Nepal’s tax law has a weird provision which lets you save up to Rs. 1.95 lakhs but only if you give away Rs. 5 lakhs to startups in Nepal and that too without expecting any return! Here’s why one word in the law changed everything!

There is one weird provision in Section 12(c) of the Income Tax Act 2058! But the initial proposal wasn’t that weird. So, in 2078, the Nepal Government proposed a smart incentive to promote startups in Nepal (pg.165). It proposed that if you help fund five startups a year by providing seed capital, up to Rs. 1 lakh each, you could deduct the total amount from your taxable income, i.e. that amount would be tax free. Finally, a tax break that could spur entrepreneurship and innovation, right? Not exactly!

The proposal indeed made sense, because then, the draft just mentioned the term “seed capital” to startups. So, that would naturally mean investment. It would imply ownership. A stake. A chance to be part of the next big thing while saving on tax under the prevailing tax rate in Nepal. A tax incentive that would introduce and promote the concept of “angel investing” in Nepal! 

But then, when the proposal became law, something changed: quietly, and without explanation (pg. 179)! By the time the law was finalized, one small word was added and it made all the difference. 

And the word was “grant”.

Now, to qualify for the tax deduction, you can’t invest. You have to give the money away as a grant. No shares. No returns. No ownership. Just a donation disguised as a tax incentive.

With that one word, a promising investment mechanism turned into a personal loss for anyone doing the math.

What could’ve been a powerful tool for startup growth became a policy most taxpayers will simply walk away from.

Let’s break down why.

The Original Vision: Encouraging Seed Capital Investments

When the draft of Section 12(c) of the Income Tax Act 2058 was first introduced, it felt like a forward-thinking step in the right direction.

The proposed wording was clear and promising:

“If a person provides up to Rs. 100,000 per business to at least five startups, excluding related persons, as seed capital, the amount (maximum of 5 lakhs)  may be deducted while calculating their taxable income.”

At the heart of this proposal was one key term: seed capital.

This wasn’t just any financial support. In the language of entrepreneurship, seed capital is the funding provided to early-stage startups in exchange for a potential stake, equity in a company, not just goodwill. It’s what helps ideas become businesses, and businesses become sustainable.

This initial draft hinted at something Nepal’s startup ecosystem truly needed: a tax incentive that encouraged individuals to support innovation while also giving them a chance to participate in the growth of new ventures and become angel investors. 

Imagine a scenario: an entrepreneur in Pokhara is building a digital payment platform targeting small local businesses. You, an individual with some disposable income, believe in their vision. Under this draft provision, your Rs. 100,000 investment would:

• Help the entrepreneur scale their product,
• Qualify you for a tax deduction,
• And potentially return significant value in the future if the startup succeeds.

For early-stage businesses, raising capital can be a major hurdle. For taxpayers, finding legitimate, forward-looking ways to reduce their liability under the current tax rate in Nepal is always valuable. This provision bridged both needs.

It had all the right ingredients:

• Encouragement for private-sector participation,
• A practical tax benefit under the Income Tax Act 2058, and
• A growth-minded strategy to boost Nepal’s innovation economy.

Unfortunately, as we’ll see next, this smart incentive was diluted by one small but significant change.

First, Let’s Understand How Income Tax Works in Nepal

Before diving into what the original Section 12(c) of the Income Tax Act 2058 was trying to accomplish, it's important to understand how income tax actually works in Nepal. Because unless you're clear on how your income is taxed, you can’t fully appreciate why a tax deduction, even one tied to startup funding, matters.

The Tax Rate in Nepal for Individuals (FY 2080/81)

If you're an individual earning a salary in Nepal, your income is taxed progressively. That means the more you earn, the higher the portion of your income that's taxed at a higher rate. Here's a breakdown of the income slabs and tax rates applicable for a single individual for the fiscal year 2080/81:

Note: The first Rs. 5 lakhs is tax-exempt only if you’re enrolled in the Social Security Fund (SSF), which is currently mandatory for private sector employees in Nepal. If not enrolled in SSF, the tax rate in Nepal for the first slab is 1%

So, as your income increases, so does the amount of tax you pay, especially once you cross into higher income brackets.

To read more about how income taxes work in Nepal, head to our blog post: Tax Rate in Nepal: A Comprehensive Guide to Tax Slabs, Deductions, and Tax Calculator Tools

The Potential Impact of the Original Provision

Let’s take a relatable case on what the proposed law was trying to accomplish.

Meet Sagar, a mid-career marketing professional living in Kathmandu. He earns Rs. 25,00,000 annually and, like many professionals, is always on the lookout for smart ways to reduce his tax burden, legally and meaningfully.

Under the regular tax regime (no special deductions), here's how Sagar’s tax liability would look as per the tax rate in Nepal:

Without Any Investment or Deduction:

So after paying Rs. 5.6 lakhs in taxes, Sagar is left with Rs. 19.4 lakhs of his annual income.

What if He Could Deduct Rs. 5 Lakhs by Supporting Startups?

