Capital Gains Tax on Land Sales in Sri Lanka (2025 Complete Guide)
Capital Gains Tax on Land Sales in Sri Lanka (2025 Complete Guide)
Planning to sell your land or house? The profit isn't entirely yours.
For a long time, Sri Lanka was a tax haven for property flippers. You could buy land for Rs. 5 Million, sell it for Rs. 15 Million a few years later, and pocket the entire Rs. 10 Million gain tax-free. Those golden days ended with the Inland Revenue Act No. 24 of 2017, which reintroduced Capital Gains Tax (CGT).
If you're selling property in 2025, you need to understand exactly how much tax you'll owe—and more importantly, how to legally minimize it. In this guide, I break down every aspect of CGT for Sri Lankan property transactions.
Table of Contents
- The Basic Rate: 10%
- How Capital Gain is Calculated
- Deductible Expenses (Reduce Your Tax)
- The Principal Residence Exemption
- How and When to Pay
- The IRD Clearance Certificate
- Common Mistakes to Avoid
- FAQs
1. The Basic Rate: 10%
The Capital Gains Tax rate on property sales in Sri Lanka is a flat 10%.
This applies to:
- Residential land
- Commercial land
- Agricultural land
- Houses, apartments, and buildings
- Any immovable property
Important: The tax is calculated on the gain (profit), not on the total sale price.
2. How Capital Gain is Calculated
Formula:
Capital Gain = Selling Price - Cost of Acquisition - Allowable Expenses
Example Calculation
| Item | Amount (Rs.) |
|---|---|
| Selling Price (2025) | 15,000,000 |
| Cost of Acquisition (2018) | 5,000,000 |
| Gross Gain | 10,000,000 |
| Less: Allowable Expenses | -950,000 |
| Net Capital Gain | 9,050,000 |
| Tax @ 10% | 905,000 |
Inflation Adjustment (Indexation)
Unlike some countries, Sri Lanka does not allow indexation for inflation. The cost of acquisition is taken at historical value. This means if you bought land in 1990 for Rs. 500,000 and sell it today for Rs. 50 Million, your "gain" is Rs. 49.5 Million—even though most of that "gain" is just inflation.
💡 Pro Tip: Keep all original purchase documents, including the old deed and payment receipts. If you can't prove your original purchase price, the IRD may use the government valuation (which is often lower than what you actually paid), increasing your taxable gain.
3. Deductible Expenses (Reduce Your Tax)
The law allows you to deduct certain "Incidental Costs" from your capital gain. These reduce your taxable amount.
| Expense Type | Deductible? | Notes |
|---|---|---|
| Legal Fees (Purchase) | ✅ Yes | Lawyer fees when you bought the property |
| Legal Fees (Sale) | ✅ Yes | Lawyer fees for the current sale |
| Stamp Duty (Purchase) | ✅ Yes | The 3-4% tax you paid when buying |
| Survey Costs | ✅ Yes | If you paid for a new survey plan |
| Broker Commission | ✅ Yes | The 2-3% agent fee |
| Improvement Costs | ✅ Yes | Cost of boundary walls, filling, etc. (with receipts) |
| Renovation Costs | ✅ Yes | Major improvements to buildings (not repairs) |
| Advertising Costs | ✅ Yes | Cost of listing on websites or newspapers |
| Daily Maintenance | ❌ No | Regular upkeep is not deductible |
| Interest on Loans | ❌ No | Mortgage interest is not deductible |
Revised Example with Deductions
| Expense | Amount (Rs.) |
|---|---|
| Legal Fees (Purchase) | 50,000 |
| Legal Fees (Sale) | 150,000 |
| Stamp Duty (Purchase) | 200,000 |
| Broker Commission (3%) | 450,000 |
| Boundary Wall (with receipts) | 100,000 |
| Total Deductions | 950,000 |
This reduces your taxable gain from Rs. 10 Million to Rs. 9.05 Million—saving you Rs. 95,000 in tax.
4. The Principal Residence Exemption (Save Millions)
This is the most important rule in the entire tax code for homeowners.
You do NOT pay Capital Gains Tax if:
- The property was your Principal Place of Residence (the house where you actually lived).
- You have owned it for at least 2 years.
- You have resided in it for at least 2 years within the 3-year period before the sale.
