Sri Lanka Rental Income Guide

the Sri Lanka rental income taxation for the individual landlords for 2026. The guide covers: the rental income taxed at IIT 6-36% progressive — the net rental income (the gross rent minus the allowable deductions) is added to the other income and taxed at the progressive IIT rates; the deductions — rates, repairs, insurance (itemized) — the allowable expenses include the property rates, the repairs, the insurance, and the other costs; the 10% WHT on rent paid to residents — the tenant must withhold 10% of the gross rent and remit to the IRD; the 20% WHT on rent to non-residents — the higher withholding rate for the non-resident landlords; the no separate rental tax regime — Sri Lanka does NOT have the special tax regime for the rental income; the property owning company vs individual ownership — the comparison of the tax implications; the deed lease tax ~0.1% — the stamp duty on the lease agreement.

Rental Income Taxed at IIT 6-36% Progressive

IIT progressive rates: The rental income received by the individual landlord is taxed as part of the "total assessable income" (the "aggregate income" from all sources) at the progressive IIT (the "Individual Income Tax") rates for 2026: (a) LKR 0 to LKR 3,000,000 — 0% (the tax-free threshold), (b) LKR 3,000,001 to LKR 6,000,000 — 6%, (c) LKR 6,000,001 to LKR 9,000,000 — 12%, (d) LKR 9,000,001 to LKR 12,000,000 — 18%, (e) LKR 12,000,001 to LKR 15,000,000 — 24%, (f) LKR 15,000,001 to LKR 18,000,000 — 30%, (g) LKR 18,000,001 and above — 36%.
Net rental income: The taxable rental income is the "net rental income" — the gross rent received minus the allowable deductions (the "expenses incurred in the production of the rental income"). The net rental income is aggregated with the other income (the employment income, the business income, the investment income) for the rate determination.
Reporting on the ITR: The rental income must be reported on the annual ITR (the "Form IIT") under the "rental income" section. The landlord must maintain the detailed records of the rental receipts and the expenses for the IRD verification.

Deductions — Rates, Repairs, Insurance (Itemized)

Allowable deductions: The landlord may deduct the "actual expenses incurred" in the production of the rental income. The common allowable deductions under the Section 29 of the IRA include: (a) the "property rates" — the annual local government rates (the "Urban Council rates" or the "Pradeshiya Sabha rates") paid on the rental property; (b) the "repairs and maintenance" — the costs of the repair of the building, the plumbing, the electrical, the roofing, and the painting (NOT the capital improvements — the "betterment" expenses are NOT deductible, only the "repairs and the maintenance"); (c) the "insurance premiums" — the building insurance, the fire insurance, the landlord liability insurance; (d) the "management fees" — the fees paid to the property management company; (e) the "utility costs" — the water and the electricity charges if paid by the landlord; (f) the "legal and professional fees" — the legal fees for the lease agreement and the debt collection; (g) the "depreciation" — the "capital allowance" (the "wear and tear" at the rate of 2% per year on the cost of the building) available to the individuals.
Non-deductible expenses: The following expenses are NOT deductible: (a) the "capital expenditure" — the extension, the renovation, the new construction; (b) the "personal expenses" — the landlord's own utility bills unrelated to the rental property; (c) the "notional costs" — the deemed rent of the owner-occupied property; (d) the "fines and penalties" — the penalties paid to the government authorities.
Record-keeping: The landlord must maintain the records of the rental expenses: the receipts, the invoices, the contracts, the bank statements, and the depreciation schedules. The records must be retained for 6 years from the end of the tax year (the "statute of limitations" under the IRA).

10% WHT on Rent Paid to Residents

WHT obligation — 10%: The tenant (the "lessee" or the "renter") who pays the rent to the resident individual landlord (the "lessor") must withhold the tax at the rate of 10% of the gross rent under the Section 84 of the IRA. The WHT (the "withholding tax" or the "rental withholding") applies to the payments made under the "lease agreement", the "rental agreement", or the "tenancy agreement".
WHT remittance: The tenant must remit the withheld tax to the IRD by the 15th day of the month following the rental payment. The tenant must file the monthly WHT return (the "Form WHT 1") showing the landlord's details (the name, the TIN, the address), the gross rent, the WHT rate, and the tax withheld.
Credit for the landlord: The landlord may claim the WHT deducted by the tenant as the credit against the final IIT liability on the rental income. The landlord receives the annual "WHT certificate" (the "Form WHT 2") from the tenant showing the total rent and the total tax withheld. The WHT is treated as the "advance tax" — if the WHT exceeds the final tax liability, the excess is refundable.

