Tax on Fixed Deposit Interest in Sri Lanka: The 10% AIT Explained

Tax on interest is the most commonly misread line in a fixed deposit statement. Depositors see an advertised rate, do the arithmetic in their head, and then find a smaller number credited to the account. That gap is not a bank error — it is tax collected at source, and as of 1 April 2026 the amount collected is twice what it used to be. If you are comparing deposits, renewing one, or deciding between an FD and a savings account, the number that matters is what lands in your account after the deduction.

What Advance Income Tax Is

Advance Income Tax is a collection mechanism. Rather than waiting for you to declare interest income at the end of the year, the bank deducts tax from the interest before paying it to you and remits it to the Inland Revenue Department against your account. You receive the interest net; the tax has already been paid on your behalf.

The word advance carries the important distinction. AIT is not a final tax on the interest. It is an instalment against your total income tax liability for the year of assessment. That has two consequences worth understanding, and we return to both below: if too much was deducted you can recover the difference, and if your income is high enough that interest is taxed above 10%, the deduction will not have settled the bill.

What the Change Costs You

The rate on your deposit did not change — the deduction did. Here is a 12-month FD of Rs. 1,000,000 at a gross rate of 10% per annum, with interest paid at maturity, under both regimes.

The shortcut worth memorising: your net rate is now nine tenths of the advertised rate. An FD quoted at 11.5% returns 10.35% in hand. One quoted at 8% returns 7.2%. Our FD calculator applies the 10% deduction by default, so the figure it shows is what the bank credits rather than what the bank advertises.

One point that trips people up when comparing products: this deduction does not change which option wins. Savings account interest is subject to the same 10% deduction as fixed deposit interest, so an FD paying more gross still pays more net. The deduction lowers both sides of the comparison by the same proportion — it does not reverse the ranking. Our FD versus savings account comparison works through that in full.

How to Stop the Deduction If You Earn Under Rs. 1,800,000

This is the part most depositors do not know about, and for retirees and low-income savers it is worth real money.

The personal relief threshold for resident individuals is Rs. 1,800,000 a year. If your assessable income from all sources — salary, rent, business income, interest, everything — does not exceed that figure for the year of assessment, you have no income tax liability, and there is no reason for tax to be withheld from your interest in the first place. Rather than paying it and reclaiming it later, you can ask the bank not to deduct it.

You do this by filing a self-declaration with the bank. The mechanics matter:

• File with every institution separately. The declaration is made to the bank or finance company paying the interest, not to the IRD centrally. If you hold deposits at three institutions, you file three declarations.
• File before the interest is paid. A declaration submitted after an interest payment does not undo the deduction on that payment. For a deposit paying interest at maturity, that means filing well ahead of the maturity date; for a monthly-payout deposit, ahead of the next payout.
• The threshold is your total income, not your interest. A depositor with a Rs. 1,500,000 salary and Rs. 400,000 of interest is over the line at Rs. 1,900,000 and does not qualify, even though the interest alone is small.
• It is a declaration you are responsible for. You are certifying your own income position to obtain relief. If your circumstances change during the year and you cross the threshold, the obligation to settle the correct tax is yours.

Ask at your branch for the AIT self-declaration form — most banks published one to customers in April 2026 and several make it downloadable from their websites. If you are close to the threshold or unsure how a particular income source is treated, get the position confirmed by a registered tax advisor before you sign.

Who Is Outside the Deduction Entirely

• Foreign currency accounts. Interest paid on foreign currency deposits is not subject to the AIT deduction.
• Holders of an IRD approval. A person who has obtained an exemption or reduced-rate direction from the Inland Revenue Department, and has presented it to the bank, is paid accordingly.
• Non-resident individuals are generally deducted at 15%, or at a lower rate where a double taxation avoidance agreement between Sri Lanka and the depositor's country of residence provides one. Claiming a treaty rate requires documentation lodged with the bank.

Deduction Certificates and Your Annual Return

When a bank deducts AIT it must give you a certificate recording the gross interest, the tax deducted, and the net amount credited. Banks issue these at the time of interest payment — annually on long deposits, or at each payout date on monthly and quarterly options.

Keep them. Because AIT is an advance rather than a final tax, the certificate is what lets you claim the deduction as a credit when you file. Two situations make this concrete:

• You were over-deducted. Someone whose income sits below Rs. 1,800,000 but who did not file a self-declaration in time has had 10% taken from interest on which no tax was ultimately due. Filing a return with the certificates attached is how that money is recovered.
• You were under-deducted. Resident individual income above the threshold is taxed progressively, and the upper bands run well above 10%. A depositor in a higher band has had only part of the liability on that interest settled at source and will owe the balance through the annual return. Treating the 10% as if it closed the matter is a common and expensive assumption.

Banks can reissue lost certificates, but it takes time and paperwork. Filing them as they arrive is far easier than reconstructing a year of interest payments in a hurry.

What to Do Now

If you hold fixed deposits in Sri Lanka, three actions follow from this change. First, recompute what your existing deposits actually return — at nine tenths of the advertised rate, some deposits look different against alternatives than they did in March. Second, if your income is under Rs. 1,800,000, file a self-declaration with each institution before your next interest payment date rather than reclaiming tax a year later. Third, when you compare new deposits, compare net figures throughout, since a gross rate table understates the gap between a good rate and a poor one once tax is applied.

You can compare current rates across every bank we track and run the numbers on your own deposit with the FD calculator, which shows net returns by default.