Colombo, June 29, 2026 – Sri Lanka has moved to curb potential tax avoidance through life insurance schemes with the recent enactment of the Inland Revenue (Amendment) Act, No. 11 of 2026. A key provision, the newly inserted Section 52A, clarifies the taxability of proceeds from life insurance policies, specifically targeting arrangements designed to sidestep tax obligations through periodic payments.

Insurance Policies or Shadow Deposits? A Growing Tax Blind Spot

A growing concern has emerged in Sri Lanka where certain insurance products are being used as de facto deposit schemes, offering guaranteed or near-guaranteed returns similar to fixed deposits while avoiding withholding tax (WHT). Although marketed as insurance or investment-linked policies, these products often provide little genuine insurance coverage and instead function like tax-advantaged savings instruments. This creates an unfair advantage over traditional bank deposits, encourages tax-driven fund migration, reduces government tax revenue, and raises concerns about regulatory oversight. The issue highlights the need for tax and financial regulators to apply the principle of substance over form, ensuring that products operating as deposits are taxed accordingly, regardless of how they are labelled.

The amendment aims to ensure fair taxation while maintaining the general tax-exempt status of conventional life insurance benefits.

Key Provisions of New Section 52A:

1. Tax Exemption for Standard Life Insurance Payouts (Section 52A (1)): Under the new regulations, any amount received by an individual under a life insurance policy (either as the policyholder or a beneficiary) will be excluded from their assessable income if the payment is triggered by:

• The death of the insured person.
• The maturity of the policy.
• The surrender of the policy.

This means that the traditional benefits from life insurance policies paid out upon death, at the end of the policy term, or upon early termination will generally remain tax-free.

2. Taxability of Periodic and Income-Related Payments (Section 52A (2)): However, the Act explicitly outlines scenarios where payments connected to a life insurance policy will not be exempt and will therefore be subject to tax. These include:

• Any amount received under a life insurance policy that constitutes employment income or business income.
• Any annuity, or any pension, retirement, or superannuation payment.
• Crucially, any payment made under a life insurance policy otherwise than on the death of the insured person or maturity of the policy.

Targeting Tax Avoidance through Periodic Payments:

This last clause (Section 52A (2) (b)) is particularly significant in addressing the use of insurance schemes for tax avoidance. It clearly stipulates that if individuals attempt to draw periodic payments, annuities, or similar disbursements from life insurance policies in a manner that falls outside the direct events of death or policy maturity, such payments will be treated as assessable income and will be subject to taxation.

“The new Section 52A provides much-needed clarity on the tax treatment of life insurance proceeds,” stated a representative from the Inland Revenue Department. “While recognizing the importance of life insurance for protection, the amendment aims to prevent the misuse of such policies as a vehicle for tax evasion, especially through schemes involving regular or periodic withdrawals not directly tied to the primary purpose of life insurance.”

Definition of a Life Insurance Policy (Section 52A (4)):For the purposes of this section, a “life insurance policy” is defined as an insurance contract issued by an insurer licensed under the Regulation of Insurance Industry Act, No. 43 of 2000, which provides for the payment of money on the death of an individual.

The introduction of Section 52A underscores the government’s commitment to strengthening its tax framework and ensuring that all forms of income are appropriately captured, thereby bolstering revenue collection efforts in line with the nation’s economic recovery program.