20% WHT on Rent to Non-Residents

Higher WHT rate — 20%: The tenant who pays the rent to the non-resident landlord (the "landlord who is not resident in Sri Lanka") must withhold the tax at the rate of 20% of the gross rent. The higher rate reflects the "final withholding" — the non-resident landlord is NOT required to file the Sri Lankan tax return (unless the landlord has the other Sri Lankan-source income).
Treaty relief: The non-resident landlord may claim the reduced withholding rate under the applicable DTAA (the "Double Tax Avoidance Agreement") between Sri Lanka and the landlord's country of residence. The reduced rate is typically 10% to 15% depending on the treaty. The landlord must provide the "Certificate of Residence" from the home country tax authority to claim the treaty rate.
No deductions for non-residents: The non-resident landlord is NOT entitled to the deductions against the rental income for the WHT purposes — the WHT is calculated on the "gross rent" without the deduction of the expenses. However, the non-resident landlord may file the optional "non-resident tax return" to claim the deductions and the refund of the excess WHT.

No Separate Rental Tax Regime

Standard IIT rules apply: Sri Lanka does NOT have the "special rental income tax regime" (unlike the Hungary 10% deemed cost deduction or the UK "rent-a-room" scheme). The rental income is taxed under the standard IIT provisions — the net rental income is added to the other income and taxed at the progressive rates of 0% to 36%.
No deemed cost deduction: Sri Lanka does NOT allow the "deemed cost deduction" or the "flat-rate expense deduction" for the rental income. The landlord must use the "itemised cost accounting" — the actual expenses must be substantiated with the receipts and the invoices.
Withholding as the collection mechanism: The primary tax collection mechanism for the rental income is the "withholding tax" (the WHT at 10%) — the tenant withholds the tax at the source and the landlord claims the credit. The WHT ensures the basic compliance even if the landlord fails to file the return.

Property Owning Company vs Individual Ownership

Individual ownership: The rental income received by the individual is taxed at the progressive IIT rates of 6% to 36% (with the first LKR 3 million exempt). The individual landlord is entitled to the personal deductions (the interest expense on the mortgage, the property rates, the repairs). The capital gain on the sale of the property may be subject to the CGT at 10% if the property is held as the capital asset.
Company ownership: The rental income received by the company (the "property-owning company") is taxed at the CIT rate of 14% (the "SME rate" for the companies with the annual turnover below LKR 500 million) or 24% (the "standard CIT rate"). The company may also be subject to the "Deemed Dividend" rules if the rental income is distributed to the shareholders. The company may claim the "capital allowances" (the "depreciation" at the prescribed rates) on the property.
Comparison: The company ownership may be more tax-efficient for the high-income individuals in the 36% IIT bracket — the company pays the CIT at 14-24% vs the individual IIT at up to 36%. However, the company structure involves: (a) the "double taxation" — the company pays the CIT on the rental income and the shareholders pay the tax on the dividends (14%), (b) the "administration costs" — the company registration, the annual returns, the audit, (c) the "regulatory compliance" — the Companies Act compliance, the BOI registration (if applicable).

Deed Lease Tax — ~0.1%

Stamp duty on the lease agreement: The lease agreement (the "deed of lease" or the "rental agreement") is subject to the "stamp duty" under the Stamp Duty Act (Act No. 43 of 1982, as amended) and the Provincial Councils Stamp Duty Act. The stamp duty is approximately 0.1% to 0.2% of the total rent over the lease term (the "rental consideration").
Calculation: The stamp duty is calculated on the "total rent payable" over the lease period, not the annual rent. For example: the lease of LKR 100,000/month for 3 years = total rent of LKR 3,600,000 → the stamp duty at 0.1% = LKR 3,600. The stamp duty is shared between the landlord and the tenant as agreed in the lease agreement (typically 50/50).
Registration: The lease agreement for the period exceeding 1 year should be registered with the "Land Registry" (the "Registrar General's Department") — the registration fee is approximately 0.1% of the total rent. The short-term lease (less than 1 year) does NOT require the registration but the stamp duty still applies.