Income Tax

Income

Income Tax

All forms of tax on income generated by a natural or legal person except taxation on agricultural income is collected and administered by the Inland Revenue Department. Income tax is levied on the total aggregated income generated from employment, business, investment and windfall gains. The rates for taxation on the income of a natural and legal person is detailed out in the Income Tax act 2001 which is subject to amendment through the yearly Finance act.

Employment Income

For the purposes of determining the total income earned through employment i.e. remuneration received the following things are treated as income earned from employment.

  • Wages, Salary, Leave Pay. Overtime pay, Fees, Commission, Prizes, Gifts, Bonuses and other facilities
  • Payment for any personal allowance including amount for dear allowance, subsistence allowance, entertainment and transport allowance,
  • Payment received for settlement of or reimbursement of expenses incurred by him or his associated person for personal purpose,
  • Payment made for having given consent to any terms of employment,
  •  Payment made for termination, loss of employment, or for compulsory retirement
  • Retirement payment and retirement contribution including the amount deposited by the employer for that employee in the retirement fund,
  • Other payments made in respect of employment

Exemptions and deductions allowed

Deductions can be made while computing the total employment income earned for any reasonable expenses incurred in acquiring or earning income in case of self-employed individuals. In case of salaried employees’ specific deductions are detailed out in section 10 of the Income Tax act which are:

(a) Amount exempted from tax granted to any person entitled to tax exemption facility as provided for in a bilateral or multilateral treaty or agreement concluded between the Government of Nepal and any foreign country or international organization,

(b) Amount received by any individual for doing employment in the governmental service of a foreign country, Provided that- (1) The person has to be a resident or non-resident person only because of doing employment, and (2) Such amounts have to be paid from the governmental fund of that country.

(c) Amount received by an individual referred in the manner prescribed above, who is not a citizen of Nepal or by his nearest family member from the governmental fund of a foreign country,

(d) Amount received by a non-Nepalese citizen appointed in the service of The Government of Nepal under the term and condition of tax exemption.

Furthermore, the following amounts need not be included for the assessment of total income earned through employment.

  • Food and Tiffin provided by the employer to the employee at the work site in a manner that it is available to all employees on the same terms,
  • The settlement or reimbursement of the following expenditure incurred by any employee provided: (1) The expenditure fulfils the business purpose of the employer, (2) The expenditure exempted or to be exempted in the computation of the income earned from investment.
  • Payment of such petty amounts of which accounts are impracticable to be maintained or difficult to be maintained administratively

In case of contributions made towards an approved retirement fund deduction form taxable income are allowed in the following manner:

  • In case of contributions made to the mandatory social security fund one third of employment income or NPR 500,000 whichever is lower can be deducted from the total taxable income
  • In case of contributions made to any other retirement fund other than the Social Security Fund one third of the income or NPR 300,000 whichever is lower can be deducted from the taxable income.

Income from business activity

The following income is included in the calculation of income generated from a business activity.

  • Profit/gain derived from conducting a business activity
  • Service fee
  • Amounts derived from stock in trade
  • Gains from disposal of business assets and liabilities
  • Gifts received in respect of business
  • Amounts derived as consideration for accepting a restriction on the capacity to conduct business
  • Income from investment that is effectively connected with the business

Investment Income

Investment income includes profits and benefits derived by any person from any investment in any income year. The following profit/benefit is treated as an investment Income

  • Dividend Income except final withholding payment
  • Gains from investment insurance except final withholding
  • Interest income except final withholding
  • Rent, royalty received, payment for natural resources except final withholding
  • Gains from unapproved retirement funding
  • Net gain on disposal of depreciable assets used in investment
  • Gifts received by a person in respect of investment
  • Compensation received for having accepted any restrictions in respect of investment
  • Income form joint investment
  • Recovery of bad debts deducted earlier
  • Gains due to fluctuation in exchange rate

Deductible expenses in computation of Business Income and Investment Income

Chapter 5 of the income tax act deals with the deduction of expenses that is allowed and restricted. Generally, all actual costs are deductible in calculating the business income to the extent that such expense are incurred during the year and were made for the generation of income. The deductions allowed specifically by chapter 5 and other provisions of the act and the prevailing Finance Act are,

