Business Expenses You Can Deduct as a Freelancer in Sri Lanka
Freelancers in Sri Lanka are taxed on profit, not income. What counts as a business expense, what gets spread over five years, and what's blocked outright.
Yes, you can. And most freelancers here aren't doing it.
They declare what they earned, pay tax on the whole thing, and never find out that the cost of doing the work was supposed to come off first.
Here's what you're actually taxed on, and what you can take off it.
You're taxed on profit, not income
This is the part that gets missed.
If you're freelancing, consulting, contracting, or running any kind of business on your own, tax applies to what's left over, not what came in.
And that isn't the number you're taxed on either. Every resident individual gets a personal relief of Rs. 1,800,000 for the current year, which comes off after your expenses. So in Dilan's case you'd be looking at Rs. 800,000 before the tax rates are even applied.
The test in the law is simple: was the expense incurred during the year, in producing income from your business? If yes, it comes off.
This only works against business income, not salary
One limit that matters before you go further.
Deductions like these are only available against business income. If you're a salaried employee, the law blocks them completely. The tax deducted from your salary is worked out on the salary itself, and buying a laptop doesn't change that.
So this applies to you if you invoice clients. Freelancers, consultants, contractors, anyone self-employed in Sri Lanka. If those clients pay you from abroad in foreign currency, a separate rate ceiling sits on top of everything below.
If you have a salary and freelance on the side, you can still deduct against the freelance part. Just not against the salary.
Business expenses fall into two buckets
This is the bit worth understanding properly, because the two are treated very differently.
Running costs come off in the year you spend the money.
- Software subscriptions you use for client work
- Bank charges on client payments
- Domain and hosting
- Fees you pay an accountant or a lawyer for the business
- The business share of your internet and phone
Spend it this year, deduct it this year.
Note the wording on that last one. Your phone and internet are almost certainly used for life as well as work, so you claim the part that relates to the business, not the whole bill. More on that below.
Things that last get spread across several years.
The test: if what you bought gives you a benefit lasting longer than twelve months, it isn't a running cost. It's an asset.
- Laptop
- Monitor
- Camera
- Phone, meaning the handset itself, not the monthly bill
Assets get written off over a fixed number of years set by the law. Your accountant will call this a capital allowance. For computers and equipment in Sri Lanka, that number is five.
So a Rs. 400,000 laptop is Rs. 80,000 a year for five years, not Rs. 400,000 this year.
You still get it. Just slower. And the number of years isn't up to you or your accountant, it's fixed by law.
If you sell or scrap the asset before the five years are up, there's an adjustment that squares up whatever is left.
Claiming a phone or laptop you use for work and life
Most freelancers don't have a separate work phone. Same phone, same laptop, clients and family.
The law handles this by splitting the cost. You claim the business share, not the whole thing.
That applies to bills and to equipment. A phone bill gets split. A laptop you use half the time for other things gets split too.
You don't lose the deduction. You just don't get all of it. And you should be able to explain how you worked out the split if anyone asks, so write down your reasoning at the time rather than inventing it later.
What you can never claim, whatever the reasoning
Some spending is blocked outright, however the business case is argued:
- Personal and household spending, including your own meals, your commute from home, and your personal debts
- Income tax itself
- Fines and penalties for breaking any law
- Entertainment, meaning food, beverages, tobacco, accommodation, amusement, recreation and hospitality
Two of those have exceptions worth knowing.
Clothing counts as personal, so it's normally blocked. The exception is clothing you couldn't reasonably wear outside work. Safety gear and uniforms are claimable. A shirt you'd wear anywhere isn't.
Education is personal too, with one carve-out. A course that's directly relevant to your business and doesn't lead to a degree or diploma can be claimed. So a short course in your craft usually qualifies. A part-time degree doesn't.
There's also a wider rule underneath all of this. Nothing is deductible unless the law specifically allows it. So the question is never whether an expense feels reasonable. It's whether it's permitted.
Keep the paperwork for five years
You're required to keep records good enough to work out your profit, plus the documents behind them. Invoices, receipts, bank statements.
Keep them for five years from the date of the transaction.
A deduction you can't evidence is a deduction you'll lose.
One more thing on payments. Pay Rs. 500,000 or more outside the banking system — in a single day, on a single transaction, or across a series of payments for one event — and the deduction is denied outright. Not spread out, not reduced. Gone.
Pay by account payee cheque, account payee bank draft, credit card, debit card, or an electronic payment through a bank account, and it's fine.
Where this leaves you
Most freelancers in Sri Lanka are paying more tax than they owe. Not from doing anything wrong. From not knowing that the cost of running the business was supposed to come off the top.
