Salary Income Taxation in Nepal: Legal Provisions and Worked Computation

1. Taxable scope and year of recognition

Sections 2, 5 and 6: residence determines the geographical scope of assessable income. A resident's employment income is assessable whether its source is in Nepal or abroad; a non-resident is assessed on Nepal-source employment income. The residence definition includes normal abode in Nepal, presence of at least 183 days within a continuous 365-day period, and the specified government-posting rule. This article applies the resident salary provisions; treaty and non-resident calculations are outside its scope.

Section 6 determines the assessable-income base. Section 5 then arrives at taxable income after the authorised deductions. Schedule 1 rates apply to that taxable amount.

Sections 22(2) and 23(a): an individual ordinarily calculates employment income on the cash basis. Income is included when payment is received or made available, not merely when the employer records an expense.

Application: an employer accrues NPR 90,000 of Ashad salary but neither pays it nor makes it available until Shrawan. Subject to any applicable deemed-payment rule, the employee recognises it in the later income year. By contrast, salary made available before year-end is not deferred merely because the employee withdraws it later. Section 22(2) contains a specific exception for arrears received after court adjudication: those arrears are accounted for on an accrual basis in their relevant income years.

2. Taxable remuneration and exclusions: section 8

Section 8(1) and (2): employment remuneration is broader than basic salary. The section expressly includes wages, leave pay, overtime, fees, commission, prizes, gifts, bonuses, personal allowances, settlement of personal expenditure, employment-related payments and employer retirement contributions. The definition of employment covers past, present and prospective employment. Payment through an employer's associate or an agreed third party does not, by itself, take remuneration outside section 8.

Reimbursement versus allowance: an employee spends NPR 40,000 on an employer-directed client visit, supported by hotel and travel bills. Reimbursement of that business expenditure falls under section 8(3)(c). A separate fixed NPR 60,000 annual travel allowance, paid for the employee's unrestricted use, is included under section 8(2)(b). The relevant distinction is business expenditure versus personal remuneration, not whether the payroll description contains the word "travel".

3. Non-cash benefits: section 27 and Rule 13

Section 27(1)(b) and Rule 13: private-use vehicles and accommodation have prescribed valuation methods. For employees and the other monthly-remuneration recipients covered by the rule, the vehicle benefit is valued at 0.5% of the relevant salary and accommodation at 2%. The alternative methods for other beneficiaries should not be substituted for these employee methods.

Section 27(1)(c): for the listed domestic assistance, food, entertainment and residential utility benefits, valuation follows the provider's expenditure less the recipient's contribution. Section 27(1)(d): for a concessional loan, the benefit is the shortfall between interest payable at the applicable prevailing rate and interest actually paid. These provisions do not extend the 0.5% or 2% methods to every employee benefit.

4. Retirement contribution: section 63 and Rule 21

Section 63(2): a natural-person beneficiary may claim a deduction for contributions made to an approved retirement fund. The statutory explanation identifies the relevant arrangements operated under the Employees Provident Fund Act, Citizen Investment Trust Act, Contribution-based Social Security Act and Pension Fund Act. An employer's internal provision or a deduction merely labelled "retirement saving" is not sufficient.

Section 63(3) and Rule 21: the deduction cannot exceed the prescribed annual limit. Calculate it as follows:

Where employer contributions are included under section 8(2)(f), include them in assessable remuneration before applying the deduction. Aggregate eligible contributions to different funds; each fund does not create another NPR 500,000 ceiling.

Application of the ceiling: assessable income is NPR 1,200,000, already including NPR 120,000 of employer contributions. Eligible contributions comprise NPR 300,000 paid by the employee and NPR 120,000 by the employer. Actual contributions total NPR 420,000, but one-third of assessable income is NPR 400,000. The deduction is NPR 400,000. The remaining NPR 20,000 is not deductible for that year merely because it was deposited with an eligible fund.

The deduction under section 63 and the first-band exception in Schedule 1 are separate provisions. Eligibility for a retirement deduction does not automatically establish eligibility for the pension-fund/SSF first-band exception.

5. Other deductions under Schedule 1

These deductions reduce taxable income, not the tax amount. Their conditions apply independently of whether the employee's net pay was reduced by the payment.

Tuition application: an annual school bill contains NPR 80,000 of tuition and NPR 30,000 of transport and meals. Only tuition enters this calculation: NPR 80,000 x 25% = NPR 20,000, within the NPR 25,000 ceiling.

6. Resident tax rates and the first-band exception

Schedule 1, section 1(1), substituted by Finance Act 2083: the following progressive bands apply to resident natural persons and couples. Finance Act 2083 also removes the former separate subsection (2) couple-rate table.

Proviso to paragraph (a): the first-band charge does not apply to the specified pension income and natural persons contributing to pension funds or the contribution-based Social Security Fund; the proviso also states a separate sole-proprietor exception. For an employee, establish the applicable pension-fund or SSF category. A contribution to another retirement arrangement does not automatically satisfy that description.

The exception removes the charge on the first band, up to NPR 10,000. Income above NPR 1,000,000 remains subject to the higher bands. Paragraph (e)'s additional two percentage points apply only to income exceeding NPR 4,000,000; the provision does not turn the whole income into a 29% tax base.

Applying paragraph (e): for NPR 4,200,000 of taxable income where the first-band charge applies, tax up to NPR 4,000,000 is NPR 665,000. Only the excess NPR 200,000 attracts 29%, adding NPR 58,000. Total tax before reliefs is NPR 723,000, not 29% of the entire NPR 4,200,000.