  • Interest (Section 14)
  • Cost of Stock-in-trade (Section 15)
  • Repairs and improvement cost (Section 16)
  • Pollution maintenance cost (Section 17)
  • Research and development expenses (Section 18)
  • Depreciation (Section 19)
  • Loss from business or investment (Section 20)
  • Donations (Section 10/12-Exemtible amounts)
  • Amounts not exceeding 1 million or ten percent of the assessable income whichever is lower contributed for the heritage protection and sports development can be deducted in the calculation of business income (Section 12A)
  • Amounts contributed to the Prime Minister’s Natural Calamities fund and reconstruction fund are deductible (Section 12B)
  • Contributions made to the Corona fund established by any level of government

Non-deductible expenses computation of Business Income and Investment Income

Section 21 of the Income tax act provides for certain expenses that are not deductible. The following are the expenses that are not deductible:

  • Expenses of Domestic and personal nature
  • Any tax, fines and penalties to be paid to the government of Nepal except tax payments to local and provincial governments
  • Expenses made in order to derive any exempt income or payments subject to withholding tax
  • Profit distribution
  • Cash payment in excess of NPR 50,000 from an entity whose annual turnover exceeds NPR 200,000 except in the following cash payments
    • Payment made to the Government of Nepal, constitutional body, corporation or bank or financial institution owned by the government of Nepal
    • Payment made to a farmer or producer producing an agro product or a farmer who  has processed such product on his own
    • Payment made in place where banking services are not available or payments made on the day when banking services are closed or payment involving mandatory cash payments
  • Amounts deposited in a bank account of the recipient for payment
  • Remunerations and wages paid to employees having no permanent account numbers except time based wage up to NPR three thousand
  • Expenses against the invoice of more than two thousand rupees where permanent account numbers are not mentioned
  • Expenses incurred in feasibility study, exploration, development of natural resources, acquiring any property with useful life of more than twelve months and in disposing a liability

Treatment of Losses

Losses can be deducted as expenses by carrying the losses forward provided that such losses have not been already deducted. Losses can be carried forward for a period of seven years as per the provisions of section 20 of the Income tax act. in case of any infrastructure project to be built and transferred to the government of Nepal project relating to construction of powerhouse, generation and transmission of electricity and relating to entities conducting work pursuant to the petroleum act 1983 losses can be carried forward up to a period of 12 years. Additionally, losses can also be carried back to be set-off against taxable income. Such facility however is only available to losses suffered arising out of long term contracts. Details pertaining to the provisions of carrying backward of losses are present in section 20 sub-section 4 and 5. Section 57 of the Income tax act specifically restricts deduction of losses or carrying backward of losses in case where the ownership of the entity has undergone change. Change in ownership deemed to have been made when fifty percent or more of the ownership has changed in comparison to ownership over the past three years.  Losses can also not be deducted or carried backward when the entity has availed full or partial tax exemption in relation to business/investment income in any of the years for which losses can be deducted or carried backward.

Depreciation schedule

Assets Depreciation Rate
Buildings, structures and other similar assets of permanent nature 5%
Furniture and Fixtures 25%
Vehicles 20%
Construction equipments or any other earth moving equipment not included in other categories 15%
Intangible assets not included in other categories Based on the estimated life of the asset

In line with the above table depreciation is calculated on the pool of assets that is aggregated based on reducing balance method. Calculation of depreciation in line with the above rates is allowed if an asset is added more than six months prior to the end of the fiscal year, if the addition is made less than six months prior to the end of the fiscal year depreciation is allowed at 2/3rd of the normal rate, and if the addition of asset is made less than three months prior to the end of the fiscal year depreciation is allowed at 1/3rd of the normal rate.

Income tax levied on natural persons

The concept of residence is crucial to the understanding of taxation of income of natural person. A natural resident person is defined as a person having their natural abode in Nepal or a person who has resided in Nepal for a period of 183 days or more during a continuous period of 365 days. Resident natural person are taxed on their worldwide income while in case of non-resident person tax is levied on the income which has its source in Nepal at a flat rate of 25%. Income tax is levied on income aggregated by a natural person from employment, business, investment and windfall gains on a progressive basis. Some form of incomes is subject to final withholding and are not included in the aggregated income of the natural person.

