Income Tax in Nepal: Law, Procedure and Regulations (2081)

1. Introduction to Income Tax Law in Nepal

The Income Tax Law in Nepal is governed by the Income Tax Act, 2058 (2002) and the Income Tax Rules, 2059 (2002). The Inland Revenue District offices across the country oversee tax collection and administration. Taxpayers can pay taxes at designated locations or recognized banks. Taxation applies to individuals with taxable income, foreign establishments remitting income, and those receiving payments subject to final tax withholding. Taxable income is determined by subtracting claimed amounts from assessable income, categorized into business, employment, and investment.

1.1. Laws Governing Income Tax in Nepal

Income Tax Act, 2058 (2002) and Income Tax Rules, 2059 (2002) are the regulatory laws governing Income Tax, Computation of Income Tax, Exemptible and Deductible Amounts and Tax Bases in Nepal.

1.2. Authorities Regulating Income Tax in Nepal

Inland Revenue District with Offices in every district are responsible for collection and mobilization of Income Tax in Nepal. IRD Nepal is concerned with Tax Administration, Tax Payer Services, Tax Refund, Tax Audit amongst others.

2. Procedure for Filing of Income Tax in Nepal

Step 1: Method of Payment and Location

Taxpayers must identify the designated places notified by the Department for tax payment. If such notification is absent, taxes can be paid at recognized banks handling governmental transactions or directly to the Department.

Step 2: Initiate Payment through Recognized Banks

Taxpayers who choose to pay taxes through recognized banks must inform the Department of such payments. Taxes can be paid to the Department directly or through recognized banks. Cash payments within prescribed limits can be made directly, while larger amounts require cheques, drafts, or electronic transfers.

Step 3: Order of Payment Determination

If a cheque issued for tax payment fails to clear, the taxpayer is liable to reimburse the Department for all incurred expenses, including interest, fees, and fines. When a taxpayer owes taxes, interest, and fees from multiple income years or sources but fails to pay all amounts, the Department decides the priority of payment regarding the income year or source.

3. Taxation in Nepal for Individuals and Entities

Tax is levied on various categories of individuals and entities:

  • Individuals with taxable income in any income year.
  • Foreign permanent establishments of non-resident persons situated in Nepal, which remit income.
  • Individuals receiving payments subject to final tax withholding in any income year.

The amount of tax owed by individuals is determined based on their taxable income. Special provisions apply to resident natural persons meeting specific criteria, such as those solely earning employment income from Nepal-based sources or income solely from Nepalese business operations. Tax payable by foreign permanent establishments is computed based on specified rates applied to income remitted abroad. For individuals subject to final tax withholding, tax is computed based on applicable rates applied to each payment received.

Taxable income is computed by subtracting claimed amounts under Section 12 or 63 from the total assessable income, which is categorized into the following headings: Business, Employment, and Investment. Assessable income includes income earned by residents from employment, business, or investment, regardless of income source location, and income earned by non-residents from employment, business, or investment with income sources in Nepal.

4. Income Tax Computation of Business, Employment and Investment

4.1. Computation of Business Tax

Profits and benefits derived from any business within an income year are included in the income of that business for that individual such as:

(a) Service charge

(b) Amount from the sale of stock-in-trade

(c) Net profit from business property or liability

(d) Amount from the disposal of depreciable property

(e) Gift related to the business

(f) Amount received for accepting operational restrictions

(g) Income from investment directly related to the business

(h) Other applicable amounts

4.2. Computation of Employment Tax

Remuneration earned from employment is computed as the income received by the individual in a given year such as:

(a) Wages, salary, leave, overtime, fee, commission, prize, gift, bonus, and other facilities.

(b) Personal allowances such as dear allowance, subsistence allowance, entertainment, and transport allowance.

(c) Reimbursement of personal expenses or those of associated persons.

(d) Payments for agreeing to employment terms.

(e) Payments for termination, loss of employment, or compulsory retirement.

(f) Retirement payments and contributions, including employer deposits in retirement funds.

(g) Other employment-related payments.

(h) Additional amounts

4.3. Computation of Investment Tax

Profits and benefits derived from investments in a given income year are included in the individual’s income:

  • Dividends, interest, payments for natural resources, rent, royalty, investment insurance profits, and interest from retirement funds.
  • Net profits from the disposal of non-business taxable property.
  • Excess incomings from the disposal of depreciable property over remaining values.
  • Gifts received in relation to investments.
  • Retirement payments and contributions, including those deposited in retirement funds.
  • Amounts received for accepting investment restrictions.
  • Any other amounts required to be included.

5. Tax Exemptible Amounts and Exemptions Related to Tax in Nepal

The following amounts are exempt from Tax in Nepal:

  • Amounts granted under bilateral or multilateral treaties between Nepal and foreign countries or international organizations.
  • Income received by Nepalese citizens for employment in a foreign government service, provided it’s paid from the government fund.
  • Income received by non-Nepalese citizens for employment in the Nepalese government under tax exemption terms.
  • Allowances provided by the Nepalese government to widows, senior citizens, or the disabled.
  • Gifts, inheritance, or scholarships, except those required for income computation.
  • Donations or contributions to exempt organizations, including Nepal Rastra Bank.
  • Pension received by Nepalese citizens retired from foreign military or police service.

Tax Exemptions are also available for Professions such as Agriculture, Cooperatives and special industries. Donations and Gifts to Tax Exempt Organizations are also authorized in a limited manner.

6. Tax Deductions for Income Year and Relief in Nepal

General Deduction

Any person can deduct expenditures related to transactions made in the income year, by that year, and in earning income from the business or investment.

Interest Deduction

Individuals can deduct all interest charges under debt liabilities incurred for business or investment purposes.

Allowances for Cost of Stock-In-Trade

Deductions are allowed for the cost of stock-in-trade disposed of during the income year. The initial and final values of stock-in-trade are computed to determine the deductible amount.

Repair and Maintenance Expenses

Expenses for repairing and maintaining depreciable property used to earn income from business or investment can be deducted, subject to certain limitations.

Pollution Control Expenses

Expenses incurred for pollution control in business operations can be deducted, limited to 50% of taxable income.

Research and Development Expenses

Expenses incurred for research and development in business operations can be deducted, limited to 50% of taxable income.

Depreciation Deduction Expenses

Depreciation expenses for depreciable properties owned and used in business or investment can be deducted based on a predefined schedule.

Loss from Business or Investment

Losses from business or investment can be deducted, subject to specified conditions and limitations.

7. Conclusion

Contextually, the Income Tax Law has established certain amounts to be exempt from Taxation for income under Bilateral Treaties, government service payments, allowances, gifts, and donations to exempt organizations. Deductions and reliefs are available for expenditures related to transactions, interest charges, stock-in-trade costs, repair and maintenance, pollution control, research and development, depreciation, and losses from business or investment.

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