Tax Residency and Foreign Income of Individuals in Nepal

1. Three questions, in the correct order

Sections 2, 6 and 67: first establish the individual's residence for the relevant income year. Next identify the nature and source of each receipt. Then apply exemptions, treaty provisions, the relevant rate and any eligible foreign tax credit. A passport, visa or bank transfer description cannot answer all three questions.

This article concerns natural persons. Company residence, permanent establishments and controlled foreign entities have separate rules. The examples assume ordinary individual income, without a foreign entity or trust interposed.

2. The individual residence tests

Section 2, resident-person definition: an individual is resident if any of the following alternatives applies. These are alternative tests, not three conditions that must all be met.

Normal abode is not simply a permanent address

IRD Income Tax Directives, chapter 2: the guidance examines continuity of residence and the principal location of economic activity. It expressly distinguishes normal abode from merely having a permanent address or house in Nepal.

Application: a person has genuinely lived and worked abroad for several years, makes short annual family visits, and has no Nepal-based principal economic activity. Retaining a Nepal house and sending money to the family do not, on those facts alone, establish normal abode in Nepal. The other residence tests must still be checked. Conversely, an individual whose main business and usual base remain in Nepal does not necessarily become non-resident merely by travelling abroad for most of the year.

Count presence; do not count passport labels

The Directives count from arrival in Nepal through departure. Use actual travel dates and reconcile overlapping records so that a calendar day is not counted twice. The statutory wording is a continuous 365-day period; a calendar-year total or a single visit is not a substitute. Where the relevant period spans two income years, map the travel history and residence conclusion to each year rather than assuming a new count automatically erases the earlier presence.

Threshold example: three non-overlapping Nepal visits within the relevant 365-day period total 61, 62 and 60 days, including the relevant arrival and departure days. The total is 183 days, so the presence test is met. At 182 days, this particular test is not met, but normal abode or a government posting may still establish residence.

Citizenship, an NRN card, a foreign residence permit and Nepal tax residence are not interchangeable. A foreign citizen can meet Nepal's presence test; a Nepali citizen may fail all three domestic residence tests. An applicable treaty must be considered separately if both countries treat the individual as resident.

3. Worldwide income is not a remittance-only rule

Sections 5 and 6: subject to the applicable exclusions, a resident's assessable employment, business and investment income includes income from Nepal and abroad. A non-resident's assessable income is limited to Nepal-source income. Specific provisions also govern windfall gains. The relevant question is the income's legal character and source, not whether it was transferred into Nepal.

Application: a Nepal resident performs a temporary employment assignment abroad, receives salary into an overseas account and retains it there. If that salary is assessable under sections 6 and 8, leaving it overseas does not postpone Nepal taxation until remittance. By contrast, transferring existing principal from one account to another does not, by itself, create new employment or investment income.

Sections 22 and 23: an individual ordinarily recognises employment and investment income on the cash basis when received or made available. The recognition year must therefore be established before computing residence-dependent liability. Migration does not justify an assumed arrival-date split, or the automatic exclusion of all income received before arrival, without analysing the applicable year's rules and facts.

Section 10(f): genuine personal gifts, inheritances and qualifying scholarships are exempt unless the amount must be included as employment, business or investment income under sections 7-9. A family's receipt of a genuine gift is therefore different from an individual's receipt of salary. Calling a client fee a family remittance or gift does not change its character.

Special exemptions can also apply to specified foreign-government or treaty-protected receipts under section 10. The general worldwide-income principle is not a statement that every foreign receipt is taxable without exception.

4. Determine source under section 67

Section 67(6)(i): employment and service payments for activities performed in Nepal are Nepal-source regardless of where payment occurs. Nepal Government employment payments are also covered by a specific source rule even where the work occurs abroad. Section 67(7) supplies the foreign-source rule for amounts not treated as Nepal-source and determines the relevant foreign country by applying the source principles correspondingly.

Why the distinction matters for credit: foreign tax withheld from Kathmandu-performed employment is not automatically creditable under section 71 merely because the withholding happened abroad. Ordinary foreign tax credit requires assessable foreign income; source classification and any treaty relief must be resolved. A refund or treaty claim in the foreign country may be relevant if it taxed income beyond its permitted taxing right.

5. Record gross income and convert to NPR

Sections 8, 28 and 71: calculate the assessable remuneration before foreign income tax; examine that tax separately as a possible credit. Section 28 requires foreign-currency amounts to be translated into Nepalese rupees at the prevailing rate when received, incurred, paid or otherwise recognised for tax. An average rate requires the written permission contemplated by section 28(3), not an arbitrary year-end conversion.

Example: gross foreign salary is USD 10,000 and foreign income tax withheld and paid is USD 1,000. Assume, solely for this example, that the applicable rate for both amounts is NPR 130 per USD. Gross income is NPR 1,300,000; the possible foreign tax credit is NPR 130,000, subject to section 71. The net cash is NPR 1,170,000. Reporting only net cash as salary would understate income by NPR 130,000. Different recognition dates may require different exchange rates.

