The Hon. (Dr.) Anil Jayantha - Minister of Labour and Deputy Minister of Economic Development

¶ 01 Thank you, Hon. Speaker. The question raised by the Hon. Leader of the Opposition under Standing Order 27(2) is answered as follows.

¶ 02 Withholding tax is not a separate tax; it is merely one method used by the Inland Revenue Department to collect the tax payable by a person on taxable income. Accordingly, at the end of an assessment year, under annual assessment, under self-assessment on a quarterly basis, or at the moment income is generated at source, the applicable tax amount may be collected. Tax collected at the point where income arises—at source—is termed Withholding Tax. In some instances, the full tax liability of a person relating to a particular source is collected at source as withholding. For example, currently with the Advance Personal Income Tax mechanism on employment income, the full liability is collected based on the assumption that the person’s entire taxable income is employment income; thus, withholding from zero up to 36 percent brackets may apply on salaries.

¶ 03 Regarding withholding on interest income: currently 5 percent is levied as withholding tax on interest. To improve tax compliance and broaden the tax base, and consistent with understandings under the IMF Extended Fund Facility second review and the 2025 revenue projections, this rate has been increased to 10 percent. However, if an individual’s total annual income is below the tax-free threshold—i.e., under Rs. 1.8 million per year—the 10 percent withheld at source may be reclaimed.

¶ 04 If the individual earns above the tax-free threshold, the 10 percent withheld can be credited against the final tax payable as a tax credit at the time of settling the total liability.

¶ 05 To improve administrative efficiency and ease the burden for senior citizens and those below the threshold, we are enabling a declaration-based mechanism: if, based on a declaration to the bank or relevant financial institution, the person’s assessable income will not exceed Rs. 1.8 million for the year, the 10 percent withholding on interest will not be deducted at source. Necessary instructions are now being issued to banks and financial institutions. This mechanism also applies to children’s savings; in such cases, the guardian must submit the declaration with the relevant income details to enable the facility.

¶ 06 Considering the need to support senior citizens to maintain a decent life, Budget 2025 provides an additional 3 percent interest for fixed deposits up to Rs. 1 million for those aged 60 and above, effective from 1 July 2025, under a revised special interest scheme. This applies per depositor across banks, up to an aggregate cap of Rs. 1 million; depositors may hold fixed deposits across multiple banks within the cap. Tenure is one year, with interest payable monthly.

¶ 07 Regarding medicine purchases by senior citizens: for payments made using cards at state pharmacies, a 3 percent concession is in place, and for cash payments, a 5 percent concession already applies.