What are the capital allowance rates in Sri Lanka?

Straight-line over a fixed number of years: Class 1 computers and data-handling equipment — 5 years (20% per year); Class 2 buses, minibuses, goods vehicles, construction equipment and manufacturing plant and machinery — 5 years; Class 3 office furniture, fixtures, equipment and anything else depreciable — 5 years; Class 4 buildings and structures — 20 years (5% per year); Class 5 intangible assets like software — over their actual useful life (20 years if indefinite).

Can I defer a capital allowance to a later year if I forget to claim it?

No. Section 16(3) of the Inland Revenue Act says capital allowances for a year of assessment must be taken in that year and cannot be deferred to a later year. If you miss one, that slice of relief is lost — a strong reason to keep a proper fixed-asset register from day one.

Capital Allowances in Sri Lanka, Explained Simply (2025/26)

Q: What is a capital allowance in Sri Lanka?

A capital allowance is the tax system's version of depreciation. When your company buys something that lasts more than a year — a computer, machine, van or building — you cannot deduct the full cost as an expense in one year. Instead, sections 11 and 16 of the Inland Revenue Act No. 24 of 2017 let you deduct the cost gradually, in equal yearly slices over 5 years (most assets) or 20 years (buildings), using the straight-line method set out in the Fourth Schedule.

Q: What counts as a capital item (depreciable asset)?

A depreciable asset is something used in the business to produce income that loses value through wear and tear, obsolescence or the passing of time — computers, machinery, commercial vehicles, office furniture, buildings and software. The Act specifically excludes land, goodwill and trading stock: land does not wear out, and stock is a normal cost of sales. The practical test: if what you bought gives a benefit lasting more than twelve months, treat it as a capital item, not an expense.

Q: Can I claim capital allowances on a car?

Usually not for an ordinary passenger car. The Fourth Schedule denies capital allowances for road vehicles except commercial vehicles (designed for loads over half a tonne or more than 13 passengers, or used in a transport/vehicle-rental business), buses and minibuses, goods vehicles, and heavy trucks or trailers. A delivery van or lorry qualifies; a director's sedan does not.

Q: Is my company's share capital taxed?

No. Money shareholders pay in as share capital is not income of the company, so it is not taxed — and it is not a deductible expense either. Tax only enters the picture when the company spends money: everyday running costs are deducted immediately, while purchases of capital assets are relieved gradually through capital allowances.

Q: What happens when I sell a capital asset?

You compare the sale price with the asset's written-down value (cost minus all allowances claimed). If you sell for more than the written-down value, the excess is an assessable charge added to your taxable income. If you sell for less, the shortfall becomes a balancing allowance — an extra deduction that year. This squares up the tax relief so you deduct exactly what the asset really cost you overall.

Q: How does a new Pvt Ltd record and claim capital allowances?

Keep a fixed-asset register listing every capital item with its date, cost, class and yearly allowance; keep the purchase invoices; record the purchase as an asset (not an expense) in your books; then in the tax computation attached to your annual income tax return, add back the accounting depreciation and deduct the Fourth Schedule capital allowances instead. The return is filed through IRD e-Services by 30 November after the year of assessment ends.

Your company buys a Rs 600,000 computer. Can you deduct it from this year's profit? No — and that surprises almost every new business owner. Big purchases that last years are capital items, and the tax system gives you the deduction in yearly slices called capital allowances. This guide explains what they are, what counts as a capital item, how the maths works (with charts), and exactly how a brand-new Pvt Ltd should record and claim them.

📅 Updated July 2026 · Year of assessment 2025/26 ⏱ ~10 min read 🏛 Based on the Inland Revenue Act No. 24 of 2017 (as amended)

1. What is a capital allowance, actually?

Think of it this way: when the company buys paper for the printer, that paper is used up this year — so its cost is deducted from this year's profit. But when the company buys the printer itself, the printer will serve the business for years. Deducting its whole cost against one year's profit would distort the picture.

So the Inland Revenue Act (sections 11 and 16) says: a purchase that gives a benefit lasting more than twelve months is capital expenditure — you cannot deduct it as a normal expense. Instead you get a capital allowance: a fixed slice of the cost deducted from taxable profit each year, until the whole cost has been relieved.

💡 One-line definition: a capital allowance is tax depreciation — the IRD's own fixed schedule for spreading the cost of long-lasting business assets over several years. It replaces whatever depreciation rate your accountant uses in the books.

2. What counts as a "capital item"?

The Act calls them depreciable assets: things used in the business to produce income that lose value through wear and tear, obsolescence or the passing of time. In plain terms:

Capital items (get allowances)	Not capital items
💻 Computers, laptops, printers, routers	🧻 Stationery, consumables — normal expense
🏭 Machinery & manufacturing plant	📦 Trading stock / inventory — cost of sales
🚐 Vans, lorries, buses (commercial vehicles)	🌍 Land — never wears out, no allowance
🪑 Office furniture, fixtures, equipment	✨ Goodwill — excluded by the Act
🏢 Buildings & permanent structures	🚗 Ordinary passenger cars — allowance denied (below)
📀 Software & licences (intangibles)	🧑‍🔧 Repairs & maintenance — expense, within limits

🛒 The company bought somethingequipment, vehicle, furniture, software…

▼

Will it benefit the business for more than 12 months?

