Sri Lanka has enacted the Inland Revenue (Amendment) Act, No. 11 of 2026, introducing extensive changes to the Inland Revenue Act, No. 24 of 2017, including revised capital gains tax rates, expanded withholding tax obligations, new Taxpayer Identification Number (TIN) requirements, changes to residence rules, and enhanced compliance and enforcement measures.
Sri Lanka has enacted a wide-ranging set of tax reforms under the Inland Revenue (Amendment) Act, No. 11 of 2026, introducing changes to income tax, withholding tax (WHT), capital gains tax, taxpayer registration and compliance requirements.
The legislation was certified on 3 June 2026, while the Inland Revenue Department (IRD) outlined the key measures in Notice SEC/PN/IT/2026/02 issued on 8 June.
The amendments affect individuals, businesses, financial institutions and withholding agents, with several provisions taking effect retrospectively and others applying from the 2025/2026 and 2026/2027 years of assessment.
Withholding tax regime expanded
The Act introduces a series of withholding tax amendments.
From 1 April 2026, the National Gem and Jewellery Authority must submit monthly tax returns containing information specified by the Commissioner-General.
Resident individuals earning interest income from bank and financial institution deposits may submit self-declarations from 1 April 2025 if they do not derive taxable income during the relevant year. False declarations may attract penalties of up to LKR 200,000.
The scope of the 5% withholding tax on service fee payments to resident individuals has also been significantly broadened. Effective from 3 June 2026, the tax applies to a wide range of professions and service providers, including auditors, personal trainers, coaches, artists, actors, photographers, counsellors, dentists, veterinarians, information technology specialists, translators, writers and others where monthly payments exceed LKR 100,000.
Withholding agents that fail to comply with annual reporting requirements may face penalties of up to LKR 200,000 per year of assessment.
Selected professions added to the 5% WHT regime
| Category | Examples |
| Professional services | Auditors, valuers, advisors, translators |
| Creative services | Artists, actors, dancers, singers, musicians |
| Media and marketing | Photographers, videographers, social media specialists, brand ambassadors |
| Technical services | Information technology specialists, electricians |
| Personal services | Personal trainers, beauticians, therapists, counsellors |
| Other services | Event organisers, cooks, debt collectors, sports persons |
Pass-through tax treatment introduced for unit trusts and mutual funds
A new pass-through taxation framework has been established for unit trusts and mutual funds. These entities must provide unit holders with annual certificates detailing income, exempt amounts and withholding tax information within five months of the end of the year of assessment.
Entities that fail to issue the required certificates will instead be treated as companies and become liable for tax. The new regime applies from 1 April 2025, with further guidance expected from the IRD.
Motor vehicle gains excluded from taxable income
Under the revised rules, gains from the realisation of motor vehicles will no longer be treated as other income under Section 8 of the Inland Revenue Act where the vehicles are neither trading stock nor depreciable assets eligible for capital allowances. Corresponding losses will also not be deductible. The measure applies retrospectively from 1 April 2024.
Cash transaction restrictions revised
The Act amends provisions designed to discourage large cash transactions. Payments of LKR 500,000 or more made in cash or by non-approved methods in connection with a single transaction or related transactions may not be claimed as deductible expenses or included in the tax cost of an asset.
However, the amendments now allow cash deposits made directly into the recipient’s bank account to qualify as an approved payment method. This change is effective from 8 May 2023.
New relief for gifts, donations and life insurance proceeds
Transfers of assets by gift or donation to the Government of Sri Lanka or qualifying universities will not trigger tax because consideration for the transfer will be deemed equal to the asset’s net cost. This provision applies from 3 June 2026.
Donations to the Government or government-established funds that qualify as deductible payments may now be carried forward to future years of assessment after deduction from total assessable income. The change takes effect from 1 April 2025.
The legislation also introduces Section 52A, which clarifies the treatment of amounts received under life insurance policies. Payments received by policyholders or beneficiaries upon death, maturity or surrender of a policy will generally be excluded from assessable income, subject to specified exceptions. The measure applies from 1 April 2025.
Residence rules updated for foreign workers and investors
Several changes have been made to Sri Lanka’s tax residence rules.
Individuals working on Sri Lankan ships who are citizens or subjects of another country will only be taxed as residents on employment income earned from that ship.
In addition, holders of an Investor Category Residence Visa will not be treated as Sri Lankan tax residents from 1 April 2025. The amendments also clarify that individuals working abroad for at least one year under contracts with unrelated foreign employers will not be regarded as Sri Lankan tax residents during the
Statement of Estimated Tax requirement abolished
The requirement to file a Statement of Estimated Tax (SET) has been removed. Quarterly income tax instalments will instead be based on the income tax payable in the immediately preceding year of assessment.
Taxpayers with no taxable income in the prior year or expecting lower taxable income will be able to determine instalments under procedures to be specified by the Commissioner-General.
Return filing relief for employees and senior citizens
From 1 April 2025, individuals whose only income is employment income fully subject to Advance Personal Income Tax (APIT) will generally not be required to maintain an income tax file or submit tax returns.
The exemption also applies where interest income does not exceed LKR 5,000 and no quarterly instalments or final tax payments are due.
Senior citizens will be permitted to file returns either electronically or in writing from the 2025/2026 year of assessment.
TIN registration requirements strengthened
The amendments significantly expand Taxpayer Identification Number (TIN) requirements.
All companies incorporated or registered in Sri Lanka must register with the Commissioner-General within 30 days. TINs will no longer be treated as confidential information and will become mandatory for a range of activities, including opening bank accounts, registering land, registering businesses, obtaining building plan approvals, registering motor vehicles and transferring shares in Sri Lankan companies.
The requirements will take effect once verification procedures are published by the Commissioner-General.
Capital gains tax rates revised and investment incentives introduced
Capital gains tax rates have been revised from 3 June 2026.
| Taxpayer | Capital gains tax rate |
| Individuals and partnerships | 15% |
| Trusts, unit trusts, mutual funds and non-governmental organisations | 30% |
The legislation also introduces a 100% Enhanced Capital Allowance (ECA) from 1 April 2026 for investments exceeding USD 250,000 in depreciable assets used in a new business undertaking in Sri Lanka, excluding intangible assets.
Tax compliance, enforcement and penalty provisions updated
The Act expands information-sharing powers, allowing taxpayer information to be disclosed to the Financial Intelligence Unit of the Central Bank of Sri Lanka, the Inspector-General of Police and the Sri Lanka Accounting and Auditing Standards Monitoring Board for specified purposes.
Default tax recovery procedures have also been strengthened. Beginning with the year of assessment commencing on 1 April 2026, unpaid taxes may be recovered through court proceedings based on certificates issued by the Commissioner-General, subject to appeal safeguards.
Failure to register, file returns, submit annual statements or comply with requests from the Commissioner-General may result in prosecution. Upon conviction, offenders may face fines of up to LKR 400,000, imprisonment for up to six months, or both.
Interest waiver available for outstanding tax liabilities
As part of a relief measure, interest on late payments and underpayments of tax, including surcharge tax and debt repayment levy, will be waived up to the 2024/2025 year of assessment provided the principal tax liability is settled in full by 2 December 2026 or has already been paid.
The amendments represent one of the most extensive overhauls of Sri Lanka’s Inland Revenue framework in recent years, affecting tax administration, compliance obligations, withholding tax procedures and investment-related tax incentives.
