – 5% on WRV & for others 20%. The % on     WRV and the excess at the end shall be added to the depreciation basis of the assets in the year.
• 5. Research & Dev. Expenses and agricultural startup expenses are deductible, whether they are of a capital nature or not.
• 6. Capital Allowances shall be deductible as per 2nd (Enhanced C.A) or 4th (Normal C.A) Schedules of this Act as below:

        4th Schedule – Capital Allowance on Depreciable Assets:

•           Building - 5%
•           Intangible assets other than Goodwill –Actual useful time or 5%
•           Others – 20%
• 7. Business or Investment Losses shall be deductible from any income and also can carry forward to 06 years. But exempt business, accordingly, it shall be     deductible.

Deductions rules in Income General deductions (for Persons)

• 1. No deductions for Employment Income
• 2. The followings shall not be allowed for computing person’s Income.
•           Domestic expenses
•           Tax payable under the Act
•           Payments for breach of any govt law
•           Expenditure of exempts income or Expenditure of income for which final WHT is paid
•           Retirement contributions
•           Dividend of a Company
•           Entertainment expenses
•           Provisions Bad Debts etc..
•           Amount incurred for lotteries or gambling taxes or levied of IRD.
• 3. A WHT deducted by a Person, should be paid to IRD, before claiming it.
• 4. No deduction shall be allowed except as expressly permitted by this Act.
• 5. When more than 1 deductions apply, the most specific deductions shall be applied.

INVESTMENT INCOME

Investment Income includes the income earned from the Assets or Properties. Ex: Rental income from Building.

Assessable Income (AI)

Resident - the person’s income from employment, business, investment or other source for that year, wherever the source arises.

Non-resident – the person’s income from the employment, business, investment or other source for that year, to the extent that the income arises in or is derived from a source in Sri Lanka.

“Person” means an individual or entity and includes a body of persons corporate or unincorporate, an executor, non-governmental organization and charitable institution;

Taxable Income (TI)

Taxable Income is calculated, when deducting the following Qualifying Payments & Reliefs (5th Schedule to this Act) from the Assessable Income

Exempted Income or Income on which final WHT deducted is not part of AI or TI

Qualifying Payments & reliefs

Qualifying Payments & reliefs:
The qualifying payments referred to in section 52 shall be as follows:

• Donation made by an individual or entity in money to an approved charitable institution
Subject to a maximum of – In the case of an individual, 1/3rd of TI or 1/4th of the AI of the individual or Rs.75, 000 whichever is less; In the case of an entity, 1/5th of the taxable income (TI) or 1/6th of the assessable income (AI) of the entity or Rs.500, 000 whichever is less.

• Donation made by an individual or entity in money or otherwise to the following:-

• i. The Government
• ii. A local authority
• iii. Any Higher Education Institution
• iv. Buddhist and Pali University of Sri Lanka or any Higher Educational Institution
• v. A fund established by the Government
• vi. A fund established by a local authority and approved by the Minister
• vii. Sevana Fund
• viii. A fund established by a Provincial Council and approved by the Minister
• ix. Api Wenuwen Api Fund
• x. National Kidney Fund
• xi. Profits remitted to the President’s Fund

Deductions rules in Income General deductions (for Persons)

• 1. A relief up to Rs 1.8 Million, given to the resident (except trustee, receiver, executor or liquidator) or Non- resident with Sri Lankan Citizen. But this relief is not given,     if a Person is having only (Capital) gain from the realization of investment assets.
• 2. If individual, 25% of the total Rental Income.

Exemptions (Up to Amendment Act 02 of 2025)

