Enhanced Capital Allowance in Sri Lanka: The USD 250,000 Threshold Change Explained

Last verified against the primary sources on 15 October 2026.

What is the Enhanced Capital Allowance change in Sri Lanka for 2026?

From 1 April 2026, the Enhanced Capital Allowance (ECA) applies to a new undertaking whose investment in depreciable assets (other than intangible assets) used in Sri Lanka exceeds USD 250,000 but does not exceed USD 3 million [1]. Under the prior regime, the minimum investment required to qualify for ECA was USD 3 million. The amendment, made by section 37 of the Inland Revenue (Amendment) Act No. 11 of 2026 as a new paragraph 1(2A) of the Second Schedule, opens a 100% allowance to a much larger pool of investors.

What the ECA Regime Looked Like Before April 2026

Sri Lanka's Enhanced Capital Allowance is a tax incentive under the Second Schedule to the Inland Revenue Act No. 24 of 2017. It is a capital allowance against income for investment in depreciable assets, granted in addition to the ordinary capital allowances under the Fourth Schedule (Second Schedule para 1(1)) [2]. It reduces taxable income; it is not a credit against the tax itself.

Before the 2026 amendment, the qualifying threshold set a high entry point: the minimum total investment in depreciable assets had to reach USD 3 million.

This threshold positioned ECA as a large-scale investor incentive. Mid-sized manufacturers, regional service operations, and smaller capital-intensive businesses were outside its reach unless their total asset spend crossed that USD 3 million floor.

For BOI-approved companies, ECA was available for expansion of existing undertakings without requiring separate BOI approval for the expansion itself. Registration with BOI and approval of the underlying business was sufficient.

The Two Changes Effective 1 April 2026

The Inland Revenue (Amendment) Act No. 11 of 2026 introduces two distinct changes to the ECA regime, both effective from 1 April 2026 (Y/A 2026/2027) under the commencement table in section 1(3) [1].

1. New ECA Tier: above USD 250,000, up to USD 3 Million

A new category of ECA now applies where a person invests in depreciable assets in respect of a new undertaking during a Year of Assessment, and the total investment in those depreciable assets used in the undertaking in any part of Sri Lanka exceeds USD 250,000 but does not exceed USD 3 million [1].

The allowance is 100% of the qualifying investment, claimed in the Year of Assessment in which the investment is made.

The key conditions:

• The investment must be in a new undertaking (not an expansion of an existing undertaking)
• The assets must be depreciable assets; intangible assets are expressly excluded
• Total investment must exceed USD 250,000 and not exceed USD 3 million
• Assets must be used in the undertaking in Sri Lanka

2. New BOI Approval Condition for Expansions

The second change affects BOI-approved companies claiming ECA on expansion of existing undertakings. A new proviso to paragraph 1(1A) of the Second Schedule requires the BOI to have specifically approved the expansion [1].

Previously, a BOI-approved company could claim ECA on expansion capital spending without separately obtaining BOI approval for that expansion. From Y/A 2026/2027, the expansion must itself be approved by BOI to qualify. Companies relying on the pre-April 2026 approach for ongoing expansion programmes need to review whether BOI approval of each expansion phase has been obtained.

Who Benefits from the USD 250K to USD 3M Tier

The new lower tier is designed to capture investors and new businesses in the mid-market range. In practical terms, the band covers:

Manufacturing and Processing: A mid-sized food processing facility, a specialist manufacturer, or a plastics operation can now qualify where total machinery and equipment investment falls in this range. Before April 2026, the same investment would have generated only the ordinary capital allowances: 20% a year on a straight-line basis for plant and machinery, written off over five years [2].

Technology and Infrastructure: Server infrastructure, specialised IT equipment, and technical installations for data centres or telecom operations that fall below the USD 3 million floor now qualify.

Healthcare and Life Sciences: Medical equipment investments for private hospitals and clinics establishing new facilities may fall in the qualifying range.

Hospitality: A new boutique hotel or resort project whose depreciable asset spend sits above USD 250,000 and up to USD 3 million can now benefit.

The critical qualifier in all cases: the investment must be for a new undertaking. The ECA is not available for adding capital to an existing operation under this new tier; expansions remain governed by the BOI-approved expansion route.

What Counts as Depreciable Assets

The ECA applies to depreciable assets. Intangible assets are specifically excluded from the qualifying investment base [1].

Under the Inland Revenue Act, depreciable assets are broadly tangible assets with a useful life exceeding 12 months that are used in producing assessable income. The main categories relevant to ECA claims:

• Plant and machinery
• Equipment and tools
• Buildings used in the undertaking
• Commercial vehicles, buses, goods vehicles, trucks and motorcycles used in the business
• IT hardware and servers

Ordinary motor cars do not attract capital allowances under the Fourth Schedule [2], so do not count them toward the ECA base.

Assets that do not qualify under the ECA:

• Goodwill
• Patents and intellectual property
• Software licences
• Other intangible assets
• Land (land is not depreciable)

For the new tier, the total investment in qualifying depreciable assets across the new undertaking is aggregated for the Year of Assessment to confirm whether the threshold band is met.

