Sri Lankans enjoy most tax-free income in South Asia, but face highest tax fastest

The comparison of Sri Lanka’s personal income tax structure with its South Asian peers reveals three key findings. One, Sri Lanka has the highest tax-free income - that is, the minimum income before taxes are applied. Two, Sri Lankans are charged the top tax rate—that is, the highest rate of income tax in the tax schedule—at a lower income. Three, Sri Lanka’s tax burden is relatively lower at lower income levels (individuals earning below LKR 250,000 per month) but higher at higher income levels (above LKR 250,000).

Background

In 2023, Sri Lanka reformed its personal income tax structure through the Inland Revenue (Amendment) Act, No. 45 of 2022, with the aim of increasing revenue collected through personal income taxes. These reforms included the reduction of the tax-free threshold from LKR 3.0 million (LKR 250,000 per month) to LKR 1.2 million annually (LKR 100,000 per month), the reduction of the tax slab from LKR 3.0 million to LKR 500,000 per annum, and increasing tax rates up to 36%, from the previous maximum of 18%.

As a result, personal income tax revenue surged from LKR 49.5 billion in 2022 to LKR 193.5 billion in 2023, nearly quadrupling in value.

The personal income tax structure currently applicable in Sri Lanka is shown in Exhibit 1.

Exhibit 1: Personal income tax schedule as of September 2024

Annual Income		Monthly Income
Lower Boundary	Upper Boundary	Lower Boundary	Upper Boundary	Tax Rate (%)
0	1,200,000	-	100,000	0%
1,200,000	1,700,000	100,000	141,667	6%
1,700,000	2,200,000	141,667	183,333	12%
2,200,000	2,700,000	183,333	225,000	18%
2,700,000	3,200,000	225,000	266,667	24%
3,200,000	3,700,000	266,667	308,333	30%
3,700,000		308,333	-	36%

Source : Inland Revenue Department of Sri Lanka, at https://www.ird.gov.lk/en/sitepages/default.aspx [last accessed 3 September 2024].

Sri Lanka’s generous tax-free income threshold

Sri Lanka has the highest tax-free income threshold in South Asia, excluding the Maldives. Citizens are exempt from paying income tax unless they earn over LKR 1.2 million annually (LKR 100,000 per month). In comparison, neighbouring countries have much lower thresholds. Bangladesh's monthly tax-free threshold is equivalent to LKR 75,682, while Pakistan’s is LKR 54,710. India and Bhutan have thresholds of around LKR 91,000, slightly lower than Sri Lanka. Nepal stands out as an outlier with no tax-free income threshold, imposing a 1% tax even on the lowest income earners. Sri Lanka’s generous tax-free allowance makes it one of the more taxpayer-friendly countries in the region, at least for those at the lower end of the income scale who are exempt from paying taxes.

Sri Lanka’s quick climb to the top tax rate

Sri Lanka imposes its highest tax rate at a relatively lower income threshold compared to other South Asian countries. Individuals earning over LKR 308,333 per month are subject to a steep 36% tax rate, making Sri Lanka the fastest in the region to reach its top tax bracket - the highest tax rate at which income is taxed. In comparison, India and Bhutan apply their top tax rate of 30% on incomes around LKR 457,000 and LKR 456,000, respectively, while Pakistan’s 35% rate applies to incomes above LKR 374,000. Bangladesh, with a lower top tax rate of 25%, taxes incomes above LKR 357,000. Nepal, the only country with a higher top tax rate than Sri Lanka, charges 39% on incomes over LKR 950,958, while its 36% rate applies to earnings above LKR 381,000—still higher than Sri Lanka’s threshold.

Disparity in tax burden on lower and higher income levels

The analysis reveals a distinct pattern in Sri Lanka's personal income tax burden, which varies significantly between lower and higher income levels. At lower incomes, particularly for those earning below LKR 250,000 per month, the tax burden—measured as the percentage of income paid in taxes—is lighter than in other South Asian countries. For example, individuals earning LKR 150,000 in Sri Lanka pay just 2% of their income as taxes, while the rest of South Asia, on average, pays 4% (Includes the Maldives). However, beyond this threshold, the tax burden rises steeply. For incomes exceeding LKR 250,000 per month, Sri Lanka’s tax burden increases more rapidly than its regional peers, making it one of the highest in South Asia. At an income level of LKR 500,000, Sri Lanka’s tax burden is much higher at 21%, compared to the South Asian average of 15%. However, it is still below the tax burden of Pakistan (22%) and Nepal (23%).

