1.1.     General

The Income Tax Act also levies income tax on individuals. The scope of the taxable income of individuals depends on the residential status of such individual as per the Income Tax Act.  Resident individuals are subject to tax on their worldwide income derived from employment, business or investment, while non-residents are only liable for income tax on their net income earned or sourced in Nepal.

1.2.     Residential Status

An individual, irrespective of his citizenship, may be classified as resident or non-resident depending on the length of stay.

“A person who resides in Nepal for a period of 183 days or more in 365 consecutive days or whose normal place of abode is Nepal is considered residents of Nepal.”

Dual residence is not recognized for the purpose of Nepalese tax. The Income Tax Act also does not have any separate provision for taxing the income of short-term visitors.

1.3.     Rates

Income tax is levied on the net income earned or received from each of the following:

  • Business income;
  • Employment income;
  • Investment income; and
  • Windfall gains

Tax is levied on the total income earned or received by an individual less deductions, relied and incentives. Certain categories of income are not included in the total income of an individual but are taxed separately under special provisions under the Income Tax Act as follows:

  • Rent from a house is taxed at a flat rate of 10%;
  • Income from bank deposits is taxed separately at source at a flat rate of 5 %;
  • Gain in investment insurance of a resident natural persons and from unapproved retirement fund is taxed at a flat rate of 5%;
  • Windfall gains tax is taxed at a rate of 25%;
  • Returns distributed by a mutual fund to a natural person is exempt from tax;
  • Meeting fees is taxed at a rate of 15%;
  • Amount paid to a non-resident person after withholding applicable taxes under remuneration, fees, commission, royalty, interest and under contractual payments are final withholdings; and
  • Dividend received from a resident company and partnership firm is taxed as final tax withholding at a rate of 5% to the resident and non-resident person both.

The tax-free threshold or basic exemption limit is NPR 400,000 for a couple[1] and NPR 350,000 for an individual.

The exemption limit for the incapacitated person is 150% of the above exemption limit.

However, 1% tax is levied on employment income within the exemption threshold and deposited in separate revenue account of IRD as social security tax.

A rebate of 10% of the tax liability is provided to women (not with couple status) on their employment income.

A remote area benefit that increases the minimum exemption threshold by up to NPR 50,000 is also available for individuals working in remote areas.

The progressive income tax rates applicable to various taxpayers’ income (other than the special incomes discussed above) are as follows:

a)    Resident Individuals:

S.N. Income threshold Income tax rates
From (NPR) To (NPR)
1 0 350,000 1%[2]
2 350,001 450,000 15%
3 450,001 to 2,500,000 2,500,000 25%
4 More than 2,500,000 —– 35%

b)    Resident Couples:

S.N. Income threshold Income tax rates
From (NPR) To (NPR)
1 0 400,000 1%[3]
2 400,001 500,000 15%
3 500,001 to 2,500,000 2,500,000 25%
4 More than 2,500,000 —– 35%

c)     Non-Resident Individuals:

S.N. Income Threshold Tax rates
1. Total Income 25%

1.4.     Allowance

The above progressive tax rates apply to one’s net taxable income. In arriving at the net taxable amount, the taxpayer is entitled to deduct the following allowance/deduction from his gross income:

a)     Life insurance premium: up to NPR 20,000;

b)    Contribution to approved retirement fund: the lower of one third of the employment income or NPR 300,000; and

c)     Health insurance premium: the lower of NPR 20,000 or the actual premium paid to resident insurance company.

Besides above deductions, a resident person also gets certain tax credits which may be deducted from the tax liabilities:

a)    Medical tax credit: the lower of NPR 750 or 15% of the approved medical expense or actual approved medical expense; and

b)    Foreign tax credit: if foreign income is included in taxable income of a resident person, tax paid in foreign country in respect of that income can either be deducted as expense from the taxable income or as a credit from the tax liability in Nepal.

1.5.     Compliance

In general, every resident and non-resident individual are required to file a PIT return within 3 months from the end of the income year.

However, individuals who only have employment income are not required to file tax returns subject to the condition that the annual employment income does not exceed NPR 4 million. The employer is responsible for deducting the PIT at the time of payment of salary and depositing the same with the Inland Revenue Office on a monthly basis.

Each month’s PIT is calculated based on the employee’s estimated annual income. The employer is also required to submit annual tax returns for each employee showing total remuneration due or paid along with permissible deductions and the amount of tax due, actual tax deducted and deposited with the IRO.

[1] A resident couple may, by giving a written notice to the Inland Tax Office, choose to be assessed as a couple instead of being assessed separately as two individuals.

[2]applicable only on employment income.

[3]applicable only on employment income.


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