What Is a "New Undertaking"

A new undertaking is, in general terms, a fresh business activity that has not previously been carried on. It is distinct from:

• An expansion of existing production capacity
• Adding a new product line to an existing factory
• Opening a branch of an established operation

The new undertaking test matters because it separates the new tier (new undertakings only) from the existing ECA regime for expansions by BOI-approved companies.

A person establishing a new company, registering a new BOI project, or commencing a genuinely new business activity with depreciable asset investment in the qualifying range would generally satisfy the new undertaking condition. However, the application of this definition to specific fact patterns requires legal and tax advice, particularly where the investor has existing related operations in Sri Lanka.

Year of Assessment Timing

The ECA is claimed in the Year of Assessment in which the investment is made. The Y/A in Sri Lanka runs from 1 April to 31 March.

For the new tier:

• Y/A 2026/2027 (1 April 2026 to 31 March 2027): first Y/A in which the new ECA is available
• Investment must be in qualifying depreciable assets during the Y/A for which the claim is made
• The total depreciable asset investment must exceed USD 250,000 and not exceed USD 3 million for that Y/A

If total investment in qualifying assets is USD 250,000 or less for the Y/A, the ECA does not apply, and the ordinary capital allowances under the Fourth Schedule of the IRA apply instead [2]. If total qualifying investment exceeds USD 3 million, the existing ECA framework (with the BOI approval conditions) would need to be considered.

The BOI Approval Question

The BOI (Board of Investment of Sri Lanka) administers a range of investment approvals and incentive frameworks. ECA has historically been associated with BOI-registered and approved investments.

The 2026 amendment creates a clearer distinction:

For the new tier, the amendment does not explicitly require BOI registration or approval as a condition. The language refers to investment "in any part of Sri Lanka" without a BOI registration qualifier. However, practical guidance from the IRD and BOI on the operational mechanics of claiming this ECA, particularly the documentation required and the definitions that apply, should be sought before the first claim.

What Changes for BOI-Approved Companies with Existing ECA Claims

BOI-approved companies with expansion programmes in progress need to review their pipeline. The new condition, that BOI approval of the specific expansion is required from 1 April 2026, means:

• An expansion started before 1 April 2026 under a general BOI approval may not be sufficient if the expansion itself was not separately approved by BOI
• Capital spending on expansion after 1 April 2026 requires specific BOI expansion approval to qualify
• Companies should request confirmation from BOI that the expansion of the specific undertaking has been approved, and retain that documentation as part of the ECA claim file

This is a compliance point, not a denial of the ECA: it is a procedural requirement that needs to be satisfied before the allowance is claimed.

Tax Planning Implications

The threshold change has several planning implications:

New Investor Entry Point: Investors previously outside the ECA range now have access to a valuable incentive. A 100% allowance on qualifying capital spending can significantly reduce taxable income in the Year of Assessment of investment.

Investment Structuring: If a new undertaking's depreciable asset investment approaches USD 3 million, careful planning around phasing and timing is warranted to stay within the qualifying band for the lower tier, or to understand whether the BOI approval route is more appropriate if the investment is intended to exceed USD 3 million.

New Undertaking Requirement: Where an investor has existing operations in Sri Lanka, the structure through which a new investment is made (new legal entity, new BOI registration, ring-fenced new business) will determine whether the new undertaking test is satisfied.

Interaction with Other Incentives: The ECA sits alongside Strategic Development Project status. Concessionary rates carried over for BOI enterprises under the transitional provisions cannot apply after 31 March 2025 (section 203(6), inserted by section 35 of Act No. 11 of 2026) [1]. Review the incentives together for any new capital investment; see our BOI incentives guide and corporate income tax guide.

Steps for any business exploring the new ECA tier

1. Confirm that the investment qualifies as a "new undertaking"
2. Identify and segregate qualifying depreciable assets from intangibles, land and ordinary motor cars
3. Track total qualifying asset investment within the Y/A
4. Confirm BOI requirements applicable to the specific investment
5. Structure the ECA claim in the income tax return for Y/A 2026/2027

Talk to us. If you are planning a new undertaking in this range, our tax team can work through the qualifying assets and the claim with you; book a consultation at our contact page.

WinCore Pvt Ltd

This guide is general information on the law as at 15 October 2026 and is not advice on your specific situation.

References

1. Parliament of Sri Lanka. Inland Revenue (Amendment) Act, No. 11 of 2026, certified 3 June 2026, s.1(3) commencement table, s.35 (new s.203(6)) and s.37 (Second Schedule para 1(2A) and proviso to para 1(1A)). https://www.ird.gov.lk/en/publications/Acts_Income%20Tax_2017/IR_Act_No_11-2026_E.pdf . Primary. Accessed 15 October 2026.

1. Inland Revenue Department. Inland Revenue Act, No. 24 of 2017, consolidated, Second Schedule para 1(1) and Fourth Schedule paras 1 and 2. https://www.ird.gov.lk/en/publications/Acts_Income%20Tax_2017/IRA_Cons_Act_-_2025_Changes.pdf . Primary. Accessed 15 October 2026.