▼

YES → Capital itemrecord as an asset · claim capital allowances over 5–20 years

NO → Normal expensededuct the full cost from this year's profit

Fig 1 — the 12-month test: how to decide between an expense and a capital item (s. 11, Inland Revenue Act)

3. "Company capital" — untangling the 3 meanings

New owners often mix up three different things that all get called "capital". Only one of them earns capital allowances:

🏦 Share capital

The money shareholders put into the company for their shares (e.g. Rs 1,000,000 stated capital).

Not income · not taxed · not deductible

💵 Working capital

Cash used for day-to-day running — rent, salaries, stock, utilities.

Spending it = normal expenses, deducted immediately

🖥️ Capital assets

Long-lasting things the company buys — equipment, vehicles, buildings, software.

Relieved gradually via capital allowances

So when someone asks "how is a private company's capital taxed?" — the answer is: putting capital in isn't taxed at all. Share capital is not income of the company (and paying it in gives the shareholder no deduction). Tax happens on what the company earns, and relief happens on what it spends — immediately for running costs, in slices for capital assets. When profits later go back out to shareholders as dividends, those are a distribution, not a deductible expense.

4. The five classes & how many years each takes

The Fourth Schedule of the Act sorts every depreciable asset into five classes and fixes the write-off period — the straight-line method, meaning equal slices each year:

Class	What's in it	Years	Per year
1	Computers & data-handling equipment, incl. peripherals	5	20%
2	Buses, minibuses, goods vehicles; construction & earth-moving equipment; heavy trucks & trailers; manufacturing plant & machinery	5	20%
3	Vessels, aircraft, railway assets; office furniture, fixtures & equipment; any depreciable asset not in another class	5	20%
4	Buildings, structures & similar permanent works	20	5%
5	Intangible assets (software, licences) — excluding goodwill	Useful life	(20 yrs if indefinite)

💡 For a typical small company, almost everything — computers, furniture, machines, vans — writes off over 5 years at 20% a year. The big exception is a building: 20 years at 5%.

5. How to calculate — a worked example you can copy

The formula in the Act is simply A ÷ B: the asset's cost (its "depreciation basis") divided by the number of years for its class.

Example: in June 2025 your company buys a computer system for Rs 600,000 (Class 1 → 5 years).

Rs 600,000 ÷ 5 = Rs 120,000 allowance per year

120,000Yr 1

120,000Yr 2

120,000Yr 3

120,000Yr 4

120,000Yr 5

Fig 2 — straight-line: the same Rs 120,000 slice is deducted from taxable profit in each of the 5 years

Each year the asset's written-down value (WDV) — the part of the cost you haven't yet claimed — falls by the same slice until it reaches zero:

480,000after Yr 1

360,000after Yr 2

240,000after Yr 3

120,000after Yr 4

0after Yr 5

Fig 3 — the written-down value (cost minus allowances claimed) of the Rs 600,000 computer

Two more quick ones so you see the pattern:

Purchase	Class	Calculation	Yearly allowance
Delivery van, Rs 6,000,000	2 (5 yrs)	6,000,000 ÷ 5	Rs 1,200,000
Office building, Rs 20,000,000	4 (20 yrs)	20,000,000 ÷ 20	Rs 1,000,000
Accounting software licence, Rs 300,000 (3-yr licence)	5 (useful life)	300,000 ÷ 3	Rs 100,000

⚠️ Partly private use? If an asset is only partly used for the business (say a laptop used 70% for work), the cost is apportioned — you claim allowances only on the business share.

6. The vehicle trap 🚗

The Fourth Schedule flatly says no capital allowance for a road vehicle unless it is a commercial vehicle (built for loads over ½ tonne or 13+ passengers, or used in a transport/vehicle-rental business), a bus/minibus, a goods vehicle, or a heavy truck/trailer.

That means the office delivery van gets its 20% a year — but the director's sedan gets nothing. This same rule is why the capital portion of a passenger-car lease is effectively non-deductible; the full story (with the finance-lease split) is in our non-deductible expenses guide.

7. What happens when you sell the asset

When a depreciable asset is sold (or the business is sold), the Act squares things up against the written-down value:

Sold for more than WDV → the excess is an assessable charge, added to that year's taxable income (you had claimed "too much" relief).
Sold for less than WDV → the shortfall is a balancing allowance, an extra deduction that year (you hadn't claimed enough).

Example: the Rs 600,000 computer is sold after 2 years for Rs 400,000. WDV = 600,000 − 240,000 claimed = Rs 360,000. Sale price exceeds WDV by Rs 40,000 → added to taxable income. Had it sold for Rs 300,000 instead, the company would get an extra Rs 60,000 deduction.