How to Prove Principal Residence
- Electoral Register: Your name must appear on the voter list for that address.
- Utility Bills: CEB and NWSDB bills in your name.
- Bank Statements: Correspondence address showing the property.
- Grama Niladhari Certificate: A certificate from the GN confirming residence.
Scenarios
| Scenario | CGT Payable? |
|---|---|
| Selling your family home where you've lived for 10 years | ❌ NO (Exempt) |
| Selling an investment property you rent out | ✅ YES (10% on gain) |
| Selling vacant land you never built on | ✅ YES (10% on gain) |
| Selling a house you lived in for 18 months only | ✅ YES (Doesn't meet 2-year rule) |
| Selling one of two houses you own (you lived in the other) | ✅ YES (Not your principal residence) |
💡 Pro Tip: If you're planning to sell an investment property, consider moving into it for 2 years before selling. This converts it into your "Principal Place of Residence" and makes the entire gain tax-free. This is legal tax planning.
5. How and When to Pay
Capital Gains Tax must be paid before the deed is registered. Here's the process:
- Calculate the Tax: Work with your lawyer or accountant to determine the taxable gain.
- Fill the CGT Return Form: Available from the IRD website or your lawyer.
- Pay at a Bank: Payment is made to the IRD account at Bank of Ceylon or People's Bank.
- Get the Clearance Certificate: Once paid, the IRD issues a clearance confirming payment.
- Attach to Deed: The lawyer needs this certificate to register the transfer.
Timeline
- Payment must be made before deed registration.
- In practice, most lawyers handle this 1-2 weeks before the signing date.
- Failure to pay results in deed registration being refused.
6. The IRD Clearance Certificate
The Clearance Certificate is your proof that Capital Gains Tax has been paid (or that your transaction is exempt).
Without this certificate:
- The Land Registry will NOT register your deed.
- The buyer cannot obtain legal ownership.
- The transaction is incomplete.
For Exempt Transactions
Even if you qualify for the Principal Residence Exemption, you still need a clearance certificate. You declare the exemption on the form, and the IRD issues a "Nil" or "Exempt" certificate.
7. Common Mistakes to Avoid
❌ Mistake 1: Under-declaring the Sale Price
Some sellers try to reduce CGT by writing a lower price on the deed (e.g., Rs. 8 Million instead of Rs. 15 Million).
Consequences:
- The IRD cross-checks prices against government valuations.
- If your declared price is suspiciously low, they'll issue a Revised Assessment.
- You'll pay: Original Tax + Penalty (100% of tax) + Interest.
- Potential prosecution for tax evasion.
❌ Mistake 2: Ignoring the Tax Altogether
Thinking "the lawyer will handle it" and not budgeting for CGT leads to deal collapses when the seller realizes they owe Rs. 1 Million unexpectedly.
❌ Mistake 3: Losing Old Documents
If you can't prove your original purchase price, the IRD may use a lower "deemed cost," increasing your taxable gain significantly.
8. Frequently Asked Questions
Q1: What if I inherited the land? What's my "cost of acquisition"?
For inherited property, the cost of acquisition is the market value at the date of death of the previous owner. Get a valuation from a licensed valuer to establish this.
Q2: Does CGT apply to gifts?
Yes, if you sell property that was gifted to you. The cost of acquisition is the market value at the date of the gift.
Q3: What about land bought before 2017?
CGT still applies. The law doesn't grandfather old purchases. However, for lands purchased before April 1, 2018, different rules applied briefly—consult a tax professional for complex cases.
Q4: Can I offset losses with gains?
Yes. If you sell one property at a loss and another at a gain in the same year, you can offset the loss against the gain. Combined Capital Gains are taxed.
Q5: Is there any threshold below which CGT doesn't apply?
No. Unlike income tax, there's no tax-free threshold for Capital Gains. Even a Rs. 100,000 gain is technically taxable at 10% (Rs. 10,000).
Final Checklist for Sellers
- Calculate your gain (Selling Price - Purchase Price - Deductions)
- Gather all receipts for deductible expenses
- Determine if Principal Residence Exemption applies
- Budget for ~10% of your gain as tax
- Engage your lawyer to handle IRD filing
- Pay CGT and obtain Clearance Certificate before deed signing
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