Now, let’s go back to what the original draft of Section 12(c) under the Income Tax Act 2058 proposed:

“If a person provides seed capital up to Rs. 100,000 per business to at least five startups they can deduct that amount (maximum of 5 lakhs) from their taxable income.”

In this scenario, if Sagar had invested Rs. 1 lakh in each of five startups (total Rs. 5 lakhs), he could reduce his taxable income from Rs. 25 lakhs to Rs. 20 lakhs.

Here’s what happens to his tax burden with Rs. 5 Lakhs deducted as seed investment:

Tax Saved: Rs. 180,000

And He Still Owns Rs. 5 Lakhs Worth of Startup Equity

This is where the original vision shined. It created a financial incentive that aligned perfectly with real-world investor behavior:

• You fund promising startups.
• You lower your taxable income.
• You retain your Rs. 5 lakh in the form of startup equity.
• And if even one of those startups succeeds, you may get a decent return.

It was not just about tax savings; it was about encouraging a culture of early-stage investing, which Nepal desperately needs.

The Twist That Changed Everything: From Investment to Grant

Now here’s where the story takes an unexpected turn.

The original draft of Section 12(c) in the Income Tax Act 2058 was all about encouraging investment in startups. But somewhere between the drafting desk and the final lawbook, a single word quietly slipped in, and flipped the entire logic on its head (pg. 179).

The enacted provision reads:​

"If a person provides up to NPR 100,000 per business to a maximum of five startups, excluding related persons, as seed capital in the form of a grant, the amount may be deducted while calculating their taxable income."

And that changes everything.

Let’s Go Back to Sagar’s Scenario, but With This New Rule

Sagar still earns Rs. 25 lakhs a year. He still wants to support startups. And he still sets aside Rs. 1 lakh each for five different startup founders.

But now, according to the final version of the law, that money must be given as a grant, not an investment.

Meaning:

• He gives away Rs. 5 lakhs
• He doesn’t get any equity
• He doesn’t own any part of the startups
• He has no claim to future profits, dividends, or even a seat at the table

Sure, he still gets the tax deduction, and yes, on paper, it looks nice:

With Rs. 5 Lakhs Given as Grant

At first glance, you might think, "Hey, that’s not bad. I saved Rs. 1.8 lakhs in tax."

But take a closer look.

You gave away Rs. 5 lakhs
You saved Rs. 1.8 lakhs in tax

So, what’s your actual financial position?

You’re down Rs. 3.2 lakhs.

You're spending Rs. 5 lakhs to save Rs. 1.8 lakhs, and walking away with nothing in return.

No ownership. No return. Not even a promise.

Now ask yourself: Would you ever walk into a shop, hand them Rs. 500, and get Rs. 180 back, with no product?
Of course not. It defies common sense.

Most People Would Simply Choose the Smarter Option

Sagar, and thousands like him, would most likely:

• Pay the full tax: Rs. 5.6 lakhs
• Keep the rest: Rs. 19.4 lakhs in the bank

Instead of:

• Giving away Rs. 5 lakhs
• Paying a reduced tax: Rs. 3.8 lakhs
• Ending up with only Rs. 16.2 lakhs left

The math just doesn’t add up. Not for salaried individuals. Not for business owners. And certainly not for anyone trying to grow their wealth with a bit of prudence.

What was once a promising idea to stimulate startup investments in Nepal has now become a policy that asks taxpayers to give up real money, for a partial tax break, with zero return potential.

In a country where every rupee counts, that’s a hard sell.

Why This Law Doesn’t Work for Businesses Either

It’s not just individuals who are left scratching their heads at Section 12(c). Even for companies and business entities, this provision doesn’t make much financial sense.

Let’s say you run a private company with an annual profit of Rs. 25 lakhs. According to the income tax rate in Nepal 2080/81, most businesses pay a flat 25% corporate income tax. So, without any deductions, your tax liability for the year would be:

25% of Rs. 25,00,000 = Rs. 6,25,000

Now, under Section 12(c) of the Income Tax Act 2058, your company decides to give Rs. 5 lakhs as grants to five different startups (Rs. 1 lakh each). This amount becomes a deductible expense, reducing your taxable income from Rs. 25 lakhs to Rs. 20 lakhs.

Let’s do the math again:

25% of Rs. 20,00,000 = Rs. 5,00,000

So yes, your company saves Rs. 1,25,000 in tax. But you also gave away Rs. 5,00,000 in the process.

In total, here’s what it looks like:

Even with the tax deduction, you’re spending Rs. 3.75 lakhs more than you would have by just paying the tax and keeping the rest.

Companies, just like individuals, aren’t in the habit of giving away large sums of money with no return. Every rupee matters when you're trying to manage costs, grow sustainably, and keep your shareholders or partners happy. So why would any business voluntarily give away Rs. 5 lakhs just to save Rs. 1.25 lakhs in taxes?

Sure, on paper it looks like you're getting a deduction. But in reality, you're spending more than you're saving. It’s like handing someone Rs. 500 to get a Rs. 125 discount. No smart business would make that trade.

