The Commissioner General of Inland Revenue has issued a special notice outlining a wide range of changes to taxation, exemptions, withholding taxes, taxpayer registration requirements and the use of the Taxpayer Identification Number (TIN) following the enactment of the Inland Revenue (Amendment) Act, No. 11 of 2026.
The amendment, certified on June 3, 2026, introduces several significant reforms affecting individuals, businesses, professionals, investors, and financial institutions.
The Commissioner General of Inland Revenue issuing a statement noted that among the key changes is the exemption of gains arising from the sale of personal motor vehicles from being treated as taxable "other income." The provision, effective retrospectively from April 1, 2024, applies to vehicles that are neither trading stock nor depreciable business assets.
The Inland Revenue Department (IRD) has also reinforced measures aimed at discouraging cash transactions. Under the revised provisions, payments of Rs. 500,000 or more made in cash or through non-approved methods will not qualify as deductible expenses or form part of an asset's tax cost. Approved methods include account payee cheques, bank drafts, credit and debit cards, electronic bank transfers, and direct cash deposits into the payee's bank account.
The amendments further provide tax relief for donations and gifts made to the government and state universities. Donations to government-established funds will now be eligible for carry-forward treatment where they cannot be fully utilized in the year of assessment, the Commissioner General noted.
A new section has also clarified the tax treatment of life insurance proceeds. Amounts received by policyholders or beneficiaries upon the death of the insured, policy maturity, or surrender will generally be excluded from assessable income, subject to specified exceptions.
The legislation introduces new compliance requirements for unit trusts and mutual funds, requiring them to issue annual tax certificates to unit holders. Failure to do so will result in the fund being taxed as a company.
Significant changes have also been made to residency rules. Individuals working overseas for at least one year under contracts with unrelated foreign employers will not be considered Sri Lankan tax residents during the contract period. Investor Category Residence Visa holders will similarly be excluded from tax residency status.
The amendments expand the scope of the 5 percent withholding tax on service fees paid to resident individuals. Effective June 3, 2026, the tax will apply to payments exceeding Rs. 100,000 per month made to a broad range of professionals, including IT specialists, social media specialists, translators, writers, photographers, videographers, coaches, personal trainers, artists, musicians, dentists, veterinarians, beauticians, and event organizers.
In a move expected to simplify tax administration, the requirement to submit a Statement of Estimated Tax (SET) has been abolished. Quarterly income tax instalments will instead be based on the previous year's tax liability.
The IRD has also granted relief to salaried employees. Individuals whose only income consists of employment income fully subject to Advance Personal Income Tax (APIT), and who have no additional tax liability, will no longer be required to maintain an income tax file or submit annual tax returns. The concession extends to employees earning interest income not exceeding Rs. 5,000 annually.
The amendments introduce expanded TIN requirements for a range of transactions, including opening bank accounts, obtaining credit cards, registering businesses, motor vehicles and land, renewing vehicle licences, obtaining building approvals, and transferring shares in Sri Lankan companies. The implementation of these requirements will commence once verification procedures are issued by the Commissioner-General.
The legislation also strengthens enforcement powers available to the Inland Revenue Department. Failure to register, file returns, submit withholding statements, or comply with notices may result in prosecution, with penalties of up to Rs. 400,000, imprisonment for up to six months, or both.
In addition, capital gains tax rates have been revised. From June 3, 2026, individuals and partnerships will be subject to a 15 percent capital gains tax rate, while trusts, unit trusts, mutual funds, and non-governmental organizations will be taxed at 30 percent.
Meanwhile, taxpayers with outstanding tax liabilities have been granted an interest waiver covering late-payment interest up to the 2024/2025 year of assessment, provided the principal tax is paid in full by December 2, 2026.
The Inland Revenue Department has urged all taxpayers to familiarize themselves with the new provisions and ensure timely compliance with the amended law.
