Freelancing in Nepal has become increasingly popular in recent years, especially in areas like IT services, content creation, and consulting. Interestingly, many foreign companies are now opting to hire full-time employees from Nepal using the freelancing model. Why? Because it benefits both the employer and the freelancer.

For the freelancer, this model provides the flexibility to work with multiple clients and earn in foreign currency. Additionally, thanks to Nepal's tax regulations, freelancers who earn in foreign currency enjoy simplified tax compliance. Nepal's government has introduced a system where freelancers earning in foreign currencies only need to pay a flat 5% tax on their earnings, compared to the higher progressive tax rates for other income brackets. This lower tax rate, introduced through Section 95Ka of the Finance Act, 2078, allows freelancers to retain more of their income.

Moreover, many foreign companies find this arrangement attractive because they can avoid the complexities of full-time employment benefits like healthcare, social security, or pensions, which would typically be required if they hired through traditional employment contracts. For Nepali freelancers, the government’s policies reduce the bureaucratic burden, as they no longer need to register a business to operate under this freelancing model. This makes it easier for individuals to take on lucrative international projects without needing a full-fledged company setup.

In essence, these favorable policies have created a win-win situation. Foreign companies get access to a highly skilled workforce at competitive rates, while freelancers benefit from flexible working arrangements, foreign currency earnings, and lower taxes, driving the growth of the freelancing ecosystem in Nepal. 

Due to this, there is a rise in the number of skilled youths turning to freelancing. And hence understanding freelancer tax in Nepal has become essential for those earning income in foreign currency. 

In this guide, we’ll break down everything you need to know about paying freelancer taxes, the 5% advance tax, how to get your tax clearance certificate, and your obligations as a freelancer in Nepal.

Understanding the 5% Freelancer Tax in Nepal

As per Nepal’s Income Tax Act, freelancers earning foreign income are subject to a 5% advance tax. This tax was increased from 1% under the Finance Act 2080, and it applies to earnings from foreign clients in various fields such as software development, consultancy, and content creation.

So, how does this 5% tax work?

If you are earning foreign income from services like software programming, consultancy, or uploading content to platforms like YouTube, your bank or financial institution is required to deduct 5% of your income at the time of payment.

For example, if you receive NPR 1,00,000 from a foreign client, your bank should deduct NPR 5,000 as advance tax. This 5% is considered your final tax liability, meaning you won’t owe any additional taxes on that income.

What if the Bank Doesn’t Deduct the 5% Tax?

In some cases, banks may not automatically deduct the 5% advance tax on your foreign earnings. When this happens, the responsibility falls on you to declare your income and pay the tax.

To manually declare your income and pay the freelancer tax in Nepal, follow these steps:

1. Register for a PAN (Permanent Account Number): If you haven’t done so already, obtaining a PAN is crucial for tax purposes.
2. Declare Your Earnings: Use the Inland Revenue Department (IRD) e-filing system to declare your earnings, especially if your annual income exceeds NPR 4 million.
3. Pay the Tax: Log into the IRD portal to deposit the 5% tax manually. Make sure to keep records of all payments for future reference.

Obtaining a Tax Clearance Certificate for Freelancers

A tax clearance certificate is vital if you plan on traveling abroad or engaging in activities that require proof of tax compliance. This certificate shows that you have paid your taxes in full and have no outstanding liabilities.

Here’s how to get your tax clearance certificate as a freelancer in Nepal:

• Ensure Your Taxes Are Paid: Whether your bank deducts the 5% tax or you manually pay it, make sure all payments are recorded.
• Request the Certificate: You can apply for a tax clearance certificate through the IRD portal once your taxes are up to date.
• File a D4 Return (if applicable): If your income exceeds NPR 4 million, you must file a D4 tax return, even if no additional taxes are due.

What Happens if My Income Exceeds NPR 4 Million?

If your total earnings cross NPR 4 million, you are required to file a D4 tax return as per Section 97 of the Income Tax Act. This filing is mandatory even if the 5% tax has been deducted and no further tax is due.

Changes to Freelancer Taxation in Nepal

Over the past few years, several changes have been introduced to freelancer taxation in Nepal, particularly with the Finance Act 2080. Here’s a quick overview of the key updates:

1. Tax Rate Increase: The tax on foreign earnings increased from 1% to 5% under the Finance Act 2080.
2. Bank Practices: While banks were initially responsible for withholding the 5% tax on foreign earnings, some banks no longer do so. This means freelancers are responsible for declaring and paying their own taxes.
3. D4 Filing Requirement: If your annual earnings exceed NPR 4 million, you must file a D4 tax return, even though the 5% tax is your final liability.

Why Declaring Freelancer Income Matters

Failing to declare your income or pay the 5% freelancer tax can result in:

• Penalties: You could face penalties for underreporting or failing to declare your income.
• Interest on Unpaid Taxes: If you fail to pay the tax on time, the IRD can charge interest on the outstanding amount.
• Delays in Obtaining a Tax Clearance Certificate: Without proper tax filing, obtaining a tax clearance certificate could be difficult, making it harder to travel abroad or apply for loans.

How to Stay Tax Compliant as a Freelancer in Nepal

To avoid penalties and ensure smooth tax compliance, follow these steps:

1. Monitor Your Bank Transactions: Make sure your bank is deducting the 5% tax. If not, you will need to manually declare your income and pay the tax.
2. Keep Accurate Records: Track your income and keep a record of all payments made to the IRD.
3. Stay Updated: Always check for any updates to Nepal’s freelancer tax laws, especially as changes like those introduced by the Finance Act 2080 could impact your tax obligations.

Conclusion: Stay Compliant, Stay Ahead

Freelancing offers incredible flexibility and earning potential, but it also comes with responsibilities—tax compliance being one of the most important. Whether your bank deducts the 5% tax or you’re required to declare and pay it manually, understanding your tax obligations is crucial to avoid penalties and ensure smooth operations.

Make sure to:

• Register for a PAN
• File your taxes correctly
• Obtain a tax clearance certificate if needed

By staying on top of your taxes, you can focus on growing your freelance business without any hiccups. And if you have any questions or need any help, feel free to contact our experts at My Salary Slip. 

Feature Photo by Robson Hatsukami Morgan on Unsplash