Interest Income of Sri Lankan Citizens Living Overseas – Final Withholding Tax Implications from 1st April 2025

With effect from 1st April 2025, the Inland Revenue Department (IRD) of Sri Lanka has issued several notices on 28th March 2025, and 28th April 2025, requesting residents of Sri Lanka to provide a self-declaration to banks to avoid the deduction of 10% Withholding Tax (WHT) on interest income.

However, these notices are silent on the treatment of non-resident individuals who are Sri Lankan citizens, creating confusion for many Sri Lankans living overseas with interest-bearing accounts or fixed deposits in local banks.

Who is a Resident According to the Inland Revenue Act?

Under Section 69 of the Inland Revenue Act, No. 24 of 2017, an individual is considered a resident for a Year of Assessment if he or she:

  • Resides in Sri Lanka;

  • Is present in Sri Lanka for 183 days or more in any 12-month period overlapping with the tax year;

  • Is a Sri Lankan government employee posted abroad or their spouse;

  • Serves on a Sri Lankan ship under the Merchant Shipping Act.

Hence, Sri Lankan citizens living abroad who do not meet these criteria are considered non-residents for tax purposes.

What Is Meant by “Final Withholding Tax”?

A Final Withholding Tax (FWT) means that once the tax is deducted at the source (e.g., by the bank), the income is considered fully taxed, and it won’t be taxed again when filing your tax return.

✅ Example:

If a non-resident Sri Lankan citizen earns Rs. 2,000,000 in interest income from a Sri Lankan bank:

  • The bank will deduct 10% WHT, i.e., Rs. 200,000.

  • This Rs. 200,000 is treated as final tax — the income will not be subject to progressive tax rates, and no further tax is payable.

In contrast, if the same income is earned by a resident individual, it would be taxed under progressive rates ranging from 6% to 36%, after applying the Rs. 1.8 million personal relief.

Therefore, non-residents benefit from lower, capped tax rates (maximum 10%) on Sri Lankan interest income, whereas residents may end up paying significantly more depending on their total income.

When Is Interest Income Not Treated as Final Withholding for Non-Residents?

As per Section 88(1A)(c) of the Inland Revenue Act (as amended by Act No. 10 of 2021), interest income earned by a non-resident individual who is a Sri Lankan citizen is a final withholding payment, except in the following two cases:

1️⃣ Total interest income is within the Rs. 1.8 million personal relief threshold.

  • In this case, although 10% WHT may be deducted by the bank, it is not considered final tax.

  • The taxpayer is eligible to claim a refund from the IRD by filing a tax return.

2️⃣ Interest income + other income is within the personal relief threshold.

  • If total other income is less than Rs. 1.8 million, the remaining portion of personal relief can apply to interest income.

Examples:

Example A – Final WHT Applies:

  • Status: Non-resident Sri Lankan

  • Interest Income = Rs. 2,000,000

  • No other income

  • ✅ Interest is above Rs. 1.8M → Final withholding tax applies (Rs. 200,000 deducted) → No further tax.

Example B – Refund Available:

  • Status: Non-resident Sri Lankan

  • Interest Income = Rs. 500,000

  • No other income

  • ❌ Final WHT does not apply (since income is below Rs. 1.8M threshold)

  • Taxpayer can claim refund of Rs. 50,000 WHT by filing a return.

No Self-Declaration Option for Non-Residents

Non-resident Sri Lankan citizens cannot submit the self-declaration forms introduced by IRD for residents. Therefore:

  • WHT will be automatically deducted at 10% by banks.

  • If the interest income is below Rs. 1.8 million, or if part of it is covered by the relief, you can still claim a refund by filing a personal income tax return with IRD.

Foreign Currency Accounts in Sri Lanka – Tax-Free Interest (from 01.01.2020)

Some Sri Lankans living overseas maintain foreign currency savings or fixed deposit accounts in Sri Lankan banks (e.g., NRFC, RFC, or FCBU accounts). As per the Third Schedule to the Inland Revenue Act, amended by Act No. 10 of 2021, with effect from 1st January 2020, the interest earned on such accounts is exempt from income tax.

Relevant Legal Reference:

"Any person on moneys lying to his credit in foreign currency in any foreign currency account opened by him or on his behalf, in any commercial bank or in any specialized bank, with the approval of the Central Bank of Sri Lanka, on or after January 1, 2020..."

✅ This means:

  • Interest income earned from approved foreign currency accounts in Sri Lanka is not subject to income tax.

  • No WHT is deducted by banks on such interest.

  • This benefit applies regardless of whether the individual is resident or non-resident, as long as the account is in foreign currency and approved by the Central Bank.

✅ Key Takeaways

  • Non-residents benefit from a maximum 10% final tax on interest income in Sri Lankan Rupees.

  • Interest below Rs. 1.8 million is not final — refund can be claimed by filing a tax return.

  • No self-declaration is available for non-residents.

  • Interest from foreign currency accounts (approved by CBSL after 01.01.2020) is fully exempt from tax, and no WHT applies.

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