1. Identify the contribution and the payment separately
Sections 2, 8 and 63-65: retirement saving involves two different tax events. A contribution may reduce taxable income in the contribution year. A later retirement payment has its own tax base and rate. The deduction granted during employment does not make the eventual withdrawal wholly exempt.
The statutory retirement-payment definition covers payments connected with an individual's retirement and qualifying payments to a dependant following the individual's death. A settlement may nevertheless contain ordinary salary, bonus or another payment with a different character. Classify the components rather than applying one retirement rate to the whole bank transfer.
| Transaction | Tax base and treatment |
|---|---|
| Eligible contribution to an approved retirement fund | Section 63 / Rule 21: limited income deduction in the contribution year. |
| Contribution-based approved-fund lump sum, or qualifying Nepal Government lump-sum retirement payment | Section 65(1)(b) / section 88(1), proviso (1): 5% of the gain after the higher-of allowance. |
| Gain from an unapproved contributory fund paid by a resident person | Section 65(2) / section 88(2)(c): 5% of payout less the beneficiary's own contributions. |
| Other Nepal-source retirement payment by a resident payer | Section 88(1): generally 15% of gross, unless a specific exemption or exception applies. |
| Regularly paid pension | Section 92(1)(g) exception: annual taxation, not the lump-sum final-tax calculation. |
2. Retirement contributions: sections 8 and 63, and Rule 21
Employer contributions enter remuneration
Section 8(2)(f): an employer's contribution to a retirement fund for an employee is included in employment income. The employee's own contribution is normally paid out of remuneration already included in income. Section 63 then provides the deduction for eligible contributions; neither contribution should be omitted from the calculation merely because the money remains in a fund.
Only an eligible approved arrangement qualifies
Section 63(2), including its explanation: the approved-fund category for this deduction identifies the Employees Provident Fund, Citizen Investment Trust, retirement funds operated by the contribution-based Social Security Fund, and retirement funds operated by the Pension Fund established under their respective Acts. A bank deposit, insurance premium or employer's internal reserve does not become an eligible retirement contribution simply because it is intended for retirement.
The current provision follows Finance Act 2082's changes to the approval framework. An old approval letter alone is not sufficient evidence of present eligibility. Establish the receiving arrangement's current legal status and the contribution credited to the beneficiary.
One aggregate deduction, with three limits
Section 63(3) and Rule 21: the claim cannot exceed either one-third of assessable income or NPR 500,000, and cannot exceed the eligible amount actually contributed. Aggregate eligible employee and employer contributions across the relevant approved arrangements; there is no separate NPR 500,000 deduction for each fund.
| Case | Assessable income | Eligible contributions | One-third limit | Deduction |
|---|---|---|---|---|
| Actual contribution limits the claim | 1,800,000 | 300,000 | 600,000 | 300,000 |
| Income-related limit applies | 1,200,000 | 450,000 | 400,000 | 400,000 |
| Absolute ceiling applies | 2,400,000 | 650,000 | 800,000 | 500,000 |
Employer-contribution example: cash remuneration is NPR 1,080,000 and the employer contributes NPR 120,000. Assessable employment income is therefore NPR 1,200,000. The employee also contributes NPR 330,000 to eligible arrangements: total contributions are NPR 450,000. The deduction is only NPR 400,000 because one-third of assessable income is the lowest limit. Income after this deduction is NPR 800,000, before other applicable adjustments. Deducting the employee contribution from cash salary first, or claiming the employer contribution again separately, would misstate the result.
The retirement deduction and Schedule 1's first-band exception are different provisions. Participation in a qualifying pension fund or contribution-based SSF may meet the first-band exception; a contribution to another approved retirement arrangement does not automatically establish that exception.
3. Approved-fund and government lump sums: section 65(1)
Section 65(1): the special calculation applies to a natural person's contribution-based interest in an approved retirement fund, or a retirement payment from the Nepal Government. The contribution-based condition matters: section 2(r1) defines the approved-fund payment by reference to amounts included in the individual's income and deposited in that fund, together with growth on those amounts. The definition therefore covers the qualifying accumulated benefit, not only the original deposits.
Section 65(1)(b): where the qualifying payment is a lump sum, deduct the higher of 50% of the payment or NPR 500,000. The positive balance is treated as a gain from disposal of a non-business chargeable asset. Section 88(1), proviso clause (1), requires 5% withholding on that gain.
Employer funding: Supreme Court Decision No. 11309
Ramesh Prasad Chalise v. Citizen Investment Trust and others, 2080/04/32, paragraphs 10-14: the Court rejected 15% withholding on the approved-fund gratuity in issue merely because the employee had not personally contributed. Employer contributions can constitute retirement contributions; the specific approved-fund provision cannot be displaced by that fact alone. The Court set aside the 15% treatment and ordered refund of the excess, subject to verification of the retirement date.
