How Are Capital Allowances Calculated in Sri Lanka?

You bought a Rs. 600,000 laptop for your freelance work and you want to deduct it from your income. Sensible. But here is where a lot of people get it wrong: you cannot knock the whole Rs. 600,000 off this year's income. Equipment is a capital asset, and capital allowances in Sri Lanka spread that deduction across the years you actually use the thing.

This trips up freelancers and small-business owners constantly. They either claim the full cost in year one (an over-claim the IRD will reverse) or they get confused and claim nothing at all (leaving money on the table). The rules are not complicated once you see them. They are set out in the Fourth Schedule of the Inland Revenue Act, and they follow one simple method.

Let me walk you through it, with a real laptop and real numbers.

What is a capital allowance, and why can't I deduct equipment all at once?

A capital allowance is the tax system's version of depreciation. When you buy something that lasts more than a year (a laptop, a camera, machinery, a building), you do not use it up in one year, so the tax rules do not let you deduct it in one year either. Instead you deduct a slice of its cost each year over its useful life.

The logic is about matching. A Rs. 600,000 laptop helps you earn income for several years, so its cost is matched against income across those years, not dumped into one. Day-to-day running costs (your internet bill, software subscriptions, printer paper) are different. Those are consumed as you go, so they are deducted in full in the year you incur them. For where that line sits, see our guide on what expenses a Sri Lankan freelancer can deduct.

How do I calculate the capital allowance?

Sri Lanka uses the straight-line method. That means an equal deduction every year. The formula is simple:

Annual allowance = cost of the asset ÷ useful life in years

Take your Rs. 600,000 laptop. A computer is a Class 1 asset, and Class 1 has a useful life of five years. So:

Rs. 600,000 ÷ 5 = Rs. 120,000 per year

You deduct Rs. 120,000 from your business income each year for five years. Here is how it runs, with the written down value (the cost minus allowances claimed so far) shown at each year end:

By the end of year five, the full Rs. 600,000 has been deducted, just spread evenly. A camera, a printer, or office furniture works the same way at five years. The only thing that changes between assets is the number of years, which depends on the class.

What are the useful-life periods for each asset class?

The Fourth Schedule sorts every depreciable asset into one of six classes, and each class has a fixed number of years. This is the table that decides your annual deduction.

For most freelancers and small businesses, almost everything you buy lands at five years. Your laptop is Class 1. Your camera, desk, and chair are Class 3. A delivery van or workshop machine is Class 2. The 20-year period only bites if you own the building you work from. Notice the catch-all in Class 3: "any depreciable asset not in another class." If you cannot find your asset in classes 1, 2, 4, 5, or 6, it falls here at five years.

Can I claim a capital allowance on my car or motorbike?

This is the one that costs people money, so read it carefully. You cannot claim a capital allowance on an ordinary road vehicle. A personal car you also use for client visits does not qualify, no matter how much business driving you do.

The Fourth Schedule allows a capital allowance on a road vehicle only if it is a commercial vehicle or a motorcycle.

So if you are a freelancer who bought a car, you do not write it down through capital allowances. A delivery rider who bought a motorcycle does. A photographer who bought a van to haul equipment likely does, because a van is a goods vehicle.

What happens when I sell or scrap the equipment?

Selling a depreciable asset is not treated as a capital gain. Instead the tax system trues up the allowances you claimed against what the asset turned out to be worth. It compares your sale price (the consideration) with the written down value at the time of sale.

First, a timing point: in the year you sell an asset, you do not claim the normal allowance for that year, because you no longer own and use it at year end. So go back to the written down value from the previous year end.

Take the laptop again. Say you sell it during year three. You claimed allowances in years one and two only, so the written down value at the point of sale is Rs. 360,000 (the year-two figure).

• If you sell for less than Rs. 360,000, you get a balancing allowance. Sell for Rs. 200,000 and the balancing allowance is Rs. 360,000 minus Rs. 200,000 = Rs. 160,000, which you deduct from your business income. The asset lost more value than your allowances assumed, so you get the shortfall back.
• If you sell for more than Rs. 360,000, the excess is an assessable charge. Sell for Rs. 450,000 and the assessable charge is Rs. 450,000 minus Rs. 360,000 = Rs. 90,000, which is added to your business income. You claimed more depreciation than the asset actually suffered, so the difference is recovered as income.

A scrapped or destroyed asset works the same way. If it is worthless, your consideration is zero, so the whole remaining written down value becomes a balancing allowance you can deduct.

What if I only use the equipment partly for business?

Plenty of freelancers use one laptop for client work in the day and Netflix at night. The Fourth Schedule handles this through apportionment. You only claim the allowance on the share used to produce business income, measured by the market value of the business-use portion.

If your Rs. 600,000 laptop is 70% business and 30% personal, your annual allowance is 70% of Rs. 120,000, which is Rs. 84,000, not the full Rs. 120,000. Be honest and consistent with the split, because the same logic the IRD uses for home-office costs applies here. Our guide to home office expenses for freelancers covers how to set a defensible business-use percentage.

Getting the allowance right matters because it feeds straight into your taxable business income, which then runs through the progressive slabs covered in how to calculate your income tax in Sri Lanka. Over-claim and you risk a reversal with penalties. Under-claim and you pay more tax than you owe. And if you are still getting your head around how freelance income is taxed at all, start with what changed for Sri Lankan freelancers.

Capital allowances feel fiddly the first time, but the shape is simple. Find the asset's class, divide the cost by the useful life, and deduct that slice each year. Skip the year-one full deduction, skip the personal car, and true up properly when you sell. Do that and your equipment is written off correctly, year after year, with nothing left on the table and nothing the IRD can claw back.