(With Clear Calculation Examples)
One of the most common questions among small business owners and freelancers in Sri Lanka is:
“When should I convert my business into a Pvt Ltd company for tax benefits?”
The answer depends on your monthly income — because income tax rates for individuals and companies are structured differently. If your income crosses a certain level, it may be much cheaper in tax terms to operate through a Pvt Ltd company.
Current Personal Income Tax Rates (2025)
| Income Level (Monthly) | Tax Rate |
|---|---|
| Up to Rs. 100,000 | 6% |
| 100,000 – 141,667 | 12% |
| 141,667 – 183,333 | 18% |
| 183,333 – 225,000 | 24% |
| 225,000 – 266,667 | 30% |
| Over 266,667 | 36% |
Current Corporate Tax Rate (Pvt Ltd Company)
| Income Level | Tax Rate |
|---|---|
| All levels | 30% |
How does this work in practice?
When your monthly income is low (below Rs. 225,000), personal income tax rates are better than corporate tax (30%).
But when your income exceeds about Rs. 360,000 per month, your personal tax shoots to 36% — higher than the 30% corporate tax rate.
At that point, registering as a Pvt Ltd company can give you a tax advantage.
Let’s see some example calculations:
Scenario 1: Monthly income Rs. 300,000
👉 Personal income tax:
- First Rs. 225,000 → taxed at lower slabs (6%-30%)
- Next Rs. 75,000 → taxed at 36%
Effective tax: around 28%-30% average → no major difference vs. Pvt Ltd.
Scenario 2: Monthly income Rs. 400,000
👉 Personal income tax:
- First Rs. 225,000 → taxed at lower slabs
- Rs. 175,000 → taxed at 36%
Effective tax: around 33%-34% average
👉 Pvt Ltd tax: flat 30%
Result: Saving tax with Pvt Ltd structure!
Summary Table
| Monthly Income | Personal Tax (Avg.) | Pvt Ltd Tax | Which is Better? |
|---|---|---|---|
| Rs. 200,000 | ~24% | 30% | Personal |
| Rs. 300,000 | ~28%-30% | 30% | Similar |
| Rs. 400,000 | ~34% | 30% | Pvt Ltd |
| Rs. 500,000 | ~35%-36% | 30% | Pvt Ltd |
Conclusion: When Should You Register as Pvt Ltd?
👉 If your monthly business income regularly exceeds Rs. 360,000, it is financially smart to switch to a Pvt Ltd company:
✅ You will save on tax (from 36% down to 30%)
✅ Your business looks more professional to clients & partners
✅ You can claim more business expenses
✅ Easier to scale and attract investors
If your monthly income is below Rs. 300,000, it is usually better to stay as an individual or sole proprietor.