Ultimately, Sri Lanka's personal income tax system places the country in a distinct position within South Asia. On one hand, it offers substantial relief to low-income earners with its high tax-free threshold. On the other hand, it imposes a steep tax burden on high-income earners, far more quickly than its neighbours

Note on the Methodology used for the analysis

The tax schedules for each South Asian country were collected from the relevant government websites and other reliable sources such as PricewaterhouseCoopers (PwC), Orbitax. (Please see sources section)
Once collected, the tax brackets were converted from the respective local currency to Sri Lankan rupees using the exchange rate as of July 8, 2024 to ensure a fair comparison across countries.
Annual incomes were converted to monthly figures by dividing by 12.
Afghanistan was excluded from this analysis due to the lack of data.
The tax structure of the Maldives was also excluded from the analysis as it is considered an outlier. The Maldivian tax structure has an exceptionally high tax-free income threshold, with taxation starting at an annual income exceeding MVR 720,000, which is equivalent to LKR 14,198,976. Additionally, data from the Maldives Inland Revenue Authority indicates that the country relies minimally on income tax, generating only 1-2% of its total revenue from this source.

Additional Tables

Table 1: Tax free income threshold in South Asia (local currency and LKR equivalent)

Country	Annual Tax-free threshold in Local Currency	Monthly Tax-free threshold in Local Currency	LKR equivalent of Monthly Tax-free threshold*
Sri Lanka	LKR 1,200,000	LKR 100,000	LKR 100,000
Bangladesh	BDT 350,000	BDT 29,167	LKR 75,682
Pakistan	PKR 600,000	PKR 50,000	LKR 54,710
India	INR 300,000	INR 25,000	LKR 91,310
Bhutan	BTN 300,000	BTN 25,000	LKR 91,107
Nepal	0	0	0
Maldives	MVR 720,000	MVR 60,000	LKR 1,183,248

Table 2: Annual tax rate schedules in South Asia (local currency and LKR equivalent)

Country	Income Group (LKR Equivalent)		Tax rate (%)
Country	Lower income boundry	Upper income boundry	Tax rate (%)
Bangladesh	0	908,180	0%
	908,180	1,167,660	5%
	1,167,660	1,946,100	10%
	1,946,100	2,984,020	15%
	2,984,020	4,281,420	20%
	4,281,420		25%
Pakistan	0	656,520	0%
	656,520	1,313,040	5%
	1,313,040	2,407,240	15%
	2,407,240	3,501,440	25%
	3,501,440	4,486,220	30%
	4,486,220		35%
Maldives	0	14,198,976	0%
	14,198,976	23,664,960	6%
	23,664,960	35,497,440	8%
	35,497,440	47,329,920	12%
	47,329,920		15%
Bhutan	0	1,093,287	0%
	1,093,287	1,457,716	10%
	1,457,716	2,368,789	15%
	2,368,789	3,644,290	20%
	3,644,290	5,466,435	25%
	5,466,435		30%
Nepal	0	1,141,150	1%
	1,141,150	1,597,610	10%
	1,597,610	2,282,300	20%
	2,282,300	4,564,600	30%
	4,564,600	11,411,500	36%
	11,411,500	0	39%
India	0	1,095,720	0%
	1,095,720	2,191,440	5%
	2,191,440	3,287,160	10%
	3,287,160	4,382,880	15%
	4,382,880	5,478,600	20%
	5,478,600		30%

Sources

Maldives Inland Revenue Authority, "FAQs - Income Tax" at https://www.mira.gov.mv/Pages/View/FAQ_IncomeTax [last accessed 3 September 2024].
Orbitax, "Nepal Confirms Income Tax Rate" at https://orbitax.com/news/archive.php/Nepal-Confirms-Income-Tax-Rate-52919 [last accessed 3 September 2024].
Orbitax, "Bhutan Enacts the Income Tax" at https://orbitax.com/news/archive.php/Bhutan-Enacts-the-Income-Tax--42878 [last accessed 3 September 2024].
Income Tax Department of India, "Individual - Income Tax Return Filing" at https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-1 [last accessed 3 September 2024].
PwC, "Pakistan - Taxes on Personal Income" at https://taxsummaries.pwc.com/pakistan/individual/taxes-on-personal-income [last accessed 3 September 2024].
PwC, "Bangladesh Key Budget Proposals 2024" at https://www.pwc.com/jp/en/services/globalization/news/assets/pdf/bangladesh-key-budget-proposal2024.pdf [last accessed 3 September 2024].
Inland Revenue Department, Nepal. "Individual Income Tax Rates for FY 2023/24." Available at https://www.ird.gov.np/public/pdf/964678748.pdf [last accessed 3 September 2024].
Central Bank of Sri Lanka. "Daily Indicative Exchange Rates." Available at https://www.cbsl.gov.lk/en/rates-and-indicators/exchange-rates/daily-indicative-exchange-rates [last accessed 3 September 2024].
Central Bank of Sri Lanka Annual Economic Review 2023 at https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-economic-review/annual-economic-review-2023 [last accessed 6 September 2024].