Application: an employer-financed benefit managed through a qualifying approved fund must be distinguished from a direct payment out of the employer's own resources. The employee's personal contribution is not the sole test. Establish the arrangement, the applicable law and the payment's character before selecting the tax base and rate.
| Gross payment | Allowance | Taxable gain | Tax at 5% | Net payment |
|---|---|---|---|---|
| 400,000 | 500,000 threshold; relief limited to payment | 0 | 0 | 400,000 |
| 800,000 | 500,000 | 300,000 | 15,000 | 785,000 |
| 1,600,000 | 800,000 | 800,000 | 40,000 | 1,560,000 |
For NPR 800,000, the fixed amount exceeds 50% of the payment. For NPR 1,600,000, 50% exceeds the fixed amount. A payment below NPR 500,000 produces no taxable gain under this formula, not a tax loss that can be set against salary.
No second deduction of historical contributions: assume a qualifying approved-fund lump sum of NPR 2,000,000 includes NPR 1,200,000 of the beneficiary's historical contributions. Section 65(1)(b) gives an allowance of NPR 1,000,000, leaving gain of NPR 1,000,000 and tax of NPR 50,000. It does not permit deducting the NPR 1,200,000 as well. The separate actual-contribution formula belongs to unapproved funds under section 65(2).
The NPR 500,000 here is part of the payout formula. It is not the annual contribution deduction carried forward to retirement. The lump-sum condition must also be satisfied; the allowance is not an annual deduction against regular pension instalments.
4. Unapproved contributory funds: section 65(2)
Section 65(2), explanation: the gain is the excess of the retirement payment over retirement contributions made by the beneficiary natural person to that fund. This returns the beneficiary's own contributed capital without treating that capital as gain. The statutory subtraction is not all amounts ever deposited by both employee and employer, and is not restricted to investment interest.
Resident payer: section 65(2)(a), section 88(2)(c) and section 92(1)(d) apply 5% final withholding to the gain. Neither the NPR 500,000 allowance nor the 50% allowance from section 65(1)(b) applies.
| Component / calculation | NPR |
|---|---|
| Beneficiary's own contributions | 600,000 |
| Employer contributions | 200,000 |
| Investment growth | 100,000 |
| Total retirement payout | 900,000 |
| Less: beneficiary's own contributions | (600,000) |
| Gain subject to 5% final withholding | 300,000 |
| Tax: NPR 300,000 x 5% | 15,000 |
| Net payment to beneficiary | 885,000 |
Taxing only the NPR 100,000 investment growth would omit the employer-funded portion from this gain calculation. Conversely, taxing the full NPR 900,000 would tax the beneficiary's contributed capital. The exclusion of own contributions at payout does not mean those contributions qualified for a section 63 deduction when paid into an unapproved fund.
Non-resident payer: section 65(2)(b) instead requires the gain to enter the beneficiary's income calculation. The resident-payer 5% final-withholding conclusion cannot simply be applied to a foreign fund. Residence, source and any applicable treaty must then be examined separately.
5. Direct-employer and non-contributory payments
Proviso to section 65(2): a payment from an unapproved non-contributory fund is not treated as gain from an interest in an unapproved retirement fund. This is not a rule that every employer-financed approved fund attracts 15%; Decision No. 11309 prevents that shortcut. Equally, merely naming an internal gratuity reserve an unapproved fund does not establish eligibility for the 5% gain regime.
Section 88(1): for a resident payer making a Nepal-source retirement payment outside a specific exception, the general withholding rate is 15% of the gross payment. This covers an ordinary direct-employer retirement benefit that is not a qualifying government payment or contribution-based approved-fund payout and is not covered by another exemption.
Example: a resident private employer pays NPR 800,000 of retirement gratuity directly from its own resources. The employee has made no contributions, and no specific exemption applies. Tax is NPR 800,000 x 15% = NPR 120,000; the employee receives NPR 680,000. Deducting NPR 500,000 and charging 5% on the balance would improperly import the approved-fund rule.
Unpaid salary or an ordinary employment bonus included in the same settlement retains its employment-income treatment under sections 8 and 87. Its inclusion in a retirement settlement does not by itself convert it into a final-tax retirement benefit.
Finance Act 2083 amendment: the Act deletes the duplicated words equivalent to "and retirement payment" from section 88(1). Retirement payment remains in that subsection's list. IRD's FY 2083/84 withholding table continues to state the general 15% rate and the specific 5% exceptions; the deletion is not a general exemption from retirement-payment tax.
6. Regular pension is taxed differently
Section 92(1)(g): regularly paid pension is expressly excluded from the final-withholding classification for retirement payments. It therefore follows the annual income-tax calculation rather than receiving the section 65(1)(b) lump-sum allowance against each instalment.
Schedule 1, section 1(9a), as replaced by Finance Act 2083: a resident natural person with pension income qualifies for a deduction equal to 25% of the first-band amount. For FY 2083/84 the first band is NPR 1,000,000, so the starting amount is NPR 250,000. Rule 39 restricts the deduction so that it does not exceed the pension income itself. It is not 25% of the actual pension, and not NPR 500,000.
