Freelancers and consultants in Sri Lanka can deduct expenses incurred in producing income — equipment, software, a home-office share, professional fees, and more — before tax is applied. This guide lists every deductible and non-deductible item for 2025/26, with the rules for mixed LKR/foreign-currency income.
Since April 2025, the freelancers and consultants Sri Lanka taxes lightest are the ones with the best expense records. The old foreign-income exemption is gone — FX earnings remitted through your bank are now taxed at up to 15%, and local-client income at up to 36% — but both are taxed on profit, not turnover. Every legitimate deduction reduces both bills. This is the complete list: what you can claim, at what rate equipment writes off, and the three traps that quietly disallow everything.
The one-sentence rule
An expense is deductible “to the extent incurred … in the production of income from the business” (Inland Revenue Act s.11). That single test decides everything below. Two consequences most people miss:
- It applies to your foreign-currency income too. The 15% ceiling on bank-remitted FX income is charged on gains and profits — income after expenses — not on gross receipts. Since the exemption ended, claiming deductions on FX work matters for the first time.
- “To the extent” means apportionment is built in. A cost that is 60% business and 40% personal gives you a 60% deduction — with records to show how you split it.
The deduction checklist
| Expense | How it’s treated |
|---|---|
| Internet, phone, electricity | Business share deductible — apportion by usage and keep the basis written down |
| Home office | Business share of a dedicated workspace’s costs; no official formula, so your split must survive an audit |
| Co-working desk, studio or office rent | Fully deductible if wholly for the business |
| Software, SaaS, cloud, hosting | Subscriptions deduct as you pay; purchased licences write off over their useful life |
| Accountant, lawyer, bank & remittance fees, platform commissions (Upwork, Payoneer, Wise) | Fully deductible |
| Marketing — ads, social media, market research, launches | Deductible even if capital in nature (s.15A) |
| Subcontractors, an assistant, staff (plus their EPF/ETF) | Fully deductible |
| Professional insurance, registrations, subscriptions | Fully deductible |
| Courses & training | Deductible only if directly relevant to the business and not leading to a degree or diploma (s.197) |
| Interest on business borrowing | Deductible where the loan funds the business (s.12) |
| Travel to clients | Deductible — but the commute from home is expressly personal |
| Repairs to equipment | Deductible; improvements are capped at 20% of the asset’s written-down value per year, excess carried into depreciation (s.14) |
Statutory basis: Inland Revenue Act No. 24 of 2017 (consolidated), ss.10–16 and 197.
Home office: real, but self-assessed
There is no IRD safe-harbour rate for working from home — no “Rs. X per square foot” shortcut. What practitioners successfully claim is a reasonable, documented apportionment: the floor-area share of rent for a dedicated workroom, a usage-based share of electricity and internet (say 60% work / 40% personal for a full-time freelancer), 100% of anything used only for work. The personal share of household costs is “domestic expenditure” and always disallowed — so the claim lives or dies on the reasonableness of your split and the invoices behind it.
Equipment: the five-year write-off (and the car trap)
Anything whose benefit lasts beyond a year isn’t an expense — it’s a depreciable asset, claimed as capital allowances (s.16 + Fourth Schedule), straight-line, on assets you own and use at year-end:
| Asset | Write-off |
|---|---|
| Computers, laptops, data equipment, peripherals | 20% × 5 years |
| Office furniture, fixtures & equipment | 20% × 5 years |
| Purchased software & intangibles | over useful life |
| Buildings & structures | 5% × 20 years |
| Ordinary car | nothing |
Three details worth money:
- Your car earns no allowance. The Fourth Schedule excludes ordinary road vehicles — only commercial vehicles (over 0.5-tonne load or 13+ passengers), buses, goods vehicles and, curiously, motorcycles qualify. The running costs’ business share is still deductible; the vehicle itself is not.
- The “33% over 3 years” figure some local calculators quote for laptops is wrong — computers are Class 1: 20% a year over five.
- A part-personal laptop is apportioned — claim allowances on the business share only.
What you can never deduct
- Entertainment — all of it. The Act disallows entertainment outright (s.10), client dinners included. There is no “50% business meals” rule in Sri Lanka.
