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Withholding Tax on Interest Paid

Section 133 of the Inland Revenue Act No. 10 of 2006 as being amended [as proposed in the Budget 2011] with effect from April 1, 2011, for the deduction of income tax from interest payable on any sum of money deposited with; or paid to Bank or Financial Institution, by any individual, partnership, company or body of persons as follows,

Rates of Tax Deduction

  1. If any interest is paid or credited to a company [other than any charitable institution], the applicable rate of tax deduction on such interest is 10%;

  2. Any excess allowed on the value of any certificate of deposit (as referred to in paragraph 1), the applicable rate of tax deduction on such excess is 10%;

  3. If any interest is paid or credited to a partnership or body of person [other than any charitable institution], the applicable rate of tax deduction is 8%.

  4. If any interest is paid or credited to an individual for any year of assessment (period of 12 months commencing from April 1) and such individual makes in writing a declaration (format annexed) to the respective branch of the Bank or Financial Institution certifying that:

    1. His/her assessable income ( ie total income excluding exempt income) for that Year of Assessment does not exceed Rs. 500,000, then tax deduction should not be made from such interest for that Year of Assessment;

    2. His/her assessable income for that Year of Assessment exceeds Rs. 500,000 but does not exceed Rs. 1,500,000, then tax should be deducted at 2.5% from such interest for that Year of Assessment; or

      If the assessable income of any individual is more than Rs. 1,500,000/=, then tax deduction should be made at 8% (irrespective of whether a declaration is made or not)

  5. If any interest is paid or credited to a charitable institution for any Year of Assessment and such charitable institution makes in writing a declaration to the branch of the Bank or Financial Institution that its assessable income for that year of assessment does not exceed Rs. 500,000, then tax deduction should not be made from such interest for that year of assessment; or

    If the assessable income of any charitable institution is more than Rs.500,000/=, then tax deduction should be made at 8% (irrespective of whether a declaration is made or not)

Exemptions from Tax Deduction

  1. Any interest which is exempt from income tax under any provision of the Inland Revenue Act. Such exemption includes, in particular:
    1. the interest in total up to Rs. 500,000/‐, accruing or arising in any year of assessment to any Senior Citizen from People's Bank, Bank of Ceylon, National Savings Bank, State Mortgage Bank, Housing Development Finance Corporation Bank, SME Bank, Lanka Puthra Development Bank, any bank established under the Regional Development Bank Act or any registered society within the meaning of the Co‐operative Societies Law;
    2. The interest accruing to any person on moneys lying to his credit in foreign currency, in any account opened by him or on his behalf, in any commercial bank or specialized bank with the approval of the Central Bank of Sri Lanka; (NRFC or RFC Accounts)
    3. the interest accruing to any person from moneys lying to his credit in a special account in a commercial bank with the approval of the Central Bank of Sri Lanka of sums obtained by him by the exchange of foreign currency held by him outside Sri Lanka; (Special Accounts)
    4. the interest or discount accruing or arising to any individual from any Sri Lanka Nation Building Bond in foreign currency and issued by or on behalf of the Government of Sri Lanka, being a bond purchased by such individual;
    5. the interest accruing in any year of assessment to any charitable institution, where it is proved to the satisfaction of the Commissioner General in relation to that year of assessment that such interest is applied solely for the purposes of providing care for the children, the elderly or disabled in a home maintained by such charitable institution;
    6. The interest accruing to any person from moneys lying to his credit in foreign currency with any foreign currency banking unit (FCBU);
    7. The interest accruing to any person on moneys
      1. invested in Sri Lanka Development Bonds issued by the Central Bank, in US $;
      2. Invested in Reconstruction Bonds issued by the Government of Sri Lanka, in US $; or
      3. deposited in any Treasury Bond Investment External Rupee Account. (TIERA);
    8. The interest arising or accruing, or discount allowed, to any non resident citizen of Sri Lanka, from/on any Motherland Development Bond issued by, or on behalf of the Government of Sri Lanka, in foreign currency.
  2. Any interest from which tax is required to be deducted under section 37 (specific long term accounts) or section 95 (interest payable to persons outside Sri Lanka) of Inland Revenue Act.
  3. Any interest payable to:
    1. The Consolidated Fund of the Government of Sri Lanka or any Provincial Fund of a Provincial Council; or
    2. Any institute referred to in paragraph (a),(c),(d),(g),(h) or (i) of section 7 of the Inland Revenue Act.
  4. The Interest on any one savings account maintained by an individual or a charitable institution, if such interest is less than 5000 rupees for any month(If more than one savings account is maintained by an individual or a charitable institution, this exemption is applicable only in relation to one account)


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