Income Tax Threshold in Sri Lanka: When Do You Pay?

Maybe you just started a side business. Maybe your salary climbed, or a freelance year finally took off. And a simple question is keeping you up: have you crossed the line where you actually owe income tax?

The line exists, and it is a real number. For the current tax year, the income tax threshold in Sri Lanka is Rs. 1,800,000. Earn under that across your regular income, and you owe no income tax. Earn over it, and only the part above the line gets taxed, starting gently.

But there is a catch most people miss, and it can mean you are paying tax even while you are technically below the threshold. Let me walk through the whole picture.

When do you have to start paying income tax in Sri Lanka?

You start owing income tax once your total assessable income for the year goes above Rs. 1,800,000.

This figure is the personal relief, set under Section 52(2) and the Fifth Schedule of the Inland Revenue Act. It applies for the Year of Assessment 2026/2027, the tax year running from April 1, 2026 to March 31, 2027. Every resident individual gets it automatically, no form required.

The mechanic is simple. Add up your income for the year, subtract Rs. 1,800,000, and whatever is left is your taxable income. If the subtraction leaves zero or less, your income tax is zero.

What income counts toward the threshold?

Your total assessable income, which under Section 3(1) is the sum of gains and profits from four sources:

• Employment: salary, wages, bonuses, and benefits from your job.
• Business: profits from a trade, profession, freelancing, or any vocation.
• Investment: rent, royalties, and similar returns.
• Other sources: any other recurring gains.

You add all four together. It is the total that matters, not any single source. Someone earning Rs. 1,000,000 from a salary and Rs. 1,000,000 from freelancing has Rs. 2,000,000 of assessable income and is over the threshold, even though neither source alone would cross it. If you want the full method, our guide on how to calculate your income tax walks through it step by step.

One thing to settle first: this all assumes you are a resident for tax purposes, which changes who is taxed on what. If you are not sure, our explainer on tax residency in Sri Lanka covers the test.

What does the threshold not cover?

Here is where the clean "under Rs. 1,800,000 means no tax" rule gets a caveat. Two kinds of income sit outside the threshold entirely.

• Capital gains. When you sell an investment asset like land or shares, the gain is taxed separately at a flat 15% (for realisations on or after June 3, 2026). The personal relief cannot be set against it. So a capital gain is taxable even if the rest of your income is nil.
• Final withholding tax income. Some income, most commonly bank interest, has tax taken at source and that tax is treated as final. It does not get added into the assessable income above, and the threshold does not protect it.

How much tax do you pay just over the threshold?

Less than most people fear. Crossing the threshold does not tax your whole income. It only taxes the slice above the line, and that slice starts at the lowest rate.

The taxable income (what is left after the Rs. 1,800,000 relief) is taxed in bands:

Say your total assessable income for the year is Rs. 2,400,000. You are Rs. 600,000 over the threshold.

• Taxable income: Rs. 2,400,000 − Rs. 1,800,000 = Rs. 600,000
• That Rs. 600,000 sits entirely in the first band, taxed at 6%
• Income tax for the year: Rs. 36,000

So earning Rs. 600,000 over the line costs you Rs. 36,000, not a tax on the full Rs. 2,400,000. The threshold is a floor, not a trapdoor. Compare that with someone earning exactly Rs. 1,800,000, whose taxable income is zero and who pays nothing.

Do you pay tax on bank interest below the threshold?

Yes, and this surprises people. If you have money in a fixed deposit or savings account, the bank deducts 10% withholding tax on the interest before it reaches you. For a resident individual, that 10% is final under Section 88(1)(b).

Final means it is settled at source. The bank takes the 10% whether your total income is Rs. 50,000 or Rs. 5,000,000. And here is the part that stings: you cannot reclaim it by pointing out that your income is below Rs. 1,800,000. The personal relief reduces taxable income to zero, but it does not refund taxes already taken as final.

So a retiree living mostly on fixed deposit interest, well under the threshold, is still paying 10% on that interest. The threshold does not help them. Unless they use the option below.

Can you stop the bank deducting tax on your interest?

Now there is a way, and it is new.

The Inland Revenue Amendment Act No. 11 of 2026 added Section 84(3)(f). If you have no taxable income for the year, you can give your bank a self-declaration to that effect, and the bank will pay your interest without deducting the 10%. This is aimed squarely at low-income savers and pensioners who were losing 10% they should never have paid.

But be honest on it. The declaration is a legal statement that you have no taxable income.

How do I know if I've crossed the line?

Add up everything you earned this tax year from your job, your business, and any other recurring income. If the total is over Rs. 1,800,000, you owe income tax on the excess, and you may need to make quarterly payments rather than waiting until year end. If it is under, you owe no income tax on those sources, though final taxes on interest and any capital gains still stand.

The arithmetic is easy in theory. In practice, income arrives unevenly, sources are easy to forget, and the moment you cross the line is not always obvious until the year is over and the bill is due.

So, when do you start paying? The day your regular income for the year passes Rs. 1,800,000, and only on the part above it. Keep an eye on the total across all your sources, remember that interest and capital gains play by their own rules, and you will never be caught out by the line.