Example: a resident receives only regular pension of NPR 1,500,000 during FY 2083/84, with no other deduction or rebate. The pension deduction is NPR 250,000, leaving NPR 1,250,000 taxable. The first NPR 1,000,000 of pension income is excepted from the first-band 1% charge under Schedule 1, section 1(1)(a); the remaining NPR 250,000 attracts 10%. Annual tax is NPR 25,000. Charging 5% of every pension instalment would not apply these provisions correctly.
Where pension and other income coexist, combine the assessable amounts and apply the appropriate deductions and bands once. A separate pension stream does not create a second set of personal tax bands.
7. Legacy exemptions and fund-level exemption
Rule 20(a): the exemption covers principal, interest and other amounts deposited in the Employees Provident Fund or Citizen Investment Trust in income years before the Income Tax Act commenced, and gratuity and accumulated leave amounts accrued up to that specified period. It is not an exemption for every amount accumulated before retirement, or automatically for accruals in the income year in which the Act commenced.
Rule 20(b): a separate exclusion covers up to NPR 180,000 of retirement medical payments under the applicable service-conditions law for employees or workers who were in service when the Act commenced. Both the commencement-date employment condition and the legal basis for the medical payment must be established.
These are legacy provisions, not a fresh allowance for every current retiree. A recent employee's medical settlement does not qualify for NPR 180,000 merely because it is paid on retirement. Where a genuine legacy component exists, substantiate it from the historical records and separate the exempt amount before determining the treatment of the remaining components.
Section 64: an approved retirement fund's own income is exempt, while contributions and retirement distributions have specified treatment in computing the fund's income. That fund-level exemption does not exempt every payment to a beneficiary. The individual's receipt must still be tested under section 65 and the withholding provisions.
8. Final tax and the payer's obligations
Section 92(1)(d) and (g), and section 92(2): the relevant resident-paid unapproved-fund gain and retirement payments other than regular pension fall within final withholding. The liability is discharged when the tax correctly withheld, or deemed withheld, is deposited with IRD. Sections 8(3)(a) and 9(3)(a) keep final-withholding amounts out of the ordinary employment or investment income calculation.
Effect: for a gross qualifying approved-fund benefit of NPR 1,600,000, correct withholding is NPR 40,000 and the net receipt is NPR 1,560,000. The employee does not add the NPR 800,000 final-tax gain to ordinary salary and tax it again at marginal rates. Nor is that NPR 40,000 an ordinary salary-tax credit under section 93, which concerns non-final withholding. Salary and other non-final income must still be computed separately.
Sections 90 and 91: the ordinary withholding statement and deposit are due within 25 days after the month of payment ends. The payer must issue the applicable withholding certificate; for these non-salary payments the general certificate deadline is also 25 days after month-end. The settlement should identify the gross benefit, applicable allowance or beneficiary contribution, taxable base, rate and tax withheld. Without that separation, the beneficiary cannot verify whether 5% was applied to the gain or incorrectly to gross.
Prepared for FY 2083/84 using the provisions listed below. Examples assume genuine retirement payments, documented contribution histories and no additional exemption unless stated. Foreign-fund, treaty and disputed fund-status cases require their own analysis.
Government References
- Inland Revenue Department: Income Tax Act, 2058, consolidated through Finance Act 2082.Read with Finance Act 2083. Sections 2 (including the contribution-based payment definition in paragraph (r1)), 8(2)(f), 8(3)(a), 9(3)(a), 63-65, 87, 88(1) and its proviso (1), 88(2)(c), 90-93, and Schedule 1. Consolidation pages 82-84 contain sections 63-65.
- Inland Revenue Department: Finance Act 2083, Gazette publication 2083/03/30.Income Tax Act amendments: section 88(1)'s duplicated retirement-payment wording; Schedule 1's replacement resident bands, first-band exception and pension deduction under section 1(9a).
- Inland Revenue Department: Income Tax Rules, 2059, including the sixteenth amendment.Rule 20 (transitional retirement exclusions), Rule 21 (contribution ceiling), and Rule 39 (pension deduction limited to pension income).
- Inland Revenue Department: withholding tax rates for FY 2083/84.Pages 1-2: general retirement-payment rate, qualifying government/approved-fund calculation and unapproved-fund gains. Pages 5-6: final-withholding classifications. Published 22 Shrawan 2083.
- Inland Revenue Department: natural-person tax rates for FY 2083/84.Resident annual bands, first-band pension exception and qualifying pension deduction. Read alongside the amended Act and Rule 39.
- Supreme Court of Nepal: Ramesh Prasad Chalise v. Citizen Investment Trust and others, Decision No. 11309.Case 075-WO-0472; decision 2080/04/32; Nepal Law Reports 2081, Kartik, issue 7. Paragraphs 10-14 address employer-funded approved retirement benefits, the specific withholding provision and refund of excess tax.
- Inland Revenue Department: Income Tax Directives, 2066, fifth amendment 2081.Administrative explanation of retirement contributions and payments; read with subsequent amendments and Decision No. 11309, not as a substitute for them.