Monday Aug 31, 2026
Monday Aug 31, 2026
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For many Sri Lankans, the aspiration of homeownership has become increasingly difficult to achieve. Property prices remain elevated, construction costs have climbed sharply, and while borrowing rates have eased from their crisis-era peaks, monthly loan servicing still consumes one of the largest shares of a working household’s income.
Yet the challenge is not merely the cost of housing itself. It is that Sri Lanka’s personal income tax system largely ignores one of the most significant financial commitments an individual can undertake: financing a home. As discussions around Budget 2027 gather momentum and policymakers weigh possible personal income tax relief, attention should also focus on whether the tax system should recognise housing loan interest as a deductible expense.
The reality facing middle-income earners
The debate around personal income tax often focuses on percentages and slabs. Behind those numbers are real individuals trying to balance salaries against increasingly expensive lives. Consider a professional earning Rs. 400,000 to Rs. 500,000 a month. At first glance this appears comfortable. Yet after APIT, EPF, housing loan instalments, education costs, transport and daily expenses, disposable income shrinks dramatically.
The tax system, however, sees only gross income. A taxpayer paying Rs. 180,000 or Rs. 200,000 a month in housing loan interest on a property bought in good faith is treated identically to another taxpayer on the same salary who carries no mortgage at all. Under the rates that have applied since April 2025, the top 36% rate begins at around Rs. 358,000 a month, an income that, for a family servicing a home loan and educating children, is committed long before a discretionary rupee is spent. This raises a basic question of fairness: should a tax system ignore one of the largest and most unavoidable financial obligations an individual undertakes in a lifetime?
The Central Bank’s Housing Construction Costs Index reached 85.5 points in the second quarter of 2026, more than 20% above its level a year earlier. This sharp increase in construction costs means that prospective homeowners must borrow more to finance a home. Without timely government intervention, homeownership risks remaining beyond the reach of many Sri Lankans.
Housing is not a luxury expenditure
Tax deductions are often criticised as preferential treatment. Housing, however, differs fundamentally from discretionary spending. A primary residence is not a luxury asset for most people; it is a basic necessity. Sri Lanka’s National Housing Policy itself recognises housing as a fundamental human need and positions the State as an enabler of homeownership rather than a direct provider.
This distinction matters. The Government does not have the fiscal capacity to build homes for every citizen. Budget 2026 itself leaned on the market, proposing concessionary housing loan schemes for migrant workers through the Sri Lanka Bureau of Foreign Employment on an interest-reimbursement basis, rather than direct construction. If public policy relies on citizens to secure their own homes through long-term borrowing, it is reasonable to ask whether the tax system should recognise that effort. A housing loan interest deduction should therefore be viewed not as a concession for property ownership, but as a policy tool supporting individuals pursuing a basic social need with their own resources.
Sri Lanka has recognised this principle before
The concept is not new. The Inland Revenue (Amendment) Act No. 10 of 2002 allowed individuals to deduct housing-related expenditure as a qualifying payment, a relief that continued under the Inland Revenue Act No. 10 of 2006 until 1 April 2011. In 2014, a targeted deduction on the capital repayment of housing loans was introduced for defined professionals under Section 34(2)(w), alongside a concessionary tax rate for banks’ lending to them. Even under the current Inland Revenue Act No. 24 of 2017, housing loan interest was deductible as expenditure relief between 2020 and 2022 before it lapsed.
The fact that such relief has existed, in various forms, across three successive tax statutes demonstrates that the principle is neither novel nor administratively impossible. It reflects a policy choice, one that can be revisited if today’s economic realities justify it. Given elevated construction costs and continued affordability pressures, the argument for reconsidering that choice is stronger than it has been for years.
Tax policy should reflect real disposable income
A recurring weakness of the current regime is that it taxes gross earning capacity while giving limited consideration to a taxpayer’s actual disposable income.
A housing loan interest deduction would neither eliminate taxation nor create a blanket exemption. It would simply recognise that housing finance materially affects an individual’s ability to pay tax. Many modern tax systems take unavoidable financial commitments into account when determining taxable income, and housing often receives such recognition because it contributes to both economic stability and social wellbeing. Providing targeted relief to a taxpayer servicing substantial housing debt would therefore acknowledge that the individual is not merely acquiring an asset but creating a secure and stable home for their family.
Supporting economic growth beyond the taxpayer
The benefits extend well beyond individual homeowners. Housing has one of the strongest multiplier effects in the economy. A single home purchase stimulates activity across numerous industries:
In a period when Sri Lanka is targeting sustained growth above 7% while maintaining fiscal discipline under its IMF program, measures that stimulate private-sector activity without direct government expenditure deserve careful consideration. A targeted housing interest deduction falls squarely within that category.
A professional retention strategy in disguise
There is a dimension to this that receives far less attention: migration. Sri Lanka has already lived through waves of skilled professionals, engineers, doctors, accountants and IT specialists. leaving for markets with a fraction of the tax friction and a multiple of the disposable income. While salary differentials play a role, disposable income increasingly drives the decision to stay or leave.
For many professionals, housing is the single largest financial commitment they will ever make. A tax system that recognises those costs signal that homeownership, long-term settlement and family formation are valued policy objectives. A system that ignores them reinforces the perception that the burden falls disproportionately on a narrow band of compliant, withheld-at-source taxpayers, the very group most able to take their skills, spending and tax contribution elsewhere. People are more likely to build their futures where they can realistically build a home.
Sri Lanka would not be entering uncharted territory. Housing-related tax relief is common across jurisdictions, differing only in design. The common thread is that housing is considered important enough to justify targeted support through the tax system. Sri Lanka need not replicate any single model; the international record simply shows that such relief can be delivered in a controlled, targeted and fiscally responsible way.
A practical way forward
The strongest case is not for an unlimited deduction, but for a capped relief that balances affordability with revenue protection. Policymakers could confine it to:
A parallel measure, echoing the 2014 framework, would be a concessionary rate or tax credit for banks on interest earned from housing loans, structured so the benefit is passed on to borrowers through lower rates. Together these safeguards would channel relief toward genuine, middle-income homeowners rather than speculative investors.
Budget 2027: An opportunity for meaningful reform
Homeownership is one of the most significant financial and social milestones in a person’s life. When citizens take responsibility for securing a home through disciplined saving and years of loan repayments, tax policy should recognise and support that commitment rather than overlook it.
Restoring a housing loan interest deduction would not resolve Sri Lanka’s housing challenges overnight. It would, however, be a practical, targeted and socially meaningful measure that could improve affordability, strengthen the middle class, stimulate economic activity and help retain skilled professionals. Above all, it would affirm a simple principle: where the State cannot directly provide a basic need, tax policy should support citizens who secure it through their own efforts.
(The views and opinions expressed in this article are those of the author in her
personal capacity.)
Reference is made to Central Bank of Sri Lanka (Housing Construction Costs Index, 2026); Inland Revenue Department publications; Ministry of Finance Budget 2026 proposals.
