Capital Gains Tax in Sri Lanka

Capital gains tax in Sri Lanka is a tax on the profit you make from selling certain assets like land, buildings, shares, and other securities. This tax is governed by the Inland Revenue Act No. 24 of 2017. Updated – March 2024

In Sri Lanka, the capital gains tax rate is 10% for both residents and non-residents. However, if you are selling real property (land or building), the tax rate changes based on how long you have owned the property.

• If you have owned the property for less than 5 years, the tax rate is 30% for both residents and non-residents.
• If you have owned the property for more than 5 years, the tax rate is 10% for residents and 5% for non-residents.

To calculate the capital gains tax, you need to subtract the cost of acquiring the asset from the selling price of the asset. The profit you get is then taxed at the applicable rate.

It is important to note that some exemptions and reliefs may apply, such as for certain types of assets or transactions. It is recommended that you seek professional advice from a tax expert to ensure compliance with the relevant tax laws and regulations.

Calculating Capital Gains Tax

Here’s how you calculate capital gains tax:

1. Determine the selling price of the asset: This is the amount you received from selling the asset.
2. Determine the cost basis of the asset: This is the amount you paid for the asset, plus any additional expenses incurred during the acquisition of the asset (e.g., closing costs or brokerage fees).
3. Calculate the capital gain: Subtract the cost basis of the asset from the selling price of the asset.
4. Apply the tax rate: Multiply the capital gain by the applicable tax rate.

Here’s an example: 

For instance, if you sold a property for Rs. 4,000,000 and your cost basis for the property was Rs. 3,000,000, your capital gain would be Rs. 1,000,000. If the applicable capital gains tax rate is 10%, your capital gains tax liability would be Rs. 100,000 (10% of Rs.1,000,000/-).

It is important to keep accurate records of the cost basis and selling price of your assets to ensure accurate calculation of capital gains tax. If you have any doubts or questions about calculating capital gains tax, it is recommended that you consult a tax expert or accountant.

Deducting Capital Losses

You can deduct capital losses from capital gains for tax purposes. If you have a loss from selling an asset, you can use this loss to reduce your capital gains in the same tax year, which can lower your overall tax liability.

This process is called “netting”. Netting means subtracting the total capital losses incurred during the tax year from the total capital gains earned during the same tax year.

• If the result is positive, you will owe capital gains tax on that amount.
• If the result is negative, it is called a ‘net capital loss’. A net capital loss can be carried forward and used to offset capital gains in future tax years. However, there are some restrictions on how much of a net capital loss can be carried forward and for how long.

Keep accurate records of all your capital gains and losses, as well as any other relevant information like purchase and sale dates, costs, and expenses. This will help you to accurately calculate and report your capital gains tax liability. It is recommended that you seek professional advice from a tax expert or accountant to ensure compliance with the relevant tax laws and regulations.

Filing Capital Gains Tax in Sri Lanka

To file capital gains tax in Sri Lanka, follow these steps:

1. Determine if you need to file: If you have earned capital gains from selling assets during the tax year, you may need to file a capital gains tax return. The filing requirements depend on factors like the type of asset, the amount of gain, and your residency status.
   
   
2. Collect relevant information: Gather information related to the sale of the asset, including the purchase and sale dates, the sale price, and the cost basis of the asset. Also, determine the applicable tax rate and any deductions or credits that may apply.
   
   
3. Calculate your capital gains tax liability: Use the information gathered to calculate your capital gains tax liability. If you have incurred any capital losses during the tax year, you may be able to deduct these losses from your capital gains to reduce your tax liability.
   
   
4. Complete the capital gains tax return: Fill out the capital gains tax return using the relevant tax form provided by the Sri Lankan Inland Revenue Department. Provide accurate and complete information, and attach any necessary supporting documents.
   
   
5. Submit the return and pay any tax owed: Submit the capital gains tax return and pay any tax owed by the filing deadline. The filing deadline and payment methods may vary depending on your residency status and other factors.

If you have any doubts, we can assist you to ensure compliance with the relevant tax laws and regulations, and to help you accurately calculate and report your capital gains tax liability.

Exemptions from Capital Gains Tax

In Sri Lanka, capital gains tax (CGT) is applicable on gains from selling capital assets. However, there are certain exemptions under the law that can help reduce or eliminate the amount of CGT payable.

• Principal residence: If the property sold was your principal residence for at least two years before the sale, the entire capital gain may be exempt from CGT.
• Shares in a listed company: If the shares were held for more than one year, the gain may be exempt from CGT.
• Other exemptions: There are other exemptions for gains from selling assets used in a business, certain government securities, and certain agricultural land.

The rules for exemptions from CGT can be complex and may change. It’s always best to consult a tax professional or seek advice from the Inland Revenue Department to understand the latest rules and regulations and ensure compliance with the law.

Penalties for Non-Compliance

There may be penalties if you do not comply with the capital gains tax (CGT) requirements in Sri Lanka.

• Failure to report or understatement: If you fail to report capital gains or understate the gains, you may face penalties up to 50% of the tax payable on the understated gains, plus interest on the tax payable.
• Late filing: If you fail to file a tax return or file it late, you may face penalties up to Rs. 10,000 per month, up to a maximum of Rs. 50,000. Interest may also be charged on the tax payable from the due date to the payment date.

Make sure to meet all CGT requirements and file tax returns on time to avoid penalties and interest.

For more information, visit the official website of the Inland Revenue Department here