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IRD introduces tax relief for small savers with new self-declaration system
- IRD introduces self-declaration for AIT exemption on interest for earners below Rs.1.8mn annually
- AIT rate on interest, discounts and Islamic financial income reduced from 14% to 10%
Sri Lanka’s Inland Revenue Department (IRD) has introduced a simplified self-declaration process to alleviate the 10 percent advance income tax (AIT) burden on interest earnings for the low and middle-income earners.
Outlined in Circular SEC/2025/E/03, the new system targets the resident taxpayers with a total annual taxable income not exceeding Rs.1.8 million.
This initiative is part of the broader tax framework reforms aimed at easing the financial strain on the small savers while ensuring fiscal compliance. The taxpayers can now submit a self-declaration form to their banks or financial institutions to gain exemption from the standard AIT deductions on the interest income from deposits, savings accounts and Islamic financial products.
The eligibility for the exemption is contingent upon meeting three criteria: being classified as a Sri Lankan resident, having a total taxable income from all sources below the Rs.1.8 million threshold for the assessment year (April 1 to March 31) and submitting a completed Form ISD/WHT/01-5 (downloadable from the IRD’s website).
The IRD emphasises the user-friendly nature of the process, especially for the vulnerable groups like pensioners and low-income earners. The parents/guardians can submit declarations for minors and the individuals with multiple accounts must provide separate forms for each institution. However, the department cautions against misuse, warning of potential penalties for false declarations, including retroactive tax deductions and legal repercussions.
The circular clarifies eligibility with examples such as a retiree with Rs.1.2 million annual fixed deposit income qualifying, while a professional earning Rs.4.2 million annually does not, regardless of minimal interest income.
The banks and financial institutions are required to implement the new declarations by April 1, 2025, using the IRD-provided verification software. The self-declaration is valid for one assessment year and must be renewed annually.
Concurrently, the IRD has reduced the AIT on interest, discounts and Islamic financial income from 14 percent to 10 percent, effective April 1, 2025. This reduction, detailed in Circular SEC/2025/E/02, intends to lessen the tax burden on depositors and encourage savings. The revised AIT rate applies to all resident and non-resident depositors, excluding tax-free accounts (e.g., foreign currency holdings) and income under diplomatic treaties. Individuals earning under Rs.1.8 million annually can also claim AIT exemptions via self-declaration. The banks must issue monthly AIT certificates and file quarterly electronic reports. These changes align with the Inland Revenue Act amendments and are projected to enhance financial sector liquidity. The IRD views these measures as promoting financial inclusion, preventing disproportionate tax effects on small savers’ interest income.
“This reform aligns with our commitment to creating a fairer tax system, particularly for those who rely on savings,” stated an IRD spokesperson.
Consumer advocacy groups have welcomed the move, having long argued that the previous framework unfairly burdened the small depositors. These adjustments are seen as a positive step in balancing revenue collection with citizens’ needs as Sri Lanka refines its fiscal policies.
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