Tax SlabTax Rate
IndividualCouple
First Slab400,0001%*450,0001%*
Second SlabNext 100,00010%Next 100,00010%
Third SlabNext 200,00020%Next 200,00020%
Fourth SlabNext 1,300,00030%Next 1,250,00030%
Final Slab>2,000,00036%>2,000,00036%

1% is levied as social security tax, however this rate is not applicable for those registered as sole propertiorship, or registered in the Social Security Contribution Fund.

Income subject to final withholding  

  • Income from interests on bank deposits, dividends received from a resident company or a partnership firm, return distributed by a mutual fund are subject to 5% withholding tax
  • Windfall gains are taxed at a rate of 25%
  • Payment of registration fee, educational fee or exam fee to foreign college and universities at the rate of 5%
  • Meeting fees are subject to a tax rate of 15%
  • Payment of interest by resident BFIs on loans availed in foreign currency from foreign banks and other financial institutions to invest in areas specified by NRB at the rate of 10%
  • Any Short term gain (Shares held upto 365 days) derived from disposal of shares listed in stock exchange is subject to 7.5% and at the rate of 5% for long term gains (more than 365 days). Capital gains tax while in case of unlisted shares it is 10%

Income Tax levied on legal persons

Resident companies in Nepal as defined in the Income Tax Act are subject to taxation on their worldwide income. For the purposes of taxation resident companies are defined as being companies incorporated in Nepal or whose place of effective management is in Nepal. The definition of company for the purposes of taxation includes anybody corporate or company incorporated pursuant to the laws of Nepal, trust cooperatives, foreign company or a group of persons excluding a partnership firm with less than 20 partners or a sole proprietorship firm. Partnership firm with less than 20 partners and sole partnership firms are not taxed separately; the owner/partners of the firms are taxed on their income from the business activity based on the income tax schedule for a natural person. The following are the rate of tax applicable to legal persons for the current fiscal year.

Particulars Rate
Normal Business 25%
Entities Operating as Special Industry, entities with export income with source in Nepal 25%
Entities involved in Construction and Operation of ropeway, cable car or Sky Bridge, trolley bus, trams 25%
Entities involved in construction and operation of Roads, Bridges, Tunnels, Railway, and Airports 25%
Entities involved in construction or operation of public infrastructure under the BOOT model or involved in construction of hydropower projects, transmission projects 25%
Banks and Financial Institution, Insurance Business, Petroleum Business, Telecommunication and Internet Service, Money Transfer Service providers, Commodity Broker, Merchant Banker, Commodity Future Market Operators, Securities Business Operators, and capital market operators 30%

Concessions/Exemptions on business income

Particulars Rebate/concessions (On applicable rate)
Income derived by firm, partnership firm, and company from agricultural business 50% of applicable rate
Special industries owned and operated all year long in any given fiscal year 1/3rd in case the rate of taxation is 30%/20 percent of applicable rate
Income derived by Information technology Industry/ Special Industry 90% in case the industry provides direct employment all year long to 100 or more Nepali Citizens 80% in case the industry provides direct employment all year long to 300 or more Nepali Citizens 75% in case the industry provides direct employment all year long to 500 or more Nepali Citizens 70% in case the industry provides direct employment all year long to 1000 Nepali Citizens or more 10% additional concession on the tax payable in case the industry provides employment to one hundred or more Nepali citizens by ensuring that the number of employees includes representation form women/dalits/persons with disability by at least 33%  
Special Industry operated in Remote/underdeveloped/least developed areas 10%/20%/30% for up to 10 years from the date of commercial operation
Special Industry/Tourism industry (except casino industry) established with an investment of more than one thousand million rupees and providing direct employment to more than five hundred Nepali citizens Complete Income tax exemption for five years from the date of commercial operation and fifty percent for the next three years thereafter. Same facilities are also available to existing industries that increases their installed capacity by 25% and reaches two thousand income tax exemption and provides employment to more than three hundred Nepali citizens
Industries established in special economic zones Complete tax exemption for 10 years in case the special economic zone falls in the hilly/Himalayan region and thereafter 50 percent exemption Complete tax exemption for 5 years in case the special economic zone falls in other regions and thereafter 50 percent exemption
Income derived by startups as prescribed by the IRD having an annual turnover upto Rs 10 MILLION based on innovative skills and technology Complete tax exemption for the first five years from the date of commercial operation
Income earned from supplying raw materials and subsidiary raw materials manufactured in Nepal to special industries in Nepal 20%
Industries engaged in manufacturing of new products by using already used materials that have direct impact environment as its raw materials 50% for the first three years from the date of commercial operation and 25% for the two years thereafter
Relocation to special industries from area outside industrial area or pocket 50% for the first three years from the date of commercial operation and 25% for the five years thereafter
Relocation of special industries from Kathmandu valley to other areas outside Kathmandu valley Complete exemption  for the first three years and 50 percent for the next two years thereafter