The rules aren't hard once someone lays them out. They're just badly distributed.
Sources and section references
- Expenses are deducted to the extent they are incurred during the year in the production of income from a business or investment: Inland Revenue Act, No. 24 of 2017, section 11(1). The words 'to the extent' are what allow a part-business, part-personal cost to be split
- No deduction for an expense of a capital nature, which includes an expense securing a benefit capable of lasting longer than twelve months: sections 11(2) and 11(3)
- No deduction whatsoever in calculating income from employment: section 10(1)(a). And no deduction is allowed except as expressly permitted by the Act: section 10(3)
- Blocked outright — domestic expenses, tax payable under the Act, interest, penalties and fines payable for breach of any written law, and outlays or expenses for entertainment: section 10(1)(b)(i), (ii), (iii) and (vii)
- Domestic expenditure covers maintaining yourself including shelter, meals, refreshment, entertainment and leisure; commuting from home; clothing including shoes, other than clothing not suitable for wearing outside of work; education, other than education directly relevant to a business conducted by the individual that does not lead to a degree or diploma; and personal debts including credit card debts: section 197(1)
- 'Entertainment' means the provision to any person of food, beverages, tobacco, accommodation, amusement, recreation or hospitality of any kind: section 195
- Capital allowances on depreciable assets, calculated on the straight line method: section 16 and Fourth Schedule paragraph 2(1)–(2). Five years for class 1 (computers and data handling equipment together with peripheral devices) and class 3 (office furniture, fixtures and equipment, and any depreciable asset not included in another class); twenty for class 4 buildings: Fourth Schedule paragraphs 1(1) and 2(3)
- An asset only partly used in producing business income is apportioned according to the market value of the part that is so used: Fourth Schedule paragraph 1(2)
- Realising a depreciable asset before it is written off produces a balancing allowance or an assessable charge, measured against written down value: Fourth Schedule paragraph 4
- Records sufficient to ascertain the gains and profits of the business, plus the source documents behind them — invoices, bank statements, contracts and the rest: section 120(1), 120(5) and 120(10). Retained for five years from the date on which the transaction took place: section 120(6)(a)
- Payments of Rs. 500,000 or more in a day, for a single transaction, or for a series of transactions relating to one event are denied a deduction unless made by account payee cheque, account payee bank draft, credit card, debit card, or an electronic payment system through a bank account: section 10(2A), inserted by the Inland Revenue (Amendment) Act, No. 4 of 2023
- Personal relief of Rs. 1,800,000 from Y/A 2025/2026: Inland Revenue (Amendment) Act No. 2 of 2025; IRD Notice PN/IT/2025-01 dated 26 March 2025
Last reviewed: August 2026. General information, not advice on your situation — rules change and the details of your case matter.
Frequently asked questions
Can freelancers claim business expenses in Sri Lanka?
Yes. Section 11(1) of the Inland Revenue Act deducts expenses to the extent they are incurred during the year in producing income from your business, so tax applies to your profit rather than to everything you invoiced. Software subscriptions, hosting, bank charges on client payments, professional fees and the business share of your phone and internet all come off before the Rs. 1,800,000 personal relief is applied.
Can I claim my laptop as a tax deduction in Sri Lanka?
Not all in one year. A laptop secures a benefit lasting longer than twelve months, so section 11(3) treats it as capital rather than a running cost. It is written off instead as a capital allowance over five years under the Fourth Schedule — a Rs. 400,000 laptop is Rs. 80,000 a year for five years. You get the full amount, just spread out, and the number of years is fixed by law rather than chosen by you or your accountant.
Can a salaried employee claim work expenses in Sri Lanka?
No. Section 10(1)(a) says no deduction shall be made in calculating a person's income from employment, so buying a laptop does not reduce the tax deducted from your salary. If you have a salary and freelance on the side, you can still deduct against the freelance part — just not against the salary.
Can I claim my phone bill and internet as business expenses?
Only the business share. Section 11(1) allows the expense 'to the extent' it is incurred in producing business income, so a phone used for both work and life is split rather than claimed in full. The same applies to equipment: Fourth Schedule paragraph 1(2) apportions an asset that is only partly used in the business. Nothing prescribes a formula, so write down how you worked the split out at the time rather than reconstructing it later.
What business expenses cannot be claimed in Sri Lanka?
Section 10(1)(b) blocks domestic expenses, income tax itself, fines and penalties for breaking any law, and entertainment — defined as food, beverages, tobacco, accommodation, amusement, recreation or hospitality. Domestic expenses include your commute from home, your own meals and your personal debts. Clothing is blocked unless it is unsuitable for wearing outside work, and education is blocked unless it is directly relevant to your business and does not lead to a degree or diploma.
