How to Calculate Your Income Tax in Sri Lanka
Most Sri Lankans think income tax is complicated. It's not. The calculation follows five steps, and once you see them laid out with real numbers, you'll wonder why it ever seemed confusing.
This guide walks you through exactly how your income tax is calculated under the Inland Revenue Act for the Year of Assessment 2025/2026 (April 1, 2025 to March 31, 2026). We'll use a realistic example so you can follow along and apply the same logic to your own situation.
Step 1: Add up your total income
Start by totalling your gross income across all sources. Under Sri Lankan tax law, income falls into a few categories:
- Employment income covers salary, wages, bonuses, and benefits from your employer (local or foreign)
- Business income means revenue from freelancing, consulting, or business activities, minus allowable business expenses
- Investment income includes dividends, interest, rental income, capital gains, and winnings
- Other income captures anything that doesn't fit the categories above
If you earn in foreign currency (USD, EUR, GBP, etc.), you must convert to LKR using the official Central Bank of Sri Lanka exchange rate on the date of receipt. Not the date you invoiced. The date the money hit your account.
For business income, your gross revenue isn't what gets taxed. You subtract allowable business expenses first. If you earned Rs. 6,000,000 in freelance income but had Rs. 1,200,000 in legitimate expenses, your business income for tax purposes is Rs. 4,800,000.
Our example
Let's say you're a freelancer with the following income for YoA 2025/2026:
| Source | Amount (LKR) |
|---|---|
| Freelance business income (after expenses) | 4,800,000 |
| Interest on savings | 120,000 |
| Total income | 4,920,000 |
Step 2: Subtract personal relief
Every resident individual in Sri Lanka gets personal relief. For YoA 2025/2026, personal relief is Rs. 1,800,000.
This means the first Rs. 1,800,000 of your income is effectively tax-free.
| Amount (LKR) | |
|---|---|
| Total income | 4,920,000 |
| Less: Personal relief | (1,800,000) |
| Income after relief | 3,120,000 |
Personal relief increased from Rs. 1,200,000 (YoA 2024/2025) to Rs. 1,800,000 for YoA 2025/2026 under the IR Amendment Act No. 2 of 2025. This is a significant change that benefits every taxpayer.
Step 3: Subtract qualifying payments (if any)
Qualifying payments are specific deductions allowed under the Inland Revenue Act. These include:
- Donations to approved charities (capped at the lesser of 1/3 of taxable income or Rs. 75,000)
- Donations to the Government of Sri Lanka
- Film production expenditure (minimum Rs. 5,000,000)
- Cinema construction expenditure (capped at Rs. 25,000,000)
These come off your income after personal relief. Not everyone has qualifying payments, so if you don't, skip straight to Step 4.
For our example, we'll assume no qualifying payments:
| Amount (LKR) | |
|---|---|
| Income after relief | 3,120,000 |
| Less: Qualifying payments | 0 |
| Taxable income | 3,120,000 |
Step 4: Apply progressive tax rates
Sri Lanka uses a progressive tax system. Different portions of your income get taxed at different rates. You only pay the higher rate on the income that falls within that slab, not on everything below it.
Here are the tax slabs for YoA 2025/2026 (updated under the IR Amendment Act No. 2 of 2025):
| Taxable Income Slab | Tax Rate |
|---|---|
| First Rs. 1,000,000 | 6% |
| Next Rs. 500,000 | 18% |
| Next Rs. 500,000 | 24% |
| Next Rs. 500,000 | 30% |
| Balance above Rs. 2,500,000 | 36% |
If you're familiar with last year's slabs, you'll notice the 12% bracket is gone. The Amendment Act removed it entirely for 2025/2026. The first bracket also expanded from Rs. 500,000 to Rs. 1,000,000 at 6%, but the jump from 6% straight to 18% means some taxpayers actually pay more than before.
How this works in practice
Your taxable income of Rs. 3,120,000 gets split across the slabs like this:
| Slab | Income in Slab | Rate | Tax |
|---|---|---|---|
| First Rs. 1,000,000 | 1,000,000 | 6% | 60,000 |
| Next Rs. 500,000 | 500,000 | 18% | 90,000 |
| Next Rs. 500,000 | 500,000 | 24% | 120,000 |
| Next Rs. 500,000 | 500,000 | 30% | 150,000 |
| Balance | 620,000 | 36% | 223,200 |
| Total | 3,120,000 | 643,200 |
Your calculated tax is Rs. 643,200.
