Budget 2026 imperative: Making housing affordable through tax reform

HOUSING is a fundamental human need. Yet, for many Sri Lankans, the dream of owning a home remains elusive due to rising property prices, volatility of interest rates, and limited access to affordable financing. In this context, it is both timely and necessary for the Government of Sri Lanka to reintroduce housing loan interest as a qualifying payment relief under personal income tax—reviving a policy that once existed in the Sri Lankan income tax Law.

- By Rifka Ziyard

Sri Lanka’s National Housing Policy, revised in 2017, recognises housing as a basic human right and emphasises the Government's role as an enabler, rather than a sole provider, in facilitating access to adequate housing. The policy advocates for sustainable human settlements, public-private partnerships, and housing finance expansion to meet the growing demand across urban, rural, and estate sectors. However, despite these commitments, the country faces a housing affordability crisis, with demand outpacing supply and a significant portion of the population living in substandard or temporary housing. The Government's limited fiscal capacity to construct homes for all citizens underscores the need for innovative policy tools, such as tax deductions on housing loan interest, to empower individuals to secure their own housing. This approach aligns with the policy’s enabling framework and supports the broader goal of inclusive, safe, and resilient human settlements.

While the introduction of a tax deduction for housing loan interest is not a panacea for Sri Lanka’s housing challenges, it represents a pragmatic and implementable measure that can be introduced within a relatively short time-frame. In the broader context of housing reform, this policy tool offers immediate relief to borrowers and complements long-term strategies aimed at improving housing supply, affordability, and financial inclusion.

The 2002-2011 Policy Window and 2014 law changes

Sri Lanka previously recognised the importance of supporting homeownership through tax policy. The Inland Revenue (Amendment) Act No. 10 of 2002 introduced a provision as an amendment to Inland Revenue Act No. 38 of 2000, allowing individuals to deduct housing-related expenditures from their assessable income as a qualifying payment relief, subject to limits. Specifically: