Personal Relief in Sri Lanka: Local and Foreign Income

If you earn money from two directions at once, a local client here and a foreign client paying in dollars, your tax return has a quiet decision buried inside it. Where does your personal relief go?

Most people never notice it. The relief gets applied somewhere, the tax gets calculated, and the number is whatever it is. But that single allocation can swing your bill by a lot. Get it right and you pay the legal minimum. Get it wrong and you hand the Inland Revenue Department money you never had to part with.

Here is how the personal relief in Sri Lanka actually works when local and foreign income sit side by side, and how to make the split work in your favour.

What is the personal relief for 2025/2026?

The personal relief is the slice of income every resident individual can earn before any income tax applies. For the Year of Assessment 2025/2026, that figure is Rs. 1,800,000.

It is set under Section 52(2) of the Inland Revenue Act, with the amount fixed in the Fifth Schedule and raised to Rs. 1.8 million by the Amendment Act No. 2 of 2025. Mechanically, it comes off your total assessable income before the tax rates are applied. Assessable income is just the sum of your gains and profits for the year, from employment, business, investment, and any other source.

One limit to know up front: the relief cannot be set against gains from selling investment assets. Capital gains are taxed on their own at a flat rate, with no personal relief in front of them. Everything in this article is about your regular income streams, not capital gains.

How is personal relief applied when you have both local and foreign income?

This is where it gets interesting, and where the freelancer and remote-employee crowd needs to pay attention.

Sri Lanka taxes your two income streams at very different rates:

• Local income (a local client, a local business, local employment) runs through the progressive slabs: 6%, 18%, 24%, 30%, and 36%.
• Qualifying foreign service income is capped at a maximum of 15%.

When you earn both, the Rs. 1,800,000 relief is deducted from your total, but you decide which stream it reduces. The IRD's own manual works through examples where a taxpayer sets the basic relief against one source rather than another, in its words, "to maximise his relief." The Act requires reliefs to be deducted from assessable income, but it does not bolt the basic relief to a fixed order. So the allocation is a genuine choice.

And because your two streams are taxed at such different rates, that choice has real money attached to it.

Why does the allocation change your tax bill?

The relief is worth more when it shields income that would otherwise be taxed at a high rate. A rupee of relief sitting in front of 36% income saves you 36 cents. The same rupee in front of 15% income saves you only 15 cents.

Let us put real numbers on it. Say you earned this in 2025/2026:

• Local income: Rs. 4,000,000
• Foreign service income (qualifying for the 15% cap): Rs. 2,000,000

Your personal relief is Rs. 1,800,000. Watch what happens depending on where you send it.

Option A: relief against your local income

The local tax breaks down as 6% on the first Rs. 1,000,000, 18% on the next Rs. 500,000, 24% on the next Rs. 500,000, and 30% on the final Rs. 200,000. That comes to Rs. 330,000.

Option B: relief against your foreign income

Same income. Same relief. Same law. The only difference is where the relief went, and Option A costs Rs. 360,000 less.

The reason is simple once you see it. In Option A, the relief carved out income that would have been taxed at 30% and 36%, the top of your local stack. In Option B, the relief only saved you 15% on the foreign side, and your full Rs. 4,000,000 of local income climbed all the way into the 36% band. You paid a fortune for putting the relief in the wrong place.

Which stream should the relief reduce first?

The rule of thumb is short: set the relief against the income taxed at the highest rate. For most people with mixed income, that means the local progressive stream, because it can reach 36% while the foreign stream stops at 15%.

But here is the honest caveat, and it matters. The relief does not magically attack your top rate. It displaces income at whatever band it actually lands in. If your local income is small, the Rs. 1.8 million relief spills past the high bands and down into the 6% band, where it is worth very little. In that situation, putting the relief against the flat 15% foreign stream can actually win.

This is exactly the kind of calculation that looks trivial and quietly is not. Two streams, five tax bands, a relief that can sit in any of them, and a cap that changes the comparison. It is easy to eyeball it and lose money. If you want the full mechanics of the progressive slabs, our guide on how to calculate your income tax in Sri Lanka walks through them step by step.

Does the 15% cap on foreign income change the math?

It is the whole reason the allocation matters. Without the cap, both streams would run the same progressive rates and the relief would land in the same place no matter what you called it.

The cap comes from Paragraph 1(6) of the First Schedule, effective April 1, 2025. It taxes qualifying foreign service income at a maximum of 15%, even when your total income would otherwise push that money into the 36% band. It replaced the full exemption that freelancers enjoyed through March 31, 2025, so this is a relatively new rule and the IRD is actively enforcing it.

But the cap is conditional. All three of these must be true:

1. The service is rendered to someone who uses it outside Sri Lanka.
2. You are paid in foreign currency.
3. That payment is remitted to Sri Lanka through a bank.

We cover the 15% rate and how it stacks against the 36% progressive rates in more detail in our breakdown of the freelancer foreign income tax rate.

What if all my income is foreign?

Then the allocation question disappears, but the relief does not.

A common worry is that earning only foreign income somehow forfeits the personal relief. It does not. You are still a resident individual, and the Rs. 1,800,000 relief still applies. With a single stream, the relief simply comes off that stream, and your qualifying foreign income above the relief is taxed at the 15% cap.

The allocation decision only appears when you have two or more streams taxed at different rates. If you are a fully remote employee paid by a foreign company, the picture is slightly different again, and our guide to foreign employment income tax covers how the relief and thresholds work for salaried remote workers.

How do I get the allocation right without guessing?

You have two real options.

The manual route: list your income by stream, work out your tax with the relief on the local side, then redo the entire calculation with the relief on the foreign side, and keep the cheaper of the two. With more than two streams, or employment plus business plus investment income, the number of combinations grows and the arithmetic gets fiddly. It is doable on paper. It is also easy to slip a band and never know you overpaid.

The other route is to let software handle it.

The personal relief is the single biggest deduction most individual taxpayers get. On mixed income, where it sits is not a detail. It is the difference between paying what you owe and paying more than you owe. Work it out both ways, or use a tool that does, and keep the Rs. 360,000.