Withholding Tax [WHT] on Interest Earned from Fixed Deposits in Sri Lanka

During my holiday in Sri Lanka, I was able to have a conversation with one of our family friends working in Sri Lanka and she said that she has invested some money in one of the commercial banks in Sri Lanka and the bank is charging withholding tax at 10% from the interests earned from her fixed deposits. The bank has advised her verbally that according to the prevailing law, all those who have fixed deposits need to pay withholding tax at 10% from the interest they earn.

Nobody has apparently tried to find the veracity of this law or the practice of banks in terms of the law but has simply allowed the banks to recover tax unabatedly.

As a person who manages my investments very effectively, I need to clarify this malpractice by banks simply due to the sheer ignorance of poor customers. They also have no idea whether these taxes after recovery from their fixed deposits are being sent to the government coffer or not in view of the fact that we do not receive any such document from the banks.

The Commissioner General of Inland Revenue by his circular ref. 2007/1 dated 27.03.2007
has clearly stipulated the conditions and procedure of recovering Withholding Tax from depositors of Banks and Financial Institutions of Sri Lanka.

I need to emphasize if the customer has given a declaration to the bank in the format of the declaration published in the above circular, the recovery of WHT is as follows:

a) If the total interest accruing from assessable income within a year commencing from 1 April up to 31 March of the following year is less than Rs.300, 000.00, the customer should not pay any WHT.

b) If the total interest earned is more than Rs. 300,000.00 but less than 600,000.00, the customer is liable to pay WHT at 2 ½ % of such interest.

c) If the interest earned per annum is more than Rs. 600,000.00, then only the customer needs to pay WHT at 10% on the interest of the fixed deposit.

If the Interest earned by a joint account, only 50% needs to consider by the joint account holder for the calculation of interest earned.

Secondly, there are exemptions granted by the government, which also need to be verified by the customer before making his own declaration.

I further wish to append a letter I received from the Inland Revenue Commissioner in response to a query I made to him which is self explanatory.

ACT 4/22 07.04.2008

Mr. Jass Ranasinthe
Blair-Anderson Ltd.
P.O.Box 53827
Dubai, UAE

Dear Mr. Ranasinghe

Withholding tax (WHT) on Interest earned

I refer to your letter dated January 28, 2008, and wish to inform you the following.

(1) The income from interest is a scheduler tax and in a case of a person other than a company, the maximum rate applicable is 10%. In a case of an individual the tax deducted on deposits of money in banks or financial institutions (including government securities and corporate debt securities) is treated as final tax.

(2) The resident individual is entitled to a tax free allowance of Rs. 300,000 under normal circumstances. However, there was no lower limit when deducting WHT on interest by banks or financial institution. Hence the individual could not get the benefit of the tax free allowance on interest income. Further, the Rs. 300000/- is taxed at of tax is 5%. Considering the above facts, the policy decision was taken by the government, to adjust the scheduler scheme of WHT on interest income in order to provide the benefit of the tax free threshold and the lower rate slab of Rs. 300000/- at 5%.

As you have correctly pointed out the Budget announcement was to apply 5% on interest over and above Rs. 300000/- up to Rs. 600000/-

However, the bank and financial institutions are not in the position to deducts tax free allowance since they are only WHT agencies. Further, the tax free allowance is not only on interest income but on the total assessable income.

Therefore, the provision relating to the WHT has been incorporated to the Act, based on the budget proposals to provide the same effect without deducing tax free allowance.

Since the bank is not in the position to deduct part of the income, instead of deducting Rs. 300000/- and charging on the balance 5%, WHT is charged on the total interest income at 2.5% up to Rs. 600000/-. The proposal is if the interest income is less that Rs. 600000; deduct Rs. 300000/- and charge WHT at 5% on the balance Rs. 300000/-

Amendment is up to Rs. 600000/- charge WHT at 2.5%. (the result would be the same. i.e. WHT is Rs.15,000/-)

Therefore, the guideline issued by the Department which is referred to in your letter is based on the amendment to the provision of the Act.

However, please note that if your total income liable to tax does not exceed Rs. 300000/- or exceeds Rs. 300000/- but does not exceeds Rs. 600000/- you are kindly required to inform the bank not to deduct tax or deduct 5% from Rs 300000/- to Rs. 600000/-

I trust this would serve the purpose intended.

The delay in replying is very much regretted. (A copy of the amendment Act No. 10 of 2007 is attached. Please refer Section 133 of the Act)


Yours faithfully


D.G.P.W. Gunatilake
Deputy Commissioner (Secretariat)