If you’re earning interest on fixed deposits in Sri Lanka, you’ve likely noticed that banks automatically deduct 10% as withholding tax. This is known as the Advance Income Tax (AIT).
Many people assume that this 10% is the final tax, and that no further payments are required. Unfortunately, that’s not always the case.
Let’s break down why you may still need to pay additional income tax on your interest income — and how it works under Sri Lanka’s current tax laws.
📌 Quick Overview: What is the 10% Tax Deducted by Banks?
As per the Inland Revenue Act, Sri Lankan banks are required to deduct 10% Advance Income Tax (AIT) from your interest income, such as:
- Savings accounts
- Fixed deposits (FDs)
- Treasury bills or bonds (via financial institutions)
This 10% is withheld at source and remitted to the Inland Revenue Department (IRD) under your Taxpayer Identification Number (TIN) (if you’ve given one to your bank).
❓ So Why Do You Still Owe More Tax?
Because the 10% is only an advance payment — not the final tax.
Under Sri Lanka’s personal income tax system, you are taxed based on your total annual income, not each source in isolation. If your total income exceeds the tax-free threshold of LKR 1.8 million per year (as of 2024/25), you must pay tax on the balance, including interest income.
🔹 Example:
| Income Source | Amount (LKR) |
|---|---|
| Fixed Deposit Interest | 1,200,000 |
| Salary | 2,000,000 |
| Rental Income | 600,000 |
| Total Income | 3,800,000 |
In this case, since the total income exceeds LKR 1.8M, you fall into a higher tax bracket — and the interest income is subject to your marginal tax rate, which may be 18%, 24%, 30%, or even 36%.
The 10% already deducted will be treated as a credit, but you still need to pay the difference.
⚠️ What If You Don’t Declare the Interest Income?
Failure to declare your full interest income can be considered non-compliance. The Inland Revenue Department (IRD) already receives AIT reports from banks, so they know how much interest you’ve earned.
If your tax return doesn’t match what the bank reported, it could trigger:
- A tax audit
- Penalties and interest
- Delay or rejection of refunds
👴 Are Senior Citizens Exempt?
Yes — but only under specific conditions.
If you’re a senior citizen (60+) and your total assessable income is less than LKR 1.8 million per year, you can apply for a refund of the 10% AIT deducted by the bank.
But again, this is not automatic. You must:
- File an income tax return
- Submit proof of total income and interest earned
✅ What Should You Do?
- Check your total annual income
- Gather your bank interest certificates
- File your income tax return on RAMIS (https://ramis.ird.gov.lk)
- Declare all income sources, including fixed deposit interest
- Claim credit for the 10% already deducted
- Pay any additional tax if your tax liability exceeds the withheld amount
🧮 Need Help Calculating?
If you’re unsure how much more tax you owe on your interest income, a tax advisor or accountant can:
- Review your income sources
- Calculate your total tax liability
- Ensure you claim all credits properly
- Help you avoid fines and audits
🔚 Final Thoughts
Yes — banks deduct 10% tax on your fixed deposit interest.
But that doesn’t mean you’re done with your tax obligations.
If your total income exceeds the tax-free threshold, your interest income may push you into a higher tax bracket — and you’ll owe the difference. The 10% is just the beginning.
💡 So don’t ignore your fixed deposit interest when filing taxes — declare it, claim credit, and stay compliant with Sri Lanka’s Inland Revenue Department.
