Last Updated: July 2026 | Based on Inland Revenue Act No. 24 of 2017 (as amended) and IRD Guidelines.
What Are Tax Deductions?
Tax deductions (called "qualifying payments" in Sri Lanka) are expenses that reduce your taxable income. Less taxable income means less tax.
Simple Example:
- Your income: Rs. 2,000,000
- Qualifying payments: Rs. 200,000
- Taxable income: Rs. 1,800,000
You only pay tax on Rs. 1,800,000 instead of Rs. 2,000,000.
The Rs. 1,000,000 Cap
Important: Total qualifying payments are capped at Rs. 1,000,000 per year.
Even if your expenses exceed Rs. 1M, you can only deduct up to Rs. 1M. This cap applies to the combined total of all qualifying payments below.
Types of Deductions You Can Claim
1. Life Insurance Premiums
Maximum: Rs. 100,000/year
You can deduct premiums paid for:
- Life insurance on yourself
- Life insurance on your spouse
- Life insurance on your children
Requirements:
- Policy from a licensed insurer in Sri Lanka
- Minimum policy term of 10 years
- Must be a pure life policy (not just investment)
2. Health Insurance Premiums
Maximum: Rs. 100,000/year
Covers premiums for:
- Medical insurance for yourself
- Medical insurance for dependents
Requirements:
- Policy from a licensed insurer
- Covers medical expenses
3. Housing Loan Interest
Maximum: Rs. 300,000/year
You can deduct interest paid on:
- A loan to buy your primary residence
- A loan to build your primary residence
Requirements:
- Must be your main home (not rental property)
- Loan from a licensed financial institution
- Keep all interest statements
4. Donations to Government
Maximum: Unlimited (no cap)
Donations to:
- Government hospitals
- Government schools
- Other government institutions
These are fully deductible and don't count toward the Rs. 1M cap.
5. Donations to Approved Charities
Maximum: Lower of Rs. 75,000 or 1/3 of donation
Donations to registered charities are deductible, but with limits.
Example:
- You donate Rs. 150,000
- 1/3 of donation = Rs. 50,000
- You can deduct Rs. 50,000 (lower than Rs. 75,000)
6. Solar Panel Expenses
Maximum: Rs. 600,000/year
If you installed solar panels on your home, you can claim the cost over multiple years.
Requirements:
- Panels installed on your residence
- Can carry forward unused amounts
Quick Reference Table
| Deduction Type | Maximum per Year |
|---|---|
| Life Insurance | Rs. 100,000 |
| Health Insurance | Rs. 100,000 |
| Housing Loan Interest | Rs. 300,000 |
| Approved Investments | Rs. 100,000 |
| Government Donations | Unlimited |
| Charity Donations | Rs. 75,000 |
| Solar Panels | Rs. 600,000 |
| Total Cap | Rs. 1,000,000 |
What About EPF?
Your EPF contribution (8% of salary) is handled differently:
- It's automatically excluded from taxable income
- You don't need to claim it as a deduction
- Your employer already factors this in when calculating APIT
👉 Read more: EPF/ETF Tax Benefits Guide
How to Claim Deductions
For Employees
- Submit proof of qualifying payments to your employer
- Employer adjusts your APIT calculation
- Less tax is deducted from your salary
Documents to provide:
- Insurance premium receipts
- Housing loan interest certificate
- Donation receipts
When Filing Your Return
- List all qualifying payments in your tax return
- Attach proof documents
- Calculate reduced taxable income
- Pay any remaining tax (or claim refund)
Maximizing Your Deductions
Strategy 1: Use All Categories
Don't just max out one category. Spread across:
- Rs. 100,000 life insurance
- Rs. 100,000 health insurance
- Rs. 300,000 housing loan interest
- Total: Rs. 500,000 in deductions
Strategy 2: Time Your Payments
Pay annual premiums before March 31 to claim in that tax year.
Strategy 3: Keep Records
Many deductions are lost because people don't keep receipts. Save:
- All insurance payment receipts
- Loan statements showing interest
- Donation acknowledgment letters
Deductions You CANNOT Claim
These are not deductible:
- ❌ Rent payments
- ❌ School fees
- ❌ Grocery expenses
- ❌ Vehicle loan interest
- ❌ Credit card interest
- ❌ Travel expenses (unless business)
- ❌ Clothing
Example: Full Calculation
Your Situation:
- Annual income: Rs. 3,000,000
- Life insurance paid: Rs. 80,000
- Health insurance paid: Rs. 50,000
- Housing loan interest: Rs. 250,000
Calculation:
- Gross income: Rs. 3,000,000
- Less personal relief: Rs. 1,800,000
- Less qualifying payments: Rs. 380,000
- Taxable income: Rs. 820,000
Tax on Rs. 820,000:
- First Rs. 1,000,000 × 6% on Rs. 820,000 = Rs. 49,200
- Total tax: Rs. 49,200
Without qualifying payments, taxable income would be Rs. 1.2 million:
- First Rs. 1,000,000 × 6% = Rs. 60,000
- Next Rs. 200,000 × 18% = Rs. 36,000
- Total tax: Rs. 96,000
With deductions, you save Rs. 46,800!
Key Takeaways
✅ Qualifying payments reduce your taxable income
✅ Maximum total deduction is Rs. 1,000,000/year
✅ EPF is automatically handled - no need to claim
✅ Keep all receipts and statements
✅ Submit proof to employer to reduce APIT
Calculate Your Savings
Use our Income Tax Calculator to see how deductions affect your tax. Try different scenarios to maximize your savings.
👉 Related: Complete Income Tax Guide
Frequently Asked Questions
"Can I claim deductions from previous years?"
No. Qualifying payments must be made within the tax year (April 1 - March 31) to be claimed for that year. The only exception is solar panel installation costs which can be carried forward.
"Do I need to submit proof for every deduction?"
Yes. Keep all receipts, premium statements, and bank certificates for at least 5 years. The IRD may request verification during assessment.
"Can my spouse claim the same deduction?"
No. Each qualifying payment can only be claimed by one taxpayer. However, you can strategically allocate deductions between spouses for optimal tax savings.
"What if my total deductions exceed Rs. 1,000,000?"
Only Rs. 1,000,000 is allowed (excluding unlimited government donations). Plan your qualifying payments accordingly.
Read: Related Guides
| Guide | What You'll Learn | Read Time |
|---|---|---|
| Income Tax Guide 2025/2026 | Complete tax brackets & calculations | 18 min |
| APIT Explained | How employer tax deductions work | 12 min |
| EPF/ETF Tax Benefits | Triple tax advantage explained | 9 min |
| Expat & Remote Worker Tax | 183-day rule, foreign income | 11 min |
Official Resources
- Inland Revenue Department: ird.gov.lk
- IRD Tax Forms (T10): Income Tax Forms
- Inland Revenue Act: Parliament.lk
Disclaimer
This guide is for educational purposes. Tax laws change and individual circumstances vary. Consult the IRD or a tax professional for personalized advice.
Last Updated: July 1, 2026
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