Capital Gains tax

Section 95 A details out the provisions relating to collection of tax on the net gain on any disposal of asset or liability. In case of a resident entity capital gains tax is collected at the rate of 10 percent for any gains from commodity market, 10 percent for net gain in disposal of shares listed in the stock exchange, 15 percent for any net gain derived from disposal of interest held in a company not listed in the stock exchange. For non-resident entities, 10 percent tax is levied on any net gain derived from the commodity market, in case of disposal of interest held in either a listed or unlisted company, 25 percent tax is levied. In case of gains from commodity market tax is collected by the entity operating commodity market services, in case of listed shares tax is collected by the related stock broker or any other authorized entity and in case of unlisted company the tax is withheld by the company whose interest has been disposed. In case of disposal of land and building, the Land Revenue office collects the tax on net gain at the rate of 2.5 percent for any disposal of Land and Building owned for a period of more than five years and 5 percent wherein ownership is less than five years. Capital gains tax is subject to advance tax.

In calculation of net profit/gain derived from the disposal of business assets or liability the following losses from the sum of all gains/profits derived during the disposal of assets or liabilities may be deducted:

  • The sum of all losses suffered in that year from the disposal of business or liability
  • Any loss not deducted from the net loss suffered from any other business of the same person
  • Any loss not deducted from the net loss suffered from any other business of the same person during the previous years

Special provisions for income tax of small tax payers

The following tax rates are applicable for resident businesses under the following conditions

  • Having income source in Nepal
  • Having turnover up to NPR 2,000,000 and net income below NPR 200,000
  • Not claiming any medical tax credit
Location of business Tax(per annum)
Operating in Metropolitan and sub-metropolitan NPR 7,500
Operating in a municipality NPR 4,000
Operating in other areas NPR 2,500

Income tax for person choosing to pay tax based on turnover

Resident natural person that derives income from business can choose to pay tax based on annual turnover subject to the following conditions

  • Income sources must be in Nepal
  • Annual business turnover exceeds NPR 2,000,000 but is below NPR 5,000,000
Nature of business Tax(per annum)
Person Conducting transaction of goods including gas, cigarette by charging a commission not in excess of 3% of the price 0.25% of turnover in excess of NPR 3,000,000 upto NPR 5,000,000 0.3% for turnover in excess of NPR 5,000,000 upto 10,000,000
Person dealing with goods not specified above 1% of turnover in excess of NPR 3,000,000 upto NPR 5,000,000 0.8% for turnover in excess of NPR 5,000,000 upto 10,000,000
Person dealing in services 2% of turnover

Rebates and concessions for small tax payers due to the effect of Covid pandemic

Annual turnover Rebates/exemptions (On applicable rate)
Upto NPR 2,000,000 90%
NPR 2,000,000-5,000,000 75%
Upto 10,000,000 50%
Businesses involved in hotel, travel, trekking, Cinema, party palace, media house, transportation and airlines industry having an annual turnover of more than NPR 1,000,000 99%

Payment of Taxes

Taxes are paid to be in advance by Legal persons based on estimated profit of the entity of the entire fiscal year on the following dates

Due Date Advance Tax
By January 14 40% of the total estimated Tax liability
By April 14 70% of the total estimated tax liability
By July 15 100% of the total estimated tax liability

Taxes are to be paid by person opting to pay taxes on the basis of turnovers on the following dates

Due Date Advance Tax
By January 14 Applicable tax based on the total turnover till 4th January
By July 15 Remainder of Applicable tax based on estimated turnover till 15th July based on the actual turnover till 4th July.

Natural person having income from only employment are not required to file tax returns, the employer is responsible for submitting tax returns detailing out the total remuneration, deductions made and tax paid. If the natural person earns income from business and investment, personal income tax return must be filed within three months from the end of the fiscal year i.e. within October 15.

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