6. Foreign tax credit: section 71

The credit is limited, and country-specific

Section 71(1) and (2): a resident may claim foreign income tax paid for assessable foreign income. Compute the claim separately for each source country. The allowable rate cannot exceed Nepal's average tax rate for the year. The section's explanation defines the average using Nepal tax payable before foreign tax credit divided by taxable income.

This is a tax-level credit, not a deduction from gross income. A foreign tax assessment without evidence of payment is not the same as tax paid. The income, source country, tax period and beneficiary must be reconciled; a remittance fee or unrelated charge is not automatically foreign income tax.

Worked example: do not pool two countries

Assume a resident with ordinary employment income of NPR 3,000,000 for FY 2083/84: Nepal-source NPR 1,200,000, Country A source NPR 1,200,000 and Country B source NPR 600,000. There are no deductions, rebates or first-band exception. Both overseas amounts are assessable foreign salary, not receipts under the special service regime below. Eligible foreign income tax paid is assumed to be NPR 240,000 in A and NPR 30,000 in B. These are illustration amounts, not statements of either country's actual rates.

The average rate is NPR 395,000 / NPR 3,000,000 = 13.166666...%. Use the unrounded fraction in the country calculations.

Total credit is NPR 188,000. Nepal tax after foreign credit is NPR 395,000 minus NPR 188,000 = NPR 207,000, before adjusting for any Nepal withholding or advance tax already paid. Country B's unused NPR 49,000 ceiling cannot absorb A's excess. Pooling the two foreign taxes and their combined ceiling would incorrectly increase the credit.

Carry-forward and the alternative expense method

Section 71(3): foreign tax denied because of the rate ceiling may be carried forward and treated as paid against future assessable foreign income from the same country. In this example, A's NPR 82,000 is tracked for Country A; it is not an immediate Nepal tax refund or a credit against Country B income. A later claim remains subject to the applicable credit rules.

Section 71(4): the taxpayer may instead forgo the year's foreign tax credit and claim the eligible foreign income tax as an expense. Do not claim both treatments for the same amount. The illustration uses the credit method; choosing the expense method requires recomputing taxable income and tax rather than subtracting the same credit afterward.

7. Treaties: residence and short employment visits

Section 73 and the applicable treaty: domestic residence is the starting point, not the end of a dual-residence analysis. For example, Article 4 of the Nepal-India agreement applies individual tie-breakers in sequence: available permanent home, closer personal and economic relations, habitual abode, nationality and, where necessary, agreement between competent authorities. A foreign residence certificate is evidence, not a universal instruction to ignore Nepal law.

Article 15 distinction: its short-visit employment exception is not Nepal's domestic residence test. It requires no more than 183 days in any twelve-month period commencing or ending in the fiscal year concerned, an employer not resident in the work state, and remuneration not borne by a permanent establishment or fixed base there. All conditions must be met: a 120-day assignment paid by a work-state resident employer fails the employer condition. Apply the actual country's treaty and income article; these are not universal rules.

8. Specified foreign-currency receipts are a separate regime

Section 95A(6b), (6c) and (6d): the relevant bank, financial institution or money-transfer institution collects 5% on specified foreign-currency receipts of qualifying resident natural persons not engaged in operating a business. The provisions concern software or similar electronic services, personal consultancy services supplied outside Nepal, and audiovisual content uploaded to social media. Establish each condition; a foreign customer or payment in dollars alone does not establish eligibility.

Finance Act 2083: the amendment to section 92(1) expressly places these specified payments in the final-withholding classification. That matters: do not automatically add a qualifying final-tax receipt to ordinary salary and then claim its collection as ordinary salary tax paid. Equally, do not apply 5% to all overseas employment salary, foreign rent or a business's export turnover.

Example: if NPR 1,000,000 is a qualifying receipt under one of those provisions, collection is NPR 50,000. This conclusion depends on the statutory category and final-tax treatment, not merely the bank's transfer description. If the receipt is instead ordinary foreign salary, the residence, source, annual computation and credit rules above apply.

9. Filing and the legal material to apply

Sections 96 and 97: the ordinary income-return deadline is three months after income-year end, subject to a valid exemption or extension. Finance Act 2083 replaces section 97(1); the older standalone salary-only exemption is not retained in that replacement. Having tax deducted abroad, or receiving income without remitting it to Nepal, does not by itself establish a Nepal filing exemption. A final-tax receipt also does not excuse reporting separately taxable ordinary income.

The residence conclusion should be supported by the travel chronology and facts relevant to normal abode. Reconcile gross income, country of source, recognition dates, NPR conversion and foreign tax paid to the return and credit calculation. For a disputed position, these are the facts the legal provisions require, not substitutes for them.

Section 75: IRD may issue public circulars to guide consistent application, and is bound by a circular until it is cancelled. Administrative explanations must be read with the legislation, subsequent amendments and any applicable judicial interpretation. The Directives' examples on normal abode and day counting are relevant guidance; their older numerical tax examples are not used as FY 2083/84 rates here.

Prepared for the stated income year. The examples do not determine a particular country's foreign tax liability or resolve an individual's treaty residence. Company/foreign-entity arrangements, disputed migration-year allocation and fact-specific exemptions require separate analysis. No directly applicable published Supreme Court decision on the individual 183-day or section 71 issues was verified in this review; that is not a claim that no such decision exists.