In Sri Lanka, interest earned from bank deposits is generally subject to a 10% Advance Income Tax (AIT) under the 2025 Budget Proposals. However, starting from April 1, 2025, there is an opportunity for certain individuals to reduce or eliminate this tax if their annual assessable income does not exceed Rs. 1,800,000. This is great news for those who are struggling to manage their finances and want to keep more of their earned interest. This blog will explain how to apply for this reduction, the eligibility criteria, and the steps involved.
The Basics of the 10% Tax on Bank Deposit Interest
Before we dive into the details of how to apply for the tax reduction, let’s first clarify the basics of the Advance Income Tax (AIT) that will be applied on the interest earned from bank deposits.
- Rate of Tax: A 10% tax will be levied on the interest income that individuals earn from their deposits in banks and financial institutions.
- Who is Affected: This tax will affect all individuals receiving interest income from their savings accounts, fixed deposits, and other similar financial products.
However, individuals whose annual assessable income (total income from all sources) is below Rs. 1,800,000 have an opportunity to reduce this tax burden.
What is Assessable Income?
Assessable income refers to the total income you earn from various sources, including:
- Salary: Wages or salary earned through employment
- Business Income: Profits earned from any business you operate
- Investment Income: Interest earned from bank deposits, stocks, bonds, etc.
- Other Sources: This could include rental income, pension, and other sources of income
To qualify for the tax reduction on bank deposit interest, your total annual assessable income from all these sources combined must not exceed Rs. 1,800,000 in the relevant Year of Assessment (April 1st to March 31st).
How to Apply for the Tax Reduction
Now, if you meet the eligibility criteria and wish to reduce the 10% tax on your bank deposit interest, the process is relatively straightforward but involves specific steps. Here’s how you can proceed:
1. Submit a Self-Declaration to Your Bank or Financial Institution The key to reducing or eliminating the 10% tax is to submit a self-declaration to the bank or financial institution where your deposit is held. This declaration will inform the institution that you qualify for the reduction based on your total income for the relevant year.
- Form Submission: The self-declaration form can be downloaded from the IRD Inland Revenue Department’s official website. It’s crucial to ensure you use the correct form, as banks and financial institutions will only accept the version available online from the IRD.
- Personal Details: The form will require you to provide your Taxpayer Identification Number (TIN), which is essential for processing. If you don’t already have one, you will need to obtain it from the Inland Revenue Department.
2. Ensure Your Annual Assessable Income is Below Rs. 1,800,000 As mentioned earlier, to qualify for the reduction, your total annual assessable income from all sources must be less than Rs. 1,800,000 for the year of assessment. The bank or financial institution will verify this when processing your self-declaration.
3. Multiple Bank Accounts? Submit Separate Declarations If you have multiple bank accounts or deposits across different institutions, you will need to submit a separate self-declaration for each institution. This ensures that each institution has the correct information regarding your eligibility.
4. What if You Open a New Deposit Account? If you decide to open a new deposit account after submitting a self-declaration for an existing account, the previous declaration will become invalid. You will need to submit a new self-declaration for the new account to ensure you receive the benefit for that year.
5. Validity of the Self-Declaration The self-declaration is only valid for one year of assessment, which spans from April 1st to March 31st of the following year. Therefore, you will need to submit a new declaration every year to continue benefiting from the tax reduction.
6. Guardians Can Submit Declarations on Behalf of Minors If the deposit account is in the name of a minor, the guardian (typically a parent or legal representative) can submit the self-declaration on their behalf. The guardian will need to provide their National Identity Card (NIC) and Taxpayer Identification Number (TIN) when submitting the declaration.
7. Joint Accounts For joint accounts, each account holder must submit a separate self-declaration. Each person will only be eligible for the tax reduction on the portion of the interest they are entitled to from the joint account.
8. Submission Before Tax Deduction The self-declaration should be submitted before the AIT is deducted from your interest payments. If the tax has already been deducted by the bank before you submit the form, you will not be able to claim an immediate refund. In such cases, you can file a claim for a refund with the Inland Revenue Department (IRD) later.
9. Accuracy of Information It’s essential that the information you provide in the self-declaration is accurate and truthful. If the IRD finds that the information provided is false or misleading, they may reject your declaration, and you may face penalties as outlined in the Inland Revenue Act, No. 24 of 2017.
Conclusion
In conclusion, the opportunity to reduce the 10% Advance Income Tax on your bank deposit interest is a great way to minimize the tax burden if your income is below the set threshold. The process involves submitting a self-declaration to the bank, ensuring your total annual assessable income is below Rs. 1,800,000, and adhering to the guidelines set by the Inland Revenue Department. Make sure to follow the process correctly to benefit from this tax reduction!
For additional guidance and personalized assistance with the self-declaration process or any other tax-related matters, contact Talentspark Consulting today. We’re here to help ensure you stay compliant and optimize your tax situation!