Section 50: resident spouses may elect, by written notice, to be treated as one natural person for the particular income year, with joint and several liability. Common rate bands do not abolish that election or permit two first-band amounts inside one elected couple computation.

7. Rebates and medical credit: tax-level adjustments

Schedule 1, section 1(11): remuneration-only women's rebate

A qualifying resident woman earning only remuneration income receives a 10% rebate on tax payable under the provision. It is not a deduction of 10% from gross salary. The remuneration-only condition must be established; this is not a universal rebate for every woman with taxable income.

Section 51 and Rule 17: approved medical treatment credit

Section 51(1) and (2) permit a resident natural person to claim a credit for approved medical treatment expenditure incurred for that person, calculated at 15%, together with eligible brought-forward credit. Section 51(3) makes the annual claim subject to the prescribed ceiling. Rule 17(3), as amended, prescribes NPR 1,500.

Rule 17 covers qualifying bills for treatment by recognised hospitals, nursing homes, health centres and practitioners. It excludes cosmetic surgery and the stated costs compensated under health insurance. Section 51(4) permits unused eligible credit to be carried forward where the ceiling or insufficient tax prevents its use.

Application: approved treatment costs NPR 20,000, of which health insurance reimburses NPR 8,000. Eligible expenditure is NPR 12,000; its 15% credit is NPR 1,800. If there is sufficient tax liability and no opening credit, NPR 1,500 is claimed for the year and NPR 300 remains available for carry-forward under section 51(4). The reimbursed NPR 8,000 is not claimed again.

Conflicting summary figure: IRD's FY 2083/84 rate summary still reproduces NPR 750. The amended Rule 17(3) states NPR 1,500 and identifies the replacement of the former amount. The computation here follows the amended Rule, not the unrevised summary figure.

8. Combined computation: applying the provisions in order

Assume a resident employee whose contribution-based SSF participation qualifies for the first-band exception. The employee has no women's rebate or other income. Eligible retirement contributions across the applicable approved arrangements total NPR 300,000, including NPR 180,000 contributed by the employer. The insurance and tuition payments satisfy the conditions above, and approved medical expenditure after insurance compensation is NPR 12,000.

The employer contribution is included once in assessable remuneration and forms part of the single retirement deduction. The insurance and tuition amounts reduce income; the medical claim reduces tax. Charging NPR 10,000 on the first band in this eligible SSF case would overstate the liability by that amount.

9. Employer withholding: sections 87 and 90

Section 87(1): a resident employer must withhold tax at Schedule 1 rates when paying Nepal-source amounts included in employment income. Section 87(2) provides that other deductions or restrictions affecting the employee's remuneration do not remove that withholding obligation. Payroll must therefore estimate the annual liability and adjust withholding when annual remuneration or allowable deductions change.

Applying the combined example: if NPR 10,000 has already been withheld and five payroll periods remain, the balance is NPR 11,500: NPR 21,500 less NPR 10,000. The revised withholding is NPR 2,300 per remaining period. This adjustment follows the annual computation; it is not a fresh set of tax bands for the remaining five months.

Section 90(1) and (2): the ordinary deadline for the withholding statement and corresponding payment is 25 days after month-end. Section 90(3) and (4) deem tax to have been withheld when it should have been withheld and require its payment. Failure to deduct from the employee is therefore not a defence to the employer's obligation to deposit the tax.

10. Employee return filing: sections 96 and 97

Section 96(1): the ordinary filing deadline is three months after the income year ends, subject to an applicable exemption or extension. Finance Act 2083 replaces section 97(1); the replacement does not retain the former standalone salary-only/single-employer exemption.

For a salary recipient, relevant exemption tests include no tax payable under section 3(a), income within the final-withholding regime under section 3(c), or an applicable IRD designation. IRD may also direct an otherwise exempt person to file. The employee in the combined example has an annual liability of NPR 21,500; employer withholding alone does not establish an exemption under section 97.

Where an employee has changed employers, aggregate employment income and reconcile withholding across employers. Multiple employment contracts do not create multiple personal first bands. Use the return, where required, to reconcile the final liability and eligible credits against tax paid.

Applies to the stated income year and assumptions. Separate rules govern non-resident employment, treaty relief, pension income and final-tax retirement payments.

References

1. Inland Revenue Department: Income Tax Act, 2058, consolidated through Finance Act 2082.Read with Finance Act 2083. Relevant provisions include the residence definition; sections 5, 6, 8, 22, 23, 27, 50, 51, 63, 87, 90, 96 and 97; and Schedule 1. The earlier consolidation alone does not establish the FY 2083/84 position.
2. Inland Revenue Department: Finance Act 2083, Gazette publication 2083/03/30.Amendments to the resident natural-person/couple bands, first-band treatment, private-building insurance ceiling, tuition deduction and section 97(1).
3. Inland Revenue Department: Income Tax Rules, 2059, including the sixteenth amendment.Rules 13, 17, 21 and 38: benefit valuations, medical credit, retirement deductions and remote-area limits. The amended Rule 17(3) states NPR 1,500; its amendment note records replacement of NPR 750.
4. Inland Revenue Department: natural-person tax rates for FY 2083/84.Pages 1-3: annual bands, reliefs, insurance and tuition deductions, and the employment-only women's rebate. See section 7 for reconciliation of the summary's medical-credit ceiling with the amended Rules.