Simplified Guide to New Tax Rules for Resident Bank Depositors in Sri Lanka-29.04.2025

The Inland Revenue Department (IRD) of Sri Lanka introduced new tax guidelines in 2025, specifically for resident individuals with bank deposits as per the notice issued on 28th April 2025. These rules,  aim to improve tax compliance by streamlining taxpayer registration and managing withholding tax on interest income. Below, we explain the rules in a clear, point-wise format, illustrate their impact on resident depositors with practical examples, and cover all key details to help you understand the changes. The full document is linked at the end.

Key Rules at a Glance

• Bulk TIN Registration
  Banks must collect details from resident depositors (e.g., National Identity Card number, full name, address, email, mobile number) and submit them to the IRD via email (infor@ird.gov.lk) within 10 working days of the following month. This enables the IRD to register taxpayers and issue Taxpayer Identification Numbers (TINs) to depositors and banks.

• Self-Declaration for Tax Exemption
  Resident depositors with an annual assessable income below Rs. 1,800,000 can submit a self-declaration using the IRD’s official form to avoid 10% withholding tax (Advance Income Tax) on their interest income. The form requires details like account numbers, year of assessment, and TIN (if available).

• Joint Account Taxation
  For joint accounts held by resident individuals, each account holder’s income is assessed separately. If one holder’s income is below Rs. 1,800,000, they can submit a self-declaration to exempt their share of interest from withholding tax. The bank applies tax only to the higher-income holder’s share.

• Timing of Interest Income
  Interest income is taxed on a cash basis, meaning it’s included in taxable income only when received. For instance, interest from a fixed deposit is taxed in the year it matures, not when the deposit is placed.

• Refunding Withheld Tax
  If a resident depositor submits a valid self-declaration after withholding tax is deducted but before the bank remits it to the IRD (within 15 days after the month ends), the bank may refund the tax, if feasible.

• Verification of Self-Declarations
  Banks must verify self-declarations for completeness and accuracy using the IRD’s prescribed form. Invalid declarations include those where interest income exceeds Rs. 1,800,000, the depositor is subject to Advance Personal Income Tax (APIT), or incorrect TIN details are used.

Impact on Resident Taxpayers: Real-Life Examples

These rules affect how resident depositors manage their interest income and taxes. Here are five examples to show their impact:

• Example 1: Low-Income Depositor
  Scenario: Priya, a resident retiree, has a savings account with Rs. 500,000 at Bank A, earning Rs. 50,000 in interest annually. Her total income is Rs. 1,200,000, below the Rs. 1,800,000 threshold.
  Impact: Priya submits a self-declaration to Bank A using the IRD’s form. As her income qualifies, the bank does not deduct the 10% withholding tax, so she receives the full Rs. 50,000.
  Benefit: Priya keeps all her interest income, increasing her savings.

• Example 2: Joint Account with Mixed Incomes
  Scenario: Saman and Nimali, both resident individuals, share a joint fixed deposit of Rs. 2,000,000 at Bank B, earning Rs. 200,000 in interest (Rs. 100,000 each). Saman’s income is Rs. 1,500,000; Nimali’s is Rs. 2,000,000.
  Impact: Saman submits a self-declaration to exempt his Rs. 100,000 share from tax, as his income is below Rs. 1,800,000. Nimali’s share faces a 10% withholding tax (Rs. 10,000) because her income exceeds the threshold. Bank B issues a WHT certificate to Nimali for her taxed portion.
  Benefit: Saman avoids tax on his share, while Nimali’s tax is correctly applied, ensuring fairness.

• Example 3: Fixed Deposit Maturing in a Future Year
  Scenario: Kavinda, a resident, places a 2-year fixed deposit of Rs. 1,000,000 in 2025, maturing in 2027 with Rs. 100,000 in interest. His 2025 income is Rs. 1,600,000, excluding this interest.
  Impact: Since the interest is paid in 2027 (cash basis), it’s not taxed in 2025. Kavinda submits a self-declaration for 2025 to avoid tax on other deposits, as his income is below Rs. 1,800,000. In 2027, he’ll include the interest in his income and reassess eligibility for a self-declaration.