- Anything domestic: your own meals, ordinary clothing, the commute, personal-debt and credit-card payments, family expenses.
- Fines, penalties, and income tax itself.
- Cash payments of Rs. 500,000 or more in a day made outside banking channels (s.10(2A)) — the expense is real, the deduction is gone, and it can’t be capitalised either. Pay anything sizeable by transfer, card or account-payee cheque.
Paid in both FX and LKR? How deductions land
Deductions come off before the rates apply, so with mixed income you apportion expenses between the streams (direct costs to their stream; shared costs pro-rata). The arithmetic strongly favours getting this right:
| Income slice | Rate on profit |
|---|---|
| FX income, paid in foreign currency & remitted through a Sri Lankan bank | max 15% |
| Local (LKR) client income | 6–36% slabs |
| FX income left offshore / not bank-remitted | 6–36% slabs |
A rupee of deduction against your local income can save up to 36 cents; against capped FX income, up to 15. Your first Rs. 1.8 million of total income is covered by personal relief either way, and each FX receipt converts to rupees at the CBSL rate on the day it lands (s.77(6)) — not a year-end average. To see your own split, run the advanced tax calculator — it handles local + FX consulting income with the deductions applied.
One more mixed-income rule: if a year ends in a loss, business losses carry forward six years — but a loss from 15%-rate work can only offset income taxed at 15% or lower (s.19). Losses inherit the rate of the activity that made them.
Proof, or it didn’t happen
- Keep everything five years (s.120): invoices, receipts, bank statements, remittance advices, an asset register with purchase dates.
- The bank trail is doing double duty. Inward remittances through your Sri Lankan bank are simultaneously your qualification for the 15% ceiling and your answer to the IRD’s favourite audit method — comparing bank inflows to declared income.
- Business income is accrual-basis (s.21(3)): you record income when earned, not when paid. Deadlines, instalments and the 5% AIT on local fees are covered in our self-employed tax guide.
Deductibility always turns on your specific facts — especially apportionments, which have no official formula — and rates or thresholds can change with a Budget. These are suggestions, not advice: confirm your numbers with a Chartered Accountant or tax practitioner before acting on them.
Evidence for the claims above
- Deduction rule, disallowed items, cash-payment rule, interest, repairs, marketing, capital allowances, losses, records, accrual, FX conversion: Inland Revenue Act No. 24 of 2017, consolidated (ss.10–16, 19, 21, 77, 120, 197, Fourth Schedule)
- 15% ceiling on remitted FX income & end of the exemption: Inland Revenue (Amendment) Act No. 2 of 2025, ss.3–4; IRD Notice PN/IT/2025-01
- Rates & personal relief: IRD Notice PN/IT/2025-01
- Home-office apportionment practice: TaxWise freelancer guide (practitioner guidance — no IRD safe-harbour exists)
Track these deductions through the year in LankanTax Desktop.
See LankanTax DesktopWhat freelancers ask most.
Yes — the business share of rent for a dedicated workspace, electricity, internet and phone is deductible under the general rule in s.11. There is no official IRD formula, so use a reasonable, documented basis (floor area or usage percentage) and keep the invoices. The personal share of household costs is domestic expenditure and is never deductible.
Computers and peripherals are Class 1 depreciable assets: capital allowances of 20% a year over five years, on assets you own and use at the year end. If the laptop is partly personal, claim the business share only. Note that an ordinary car earns no capital allowance at all — only commercial vehicles and motorcycles qualify.
Yes. The 15% is a ceiling on gains and profits — meaning income after business expenses — not a tax on gross receipts. Apportion your costs between FX and local work, deduct them first, and apply the 15% cap to the remitted FX profit. Income you don't remit through a Sri Lankan bank loses the cap and is taxed at the normal slabs up to 36%.
No. Entertainment is disallowed outright by s.10 of the Inland Revenue Act — there is no partial deduction for business meals in Sri Lanka. Fines, income tax itself, private spending, and any cash payment of Rs. 500,000 or more made outside the banking system are equally non-deductible.
Every deduction, both income streams, one clean return.
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