Withholding Tax in Sri Lanka – 2025 Update

As Sri Lanka moves forward with vital fiscal reforms, the landscape of taxation continues to evolve. One of the most significant updates in 2025 is the revision of Withholding Tax (WHT) regulations, especially concerning interest income, which directly impacts individuals, businesses, and financial institutions alike.

🔹 What is Withholding Tax?

Withholding Tax (WHT) is a tax deducted at the source of income. It ensures tax collection at the point of transaction and is commonly applied to income such as interest, dividends, royalties, rent, and service fees. In Sri Lanka, WHT serves both as a collection mechanism and a way to bring more individuals and businesses into the formal tax net.

🔹 Key Changes to Withholding Tax – Effective from April 1, 2025

📌 Increased WHT on Interest Income

• WHT rate on interest income has increased from 5% to 10%.
• Applies to both residents and non-residents.
• Banks and financial institutions must deduct the tax at the time of payment or credit.

📌 Exemption for Low-Income Earners

• Individuals with annual income below Rs. 1.8 million can apply for exemption.
• A self-declaration form must be submitted to the bank or institution.
• Once approved, interest income is not subject to withholding tax.

🔹 Responsibilities of Withholding Agents

Banks and other financial entities must:

• Deduct the correct WHT rate at payment time.
• Issue WHT certificates to clients.
• File Annual WHT Returns to the Inland Revenue Department.
• Deadline: April 30, 2025 (for year 2024/25).

🔹 Why These Changes Matter

These reforms aim to:

• Improve government revenue through better compliance.
• Encourage transparency and declaration of passive income.
• Ensure fairness and broaden the tax base.

🔹 Additional Tax Updates in 2025

• Personal Income Tax: Tax-free threshold raised to Rs. 1.8 million/year.
• Corporate Tax: Rate increased to 45% for specific sectors.
• Export Services: 15% concessionary tax introduced (replacing exemptions).

✅ Need Help with Withholding Tax?

Whether you’re an individual earning bank interest, a business required to deduct WHT, or a tax agent managing client obligations, staying compliant is crucial. At Bookkeeping.lk, we provide:

• WHT compliance support
• Exemption application assistance
• Annual WHT return filing
• Training for your finance team

📞 Contact us today to ensure you’re up-to-date and fully compliant under the new tax regulations.