Benefit: The cash-basis rule simplifies tax planning by taxing interest when received.

• Example 4: Late Self-Declaration Submission
  Scenario: Anusha, a resident, earns Rs. 1,700,000 annually and has a savings account with Rs. 30,000 in interest. The bank deducts 10% tax (Rs. 3,000) in January 2025. In early February, before the bank remits the tax, Anusha submits a valid self-declaration.
  Impact: Since her income is below Rs. 1,800,000, the bank can refund the Rs. 3,000, as it hasn’t been sent to the IRD. Anusha avoids the tax deduction.
  Benefit: Quick submission within the 15-day window recovers withheld tax.

• Example 5: Invalid Self-Declaration
  Scenario: Dilip, a resident bank employee subject to Advance Personal Income Tax (APIT), submits a self-declaration for Rs. 150,000 in interest income. His total income is Rs. 1,900,000.
  Impact: The bank rejects Dilip’s declaration, as APIT employees are ineligible. It deducts 10% tax (Rs. 15,000) from his interest. Dilip must account for this when filing his tax return.
  Benefit: Verification ensures only eligible depositors receive exemptions.

Additional Details for Resident Depositors

The IRD document includes several smaller clarifications that are crucial for resident individuals:

• Multiple Accounts at One Bank
  If a resident depositor has different accounts (e.g., savings, fixed deposits) at the same bank, a single self-declaration covers all accounts. However, accounts at different banks require separate declarations.

• No Supporting Documents Needed
  Resident depositors don’t need to submit proof of their TIN or other documents with the self-declaration, simplifying the process.

• IRD’s Role in Verification
  Banks verify basic details like completeness and accuracy, but the IRD conducts deeper checks. If issues arise (e.g., discrepancies in a declaration), the IRD contacts the bank directly.

• TIN Transition Period
  In 2025, banks may accept self-declarations from resident depositors without a TIN during the bulk-registration process. From 2026, all new declarations must include a TIN.

• Accuracy of Declarations
  Self-declarations must be accurate based on the bank’s records. Examples of invalid declarations include cases where interest income exceeds Rs. 1,800,000 or a depositor uses an incorrect TIN (e.g., their spouse’s TIN).

• Official Form Requirement
  The self-declaration must use the IRD’s prescribed form, downloadable from their website, and include details like the bank’s name, depositor’s NIC, account numbers, year of assessment, and signature.

Why These Rules Matter for Resident Depositors

These guidelines, applicable only to resident individuals, enhance tax compliance while providing relief for those with lower incomes. By allowing residents with incomes below Rs. 1,800,000 to avoid withholding tax, the rules help retirees, small savers, and others retain more of their interest earnings. The bulk TIN registration and verification processes ensure accurate tax reporting, reducing errors. However, resident depositors must submit complete and accurate self-declarations promptly to benefit.

For resident individuals, the rules offer:

• Increased Savings: Low-income depositors can avoid tax deductions, boosting disposable income.
• Fair Joint Account Taxation: Taxes are applied only to the appropriate account holder’s share.
• Simplified Timing: The cash-basis rule clarifies when to report interest income.
• Refund Opportunities: Timely self-declarations can recover withheld taxes.

Conclusion

The IRD’s 2025 tax rules, designed for resident individuals, streamline tax compliance and offer tax relief for those with incomes below Rs. 1,800,000. Whether you’re a retiree like Priya, a joint account holder like Saman and Nimali, or managing a fixed deposit like Kavinda, understanding these rules helps you maximize interest earnings and avoid unnecessary taxes. Resident depositors should act proactively, ensuring their self-declarations are accurate and submitted on time.

For full details, refer to the IRD document linked below.

Link : IRD Notice to Self Declaration -28.04.2025-SEC /2025/04