💼 Is Pension Income Taxable in Sri Lanka? – A Deep Dive Analysis (2025)

📌 Introduction

With Sri Lanka modernizing its tax system through successive reforms—most notably the Inland Revenue Act, No. 24 of 2017 (as amended)—questions continue to arise about what qualifies as taxable income. A recurring query is: “Is pension income taxable in Sri Lanka?”

This blog explores the legal interpretation, current Inland Revenue Department (IRD) guidance, and practical implications for individuals receiving pensions—whether from public, private, or foreign sources.

🧾 What Is Pension Income?

In general terms, pension income refers to periodic payments made to a retired individual, often as part of retirement benefits. There are three primary sources of pensions in Sri Lanka:

1. Government pensions – paid to public sector retirees.
2. EPF/ETF-based annuities or private pensions – from employer-managed schemes.
3. Foreign pensions – received from abroad, e.g., UK, Canada, Australia.

🏛️ What Does the Inland Revenue Act Say?

According to Section 5 of the Inland Revenue Act, No. 24 of 2017, the following types of income are subject to tax:

• Employment income
• Business income
• Investment income
• Other gains and profits

Pension income is not explicitly included under “employment income” because the employment relationship has ended. However, it can fall under “investment income” or “other income” depending on the structure.

🔍 Important IRD Circular:

Public sector pensions are specifically exempt from income tax.

This is supported by:

Schedule of Exempt Amounts – Item 10:
“Any amount received as a pension by a person who was employed in the public sector of Sri Lanka.”

This exemption does not automatically extend to private or foreign pensions unless they fall under a specific exemption clause.

🧮 Taxability of Different Pension Sources

🧑‍⚖️ Key Tax Rules That Apply

✅ 1. Public Pension Exemption

If you are a Sri Lankan citizen who retired from government service, your pension is fully exempt—even if it is sizable.

✅ 2. Tax on Private/Foreign Pensions

If you receive a monthly pension from:

• A private sector employer
• An overseas fund (e.g., UK State Pension, Canadian CPP, etc.)

Then you may be liable for Income Tax only if:

• You are resident in Sri Lanka and
• The money is received or remitted into a Sri Lankan bank account

Example:

A Sri Lankan retiree living in Jaffna receives LKR 150,000 monthly from a UK pension fund. This is taxable as foreign income (after reliefs, if any).

💰 Do You Need to File a Tax Return?

You must file a Personal Income Tax Return if your total assessable income exceeds LKR 1.2 million per annum (i.e., LKR 100,000 per month), including foreign pensions.

Public pensioners do not need to file unless they have other income sources (rent, dividends, business income, etc.)

📈 Common Scenarios

🧓 Retired Govt Officer (e.g., Teacher or Army Officer)

• Receives LKR 60,000/month as pension
• ✅ Not taxable
• ❌ No return needed (unless other income exists)

👩‍💼 Retired Private Company Director

• Receives LKR 100,000/month pension from company fund
• ✅ Taxable
• ✅ Must file return and pay tax if above threshold

🌍 Retired Sri Lankan living locally, receiving UK pension

• UK State Pension: £400/month (~LKR 160,000)
• ✅ Taxable in Sri Lanka under foreign income
• ✅ Return filing mandatory

🧾 Can You Claim Relief or Deductions?

Yes. Taxpayers receiving taxable pension income may still claim:

• LKR 1.2 million annual tax-free allowance
• Relief for qualifying dependent expenses (under new rules)
• Deductions for medical or charitable donations if applicable

⚖️ Recent Trends & IRD Enforcement (2025)

As the IRD digitally tracks inward remittances and bank activity, pensioners receiving foreign income are increasingly being asked to:

• Declare income accurately
• File annual returns
• Pay advance self-assessment tax (SAT) if liable

The IRD is particularly focused on:

• Dual citizens returning to Sri Lanka
• Pensioners remitting funds from Europe, Australia, or Gulf countries

📌 Final Thoughts: Should You Worry?

If you’re receiving a public sector pension, you’re safe—no taxes, no stress.

However, if you are:

• A retired private employee
• Receiving foreign pensions
• A resident taxpayer with overseas annuity income

You must ensure full compliance to avoid future penalties.

✅ Summary: Pension Taxation at a Glance

📣 Need Help Declaring Pension Income?

360 Accountants offers personalized income tax filing services for pensioners, retirees abroad, and expatriate returnees. We ensure you stay compliant while claiming every eligible exemption.

📞 Contact us today for a free consultation.