A common misconception: if you fall into the "36% bracket," people think all your income is taxed at 36%. That's not how it works. Only the Rs. 620,000 above the Rs. 2,500,000 threshold gets the 36% rate. The first million is still taxed at just 6%.
Step 5: Subtract tax credits
The last step is subtracting any tax credits you've already paid or had deducted at source. This prevents you from being taxed twice on the same income.
Withholding Tax (WHT) credits
If tax was already deducted at source on some of your income (for example, WHT on interest or service fees), you can credit those amounts against your final tax liability.
In our example, the bank withheld 10% WHT on your Rs. 120,000 interest income:
WHT credit = Rs. 120,000 x 10% = Rs. 12,000
Advance Personal Income Tax (APIT) credits
If you're employed and your employer deducts APIT from your salary, those amounts are credited against your tax liability. Your employer should give you a T-10 certificate documenting these deductions.
Quarterly tax payments already made
If you've been making quarterly tax payments (due August 15, November 15, February 15, and May 15), those are also credited against your final liability.
Final calculation
| Amount (LKR) | |
|---|---|
| Calculated tax | 643,200 |
| Less: WHT credit (interest) | (12,000) |
| Less: Quarterly payments made | (200,000) |
| Tax still payable | 431,200 |
This remaining balance is due by September 30 following the end of the tax year. For YoA 2025/2026, that's September 30, 2026. Miss this deadline and you're looking at a 20% penalty on the unpaid amount, plus compound interest at 1.5% per month.
What about final WHT income?
Some types of investment income are subject to "final" Withholding Tax. This means the WHT deducted at source is the complete tax on that income. It doesn't get added to your total income for the progressive calculation at all.
Final WHT income types include:
- Dividends from resident companies (15% final WHT)
- Winnings and prizes (14% final WHT)
- Capital gains on shares (not taxed for YoA 2024/2025, check current year rules)
So if you received Rs. 200,000 in dividends and Rs. 30,000 WHT was deducted, that dividend income stays out of your progressive tax calculation entirely. The Rs. 30,000 is the final tax on it. You don't owe anything more, and you don't claim a credit for it.
Foreign income and the 15% cap for freelancers
If you're a freelancer earning foreign currency from clients abroad (what the IRD calls an "Individual Service Exporter"), you may qualify for a concessionary maximum tax rate of 15% instead of the standard rates that go up to 36%.
This applies from YoA 2025/2026 onwards and can make a significant difference. A freelancer earning Rs. 8,000,000 in foreign income would pay substantially less under the 15% cap than through the standard progressive slabs.
For the full breakdown of how this works, including eligibility requirements, see our detailed guide on freelancer tax changes.
The Year of Assessment
One thing that trips up many people: the tax year in Sri Lanka doesn't follow the calendar year. The Year of Assessment (YoA) runs from April 1 to March 31.
- YoA 2024/2025: April 1, 2024 to March 31, 2025
- YoA 2025/2026: April 1, 2025 to March 31, 2026
When calculating your tax, make sure you're including income and expenses from the correct 12-month period. An invoice you raised in March 2026 but got paid for in April 2026 counts towards the next tax year, because the receipt date is what matters.
What if you have foreign employment income?
If you're working remotely for a foreign employer, the calculation follows the same five steps. But there are some nuances around how foreign employment income is categorised and whether WHT applies. We've covered this in detail in our guide to foreign employment income tax.
Let the math handle itself
Taxable automates every step described above. Record your income as it comes in, and the platform calculates your liability in real time using the correct tax slabs, relief amounts, and WHT credits. It handles CBSL exchange rates, generates your Statement of Estimated Tax, and keeps you on track for quarterly deadlines.
Quick reference: 2025/2026 tax numbers
Here's everything in one place for easy reference:
| Item | Value |
|---|---|
| Personal relief | Rs. 1,800,000 |
| Tax slab 1 | First Rs. 1,000,000 at 6% |
| Tax slab 2 | Next Rs. 500,000 at 18% |
| Tax slab 3 | Next Rs. 500,000 at 24% |
| Tax slab 4 | Next Rs. 500,000 at 30% |
| Tax slab 5 | Balance at 36% |
| ISE foreign income cap | 15% maximum |
| Interest WHT | 10% (credit-eligible) |
| Dividend WHT | 15% (final) |
| Quarterly payment dates | Aug 15, Nov 15, Feb 15, May 15 |
| Balance payment deadline | September 30, 2026 |
| Late balance penalty | 20% of unpaid amount |
For more on choosing the right tool to manage all of this, see our comparison of tax software options available in Sri Lanka.