The full guide
Fixed deposits in Sri Lanka — interest, maturity value, and the tax rules that change your real return
Reviewed and updated July 16, 2026 · Written for Sri Lankan investors and borrowers
Fixed deposits remain the default savings product for Sri Lankan households, and for good reason: the return is contractual, the paperwork is minimal, and every licensed bank and finance company offers them. But the number printed on the rate board is rarely the number you actually earn. Compounding frequency, the 10% advance income tax on interest, and inflation all sit between the advertised rate and your real return.
This guide walks through how FD interest is actually calculated, how to compare offers from different banks on a like-for-like basis, and the practical decisions — tenor, laddering, payout frequency — that the calculator above helps you model.
Simple interest, compounding, and effective annual yield
An FD that pays interest at maturity on a 12-month tenor is straightforward: Rs. 1,000,000 at an illustrative 9% per annum earns Rs. 90,000 in interest. But many deposits credit interest monthly or quarterly, and if that interest stays in the deposit and itself earns interest, the effective annual yield is higher than the quoted nominal rate. At 9% nominal compounded monthly, the effective annual yield is about 9.38% — Rs. 93,800 on the same Rs. 1,000,000.
The reverse is also true: a deposit that pays interest out monthly usually carries a lower quoted rate than the same tenor with interest at maturity, because the bank loses the use of that interest. When comparing two FDs, always convert both to an effective annual yield — the calculator does this automatically once you set the compounding or payout frequency.
The 10% tax on interest — and who can legally avoid it
Under current rules, banks deduct a 10% advance income tax (often called AIT or withholding tax) on interest paid to resident individuals. On Rs. 90,000 of annual interest, Rs. 9,000 is withheld and Rs. 81,000 reaches your account.
There is an important exemption: a resident individual whose total assessable income for the year is below Rs. 1,800,000 — the personal relief threshold for the 2025/2026 year of assessment — can file a self-declaration with the bank, and the bank will then pay interest without the deduction. Retirees and low-income savers who rely on FD interest should not skip this form. If your income is above the threshold, the 10% deducted is an advance against your final income tax liability, not an extra tax. These are the rules as they stand today; tax rates change with budgets, so verify with the Inland Revenue Department before acting.
Laddering: how to avoid locking everything at one rate
Interest rates in Sri Lanka move in wide cycles. Committing your entire savings to a single long tenor is a bet that rates will not rise; keeping everything at one month is a bet they will not fall. A ladder splits the difference: divide the money into equal tranches maturing at staggered dates, and roll each maturing tranche into the longest rung.
A simple three-rung ladder for Rs. 3,000,000
- Rs. 1,000,000 in a 3-month FD — matures soon, giving you liquidity and a chance to catch rising rates.
- Rs. 1,000,000 in a 6-month FD — the middle rung.
- Rs. 1,000,000 in a 12-month FD — captures the longer-tenor premium.
- As each deposit matures, roll it into a new 12-month FD. Within a year, every rupee earns the 12-month rate while something matures every few months.
Inflation: the return that actually matters
A 9% FD during 5% inflation grows your purchasing power by roughly 3.8% a year — that is the real return, calculated as 1.09 divided by 1.05, minus one. The same 9% during 12% inflation loses purchasing power even though the rupee balance grows. When you use the calculator, look at the maturity value in today’s-money terms, not just the nominal figure, especially for tenors beyond a year.
Deposit insurance and breaking an FD early
Deposits with licensed banks and finance companies are covered by the Sri Lanka Deposit Insurance Scheme administered by the Central Bank, up to a capped amount per depositor per institution. If you hold more than the cap with a single institution — particularly a finance company offering above-market rates — check the current compensation limit on the CBSL website and consider spreading deposits across institutions.
Breaking an FD before maturity is allowed at most banks, but you typically forfeit part of the interest: the bank recalculates at the rate applicable to the period you actually held the deposit, often minus a penalty. If there is a real chance you will need the money, a shorter tenor or a ladder almost always beats a broken long-tenor FD.
Comparing banks: rates change, so check before you commit
FD rates differ meaningfully between banks, and between banks and licensed finance companies, and they move with policy rates and market liquidity. We deliberately do not quote current rates in this guide because they date quickly — our live FD rates page at /fd-rates tracks published rates across institutions so you can plug a real, current figure into the calculator. As a rule, a higher rate from a smaller institution is compensation for higher risk: weigh it against the deposit insurance cap rather than chasing yield blindly.
Sources & further reading
This guide is educational and reflects publicly available rules and market conventions at the review date. Tax rates, bank rates, and regulations change — verify current figures with the institution or the Inland Revenue Department before making a financial decision. Nothing here is financial, tax, or investment advice.