Personal income tax is a tax levied on the income of individuals. In most countries, personal income tax is progressive, which means that people with higher incomes pay higher tax rates. Personal income tax is typically calculated as a percentage of an individual's income, and the rate may vary depending on the amount of income earned.

In Nepal, personal income tax is levied on the income of individuals who are residents of Nepal, as well as on the income of non-residents earned from sources within Nepal. It is important for individuals in Nepal (whether citizens of Nepal or not) to understand their personal income tax obligations and to keep accurate records of their income and expenses in order to properly report their income and pay the correct amount of tax. And hence, we have prepared this brief overview about income tax in Nepal for individuals to help you understand the basic concepts of personal income taxation. 

General Overview of Personal Income Tax in Nepal

The Income Tax Act 2058 (“Income Tax Act”) levies income tax on individuals. The scope of the taxable income of individuals depends on the residential status of such individuals as per the Income Tax Act.  Resident individuals are subject to tax on their worldwide income derived from employment, business or investment, while non-residents are only liable for income tax on their net income earned or sourced in Nepal. 

Residential Status of individuals in Nepal

An individual, irrespective of his citizenship, may be classified as resident or non-resident depending on the length of stay. 

“A person who resides in Nepal for a period of 183 days or more in 365 consecutive days or  whose normal place of abode is Nepal is considered a resident of Nepal

Dual residence is not recognized for the purpose of Nepalese tax. The Income Tax Act also does not have any separate provision for taxing the income of short-term visitors. 

Income Tax Rates in Nepal 

Income tax is levied on the net income earned or received from each of the following: 

• Business income;
• Employment income or salary income;
• Investment income; and 
• Windfall gains

Tax is levied on the total income earned or received by an individual less deductions, relies and incentives. Certain categories of income are not included in the total income of an individual but are taxed separately under special provisions under the Income Tax Act as follows:

• Rent from a house is taxed at a flat rate of 10% plus additional municipality tax to be included and deposited with the local ward/municipal office (2% in case of Kathmandu and Lalitpur Municipal Authorities).
• Income from bank deposits is taxed separately at source at a flat rate of 5 %; 
• Gain in investment insurance of a resident natural persons and from unapproved retirement fund is taxed at a flat rate of 5%; 
• Windfall gains tax is taxed at a rate of 25%; 
• Returns distributed by a mutual fund to a natural person is exempt from tax; 
• Dividend received from a resident company and partnership firm is taxed as final  withholding tax at a rate of 5% to the resident and non-resident person both.

Deductions and Allowances available for individual taxpayers in Nepal

Following rebates & allowances are available for the natural persons under Income Tax Act. 

• Retirement contribution 
  - Lower of 5 lakhs,Actual contribution or one-third of taxable income is allowed for deductions if the contributions are deposited in the Social Security Fund. 
  - Lower of 3 lakhs, Actual contribution or one-third of taxable income is allowed for deductions if the contributions are deposited in the elsewhere (Provident Fund, Citizen Investment Trust, Pension Fund etc. ) 
•  Remote Area Allowance 
  A person working in a remote area is entitled to deduct a certain amount from taxable amounts based on the class of remote area.(A-50,000, B-40,000, C-30,000, D-20,000, E-10,000).
• Handicapped Allowance 
  Handicapped Persons can deduct 50% of the amount prescribed under the first tax slab or actual income whichever is lower.
• Natural Person with Pension Income 
  Amount equal to 25% of amount prescribed under first tax band or actual pension receipts, whichever is lower shall be allowed for deduction from taxable income.
• Life Insurance Premium 
  A natural person who has paid life insurance premium amount thereon shall be entitled to a reduction of actual annual insurance premium or Rs 40,000 whichever is lower from taxable income. 
• Health  Insurance Premium 
  A natural person who has insured with a resident insurance company for health insurance shall be entitled to a reduction of actual premium paid or Rs 20,000 whichever is lower.
• Home Insurance 
  A Resident natural person who has insured private buildings in his/her ownership with resident insurance company shall be entitled to a deduction of actual l premium paid  or Rs 5,000 whichever is lower.
• Women tax credit
  Women on employment, who haven't opted for Couple is entitled to deduct 10% from her tax liability. 
• Medical Tax Credit 
  A Resident Natural Person is entitled to deduct least of the following amount from tax liability if he/she has incurred medical expenses.  
  i. Rs 750 or
  ii.15% of Medical Expenses along with any carried forward from previous year or
  iii. Actual tax liability. 

The tax-free threshold or basic exemption limit is NPR 600,000 for a couple and NPR 5,00,000 for an individual. A resident couple may, by giving a written notice to the Inland Tax Office, choose to be assessed as a couple instead of being assessed separately as two individuals.

However, 1% tax is levied on employment income within the exemption threshold and deposited in a separate revenue account of IRD as social security tax(SST). However, 1% SST isn’t applicable for taxpayers registered as sole proprietorship & taxpayer depositing amount in Social Security Fund(SSF). 

Income Tax Rates for Financial Year 2079/80 (i.e. 2022/23)

The progressive income tax rates applicable to various taxpayers’ income (other than the special incomes discussed above) are as follows:

Resident Individuals:

Resident Couple:

Non-Resident Individuals:

Compliance and Tax Filing Requirements for Individual Taxpayers in Nepal

In general, every resident and non-resident individual is required to file a personal income tax return within 3 months from the end of the income year. 

However, individuals who only have employment income are not required to file tax returns subject to the condition that the annual employment income does not exceed NPR 4 million. The employer is responsible for deducting the employee’s income tax also known as salary tax at the time of payment of salary and depositing the same with the Inland Revenue Office on a monthly basis. 

Each month’s salary tax is calculated based on the employee’s estimated annual income. The employer is also required to submit annual tax returns for each employee showing total remuneration due or paid along with permissible deductions and the amount of tax due, actual tax deducted and deposited with the tax office.

However, in case of a small taxpayer with sole proprietorship business with business transaction not exceeding Rs. 30,00,000 and profit not exceeding  Rs.3,00,000, such taxpayer is required to pay presumptive tax based on your location  as mentioned in below. 

Metropolitan City , Sub-Metropolitan City -Rs.7,500
Municipality- Rs.4,000
Rural Municipality-Rs.2,500

So, what do you think? Are you paying the right taxes? Are you taking all the benefits and incentives to save your taxes? Understanding tax and planning it to minimize your tax is an important aspect of financial planning. Do let us know if you have any question.