• 1. Interest accruing to or derived by any outside person to the Person in Sri Lanka or Government w.e.f 01.04.2018
• 2. Interest accruing to or derived from any foreign currency account in any commercial bank
• 3. A sum received by a Corporation out of Consolidated Fund or any loan from Government
• 4. With effect from 01.04.2018, any income earned by :
•           Any non-resident person by way of interest, discount or realization of any gain on any sovereign bond issued by the Government
• 5. Dividend paid out of the Dividend received
• 6. Dividends from and gains on the realization of shares of a non-resident Company, where the shareholder has substantial participation
• 7. The gains and profits earned or derived by any person from:
•           Agro Farming before processing / manufacturing w.e.f 01.04.2019 and ended by 31.03.2024;
•           IT Service – exemption ended w.e.f 01.04.2024.
•           Any service rendered in or outside of Sri Lanka and the payment received in foreign currency through a Bank in Sri Lanka. – exemption ended w.e.f              01.04.2025.
•           Any foreign source (other than item iii), where such gains or profits earned in foreign currency and send to Sri Lanka via a Bank - exemption ended w.e.f              01.04.2025.
• 8. Any amount derived by :
•           Any non-resident person from laboratory services or standards certification services
•           Any religious institutions, registered with the authority, by way of grants or donations

Different Income Tax Rates (1st Schedule to this Act)

• 1. Individuals
•           Tax Free Allowance – 1,800,000/-
                First 1,000,000/- @ 6%,
                2nd 500,000/- @ 18%,
                3rd 500,000/- @ 24%
                5th 500,000/- @ 30%, Balance @ 36%
                 Above 4.3 Million will be taxed @ 36%
•           (Capital) Gain from the realization of assets – 15%
•           Income from Employment on Pension, retiring gratuity, compensation for loss of Office etc
               1st Rs.10, 000,000 - no tax
               2nd Rs.10,000,000 @ 6%
               On balance @ 12%
•           Business income of Betting & Gamling, Manufactur & Sale or Import & sale of Liquor or tobacco – 45%
• 2. Partnership
•           Partnership tax on taxable income.
•                     a. For first 1mn @ 0%
•                     b. And any amount above 1mn @ 6%
•           Partnership Tax can be set-off against to the Individual tax payable of the Partner. No refund is claimable, but, it can carry forward to next y/a.
•           Partnership is liable to pay income tax for a gain from the realization of Investment at 10%.
• 3. Companies
•           Batting, Gaming & Gambling, Liquor & tobacco – 45%
•           For Export of Services - 15%
•           For others 30%
•           Gains from realization of investment assets - 30%
• 4. Capital gain tax (CGT)
•           CGT is charged on the gains arise from realization of investment assets.
•           Investment assets means capital asset held as part of an investment.
•           It excludes,
•                     a. Principal place of residence (owned continuously for 3 years and lived in for 2 years)
•                     b. Trading stock
•                     c. Depreciable assets
•                     d. Asset utilized was not in any manner connected to the business
•                     e. Gain below Rs. 50,000 is exempt to resident individual
•           Calculation
•                     a. Gain/Loss= Consideration received (Sec.38)
                           Less- Cost of an asset/liability (Sec.37)
•           If any property has purchased before 2017/09/30,The Market Value on this date will be the cost of the property.
•           Tax rate :-
                          10% - Individual, Partnership, Trust, Unit Trusts, Charitable Institution
                          30% - Other Companies

APIT (PAYE)

•   APIT tax has re-introduced w.e.f 01/1/2023
•   Exemption up to 150,000/- monthly salary & above this threshold will be liable based on APIT Tables.

AIT (WHT)

•   Exemption up to 100,000/-
•   AIT on Resident Person effective from 01.01.2020
•                 1. Royalty, Charge, Premium or Retirement Payment – 14%
•                 ;2. Service Fee for individual – 5
•                 ;3. Interest or discount – 10%
•                 4. Natural resource payment – 14%
•                 5. Rent – For Resident Person – 10%
•                 6. Winning of lottery, reward, betting or gambling – 14%
•                 7. Sale of Gem at Auction of National Gem & Jewellery Authority – 2.5%
•                 8. Dividend – 15% now considered under Final Tax Payments (Final Tax)
•   WHT for Non-Resident Person subject to DTAA
        Will be as below:
•                 1. Dividend - (Exempt up to 01.01.2023)
•                 2. Interest (Excluding Exempt Int.) – 10%(Non-Resident but Citizen can get the tax free allowance of 1.8 Million)
•                 3. Any other payments - 14% Excluding below:
                     Payment with respect to land, sea, air transport or telecommunication service – 2%
•   A Person is expected to open TIN and declare the Income in his / her return and pay tax after deducting any APIT or WHT already paid.