8. Rules every owner should remember

Use it or lose it (s. 16(3)): the allowance for a year must be claimed in that year — it cannot be deferred. Miss it and that slice is gone.
Owned and used: allowances are granted for assets owned and used at the end of the year of assessment in producing business income. An asset still in its box earning nothing doesn't qualify yet.
Repairs vs improvements (s. 14): repair costs are normal expenses only up to 5% of WDV per year for buildings and 20% of WDV for other assets — anything above that is added to the asset's cost and depreciated instead.
R&D is special (s. 15): research & development and agricultural start-up costs are deductible in full immediately, even though they're capital in nature.
Big-investment bonus: enhanced capital allowances exist for large projects — including, from 1 April 2026, a 100% allowance for BOI-approved investments of USD 250,000–3 million in depreciable assets (Amendment Act No. 11 of 2026), and 100–200% schemes for investments above USD 3 million under the Second Schedule.

9. Brand-new Pvt Ltd? How to record & claim, step by step

Open a fixed-asset register on day one. A simple sheet is enough: asset name, purchase date, supplier, invoice number, cost, class (1–5), yearly allowance, and a running written-down value column. Update it every time you buy a capital item.

Keep the purchase invoice for every capital item — for the life of the asset plus the record-retention period, not just one year. The invoice is your proof of cost (the "A" in A÷B).

Record the purchase as an asset, not an expense. In your books the Rs 600,000 computer goes to "Equipment" (balance sheet), not "Office expenses" (P&L). Your accountant then charges accounting depreciation in the P&L each year.

At year-end, do the tax swap: in the tax computation, add back the accounting depreciation (it's not deductible) and deduct the Fourth Schedule capital allowances instead. This is the single most common adjustment on a company tax computation.

Claim it in the annual return. File the income tax return (with financial statements and the tax computation showing your capital-allowance schedule) through IRD e-Services by 30 November after the year of assessment (1 Apr–31 Mar) ends. Deadlines and payment steps are in our company tax guide.

When you sell or scrap an asset, note it in the register and work out the assessable charge or balancing allowance (section 7) for that year's return.

📒 Day-to-day tracking: log every purchase in TaxBook.lk as it happens and attach the invoice photo. For capital items, tick "Not deductible" — the app keeps them in your P&L but excludes them from the immediate tax deduction, exactly as the law requires, so your live tax estimate stays honest while your accountant claims the allowances in the return.

Record every rupee — expenses and capital items

Log income & expenses, attach invoices, mark non-deductible items and see a live Sri Lanka corporate-tax estimate. Free, in Sinhala & English.

Open TaxBook.lk →

Frequently asked questions

What is a capital allowance in Sri Lanka?

It's the tax system's version of depreciation. Long-lasting purchases (computers, machines, vans, buildings) can't be deducted in one year; instead sections 11 and 16 of the Inland Revenue Act give you the deduction in equal yearly slices — 5 years for most assets, 20 for buildings — under the Fourth Schedule's straight-line method.

What counts as a capital item (depreciable asset)?

Anything used in the business to produce income that loses value over time — computers, machinery, commercial vehicles, furniture, buildings, software. The Act excludes land, goodwill and trading stock. The practical test: does the benefit last more than twelve months? If yes, it's capital.

What are the capital allowance rates?

Class 1 computers — 5 years (20%/yr); Class 2 commercial vehicles, construction equipment, manufacturing plant — 5 years; Class 3 furniture, fixtures and everything else — 5 years; Class 4 buildings — 20 years (5%/yr); Class 5 intangibles — over their useful life (20 years if indefinite).

Can I claim capital allowances on a car?

Not on an ordinary passenger car. Allowances are only granted for commercial vehicles (loads over ½ tonne or 13+ passengers, or used in a transport/rental business), buses/minibuses, goods vehicles and heavy trucks. A van or lorry qualifies; a sedan doesn't.

Is my company's share capital taxed?

No. Share capital paid in by shareholders is not income, so it isn't taxed — and it isn't deductible either. Tax applies to what the company earns; relief applies to what it spends (immediately for running costs, via allowances for capital assets).

What happens when I sell a capital asset?

Compare the sale price with the written-down value (cost minus allowances claimed). Sell above WDV and the excess is added to taxable income (assessable charge); sell below and you get an extra deduction (balancing allowance).

Can I defer an allowance to a later year if I forget it?

No — section 16(3) says the allowance must be taken in its year and cannot be deferred. A missed year is lost relief, which is why the fixed-asset register matters from day one.

How does a new Pvt Ltd record and claim capital allowances?

Keep a fixed-asset register and purchase invoices; book capital items as assets, not expenses; at year-end add back accounting depreciation and deduct the Fourth Schedule allowances in the tax computation; file it with the annual return on IRD e-Services by 30 November.