And here’s the bigger issue: businesses don’t just give money away for the sake of it. When companies support startups, it’s usually strategic. Maybe they’re looking for innovation, testing out partnerships, or planting seeds for future investments. There’s always some value expected in return, whether it's access to technology, talent, or even just a foot in the door in a new market.

But with Section 12(c), the message is: give your money to a startup, no questions asked, no ownership, and no say in how it’s used. Just hope for the best and enjoy a slightly smaller tax bill.

What Nepal Government Should Do to Make This Work

If Nepal is serious about supporting its startup ecosystem, it’s time to rework Section 12(c) of the Income Tax Act 2058. The idea behind the provision is good, but the way it’s written today simply doesn’t work in practice. People don’t want to give away their money with no possibility of getting it back, especially when the income tax rate in Nepal is already taking a significant portion of their earnings.

So how can the government make this law more useful, practical, and impactful? Here’s what needs to change.

1. Remove the Word “Grant” or Change the Word "Grant" to "Investment"

Right now, the law asks people to give grants to startups. In other words, they are expected to hand over their money without any expectation of a return. That’s a tough ask, especially for individuals or businesses trying to manage their own finances.

Instead, the law should allow people to make investments in startups. When you invest, you still provide capital, but you also get ownership or equity in return. This small change in wording could dramatically shift how people engage with startups. They would be more willing to contribute if they knew their money had a chance to grow along with the business.

2. Offer the Same Tax Deduction for Investments

If someone invests Rs. 100,000 in a startup, that investment should still be deductible from their taxable income, just like it is now for grants. This would reduce their tax burden and give them a financial stake in a young business.

For example, based on the income tax rate in Nepal, a person in the 30 percent tax bracket who invests Rs. 500,000 in five startups would save Rs. 150,000 in taxes. But unlike the current rule, they would also retain ownership in those startups. It’s a win-win situation, both for the investor and for the startups.

3. Only Allow Investments in Verified Startups

To make sure this tax benefit isn’t misused, the law should limit these deductible investments to registered and verified startups. These could be companies that are officially registered with the Office of the Company Registrar or recognized under a government-approved startup program.

The government can set clear criteria, such as the business being less than 7 years old, under a certain revenue threshold, and actively operating in Nepal. This will ensure that the tax incentive supports real entrepreneurs and not shell companies or fake setups.

4. Protect Small Investors with Simple Safeguards

If the government wants more people to invest in startups, it also needs to build trust. People are not going to risk their money if they feel unprotected.

The updated law should require basic transparency from startups, like clear business plans, how the funds will be used, and simple reporting. It could also include rules about how long investors need to hold on to their investment before selling it. And if anything goes wrong, there should be a clear way to handle disputes.

These safeguards would make everyday people feel more confident about backing local entrepreneurs.

Why This Change Matters

By updating Section 12(c) of the Income Tax Act 2058 to focus on investments rather than grants, the government could unlock a powerful new source of funding for Nepal’s startup ecosystem. Instead of just giving tax breaks to people who donate money, the law could encourage smart, sustainable investing that builds businesses, creates jobs, and strengthens the economy.

And for taxpayers, it’s a smarter financial decision too. Why give money away when you could invest it, save on taxes, and still have a chance at future returns?

This change would align tax policy with real-world behavior and long-term national goals. Supporting startups shouldn't be a charitable act. It should be a strategic opportunity that benefits everyone involved.

You’re Ready to Invest. But Where Are the Startups?

Even if the government updates Section 12(c) of the Income Tax Act 2058 to allow startup investments instead of grants, there’s still one big challenge left. Finding the right startups to invest in.

Let’s be honest. Most individuals who want to take advantage of a tax holiday don’t have the time, network, or expertise to go out and vet startups on their own. The idea of searching for credible founders, reading pitch decks, conducting due diligence, and negotiating terms is enough to make most people give up before they even begin.

This is where platforms like Nepal Invests come in.

Nepal Invests is an investment matchmaking platform designed to connect everyday investors with vetted, promising startups in Nepal. It takes the guesswork and friction out of the process by curating a list of startups that are already screened, verified, and ready to raise capital. Whether you're an individual looking to invest Rs. 1 lakh or a company exploring early-stage opportunities, Nepal Invests makes it simple, transparent, and efficient.

If you're looking to invest in startups and want to find credible, verified opportunities that align with your goals, or if you're a startup founder looking to raise funds, head over to www.nepalinvests.com and get registered today. It’s free, easy to use, and designed to help you move from interest to action, without the hassle or confusion.

Final Thoughts

We genuinely appreciate that the government wants to support startups in Nepal. The intention behind Section 12(c) of the Income Tax Act 2058 is a step in the right direction. But in its current form, the law is asking people to give away their money for free with no ownership, no return, and no real incentive.

Let’s be honest. In the real world, most people aren’t going to part with large sums of money unless there’s at least a chance of getting something back. And that’s completely fair. Especially when the income tax rate in Nepal 2080/81 already takes a significant portion of earnings, taxpayers naturally want to make sure their remaining money is being put to good use.

People are willing to support startups. In fact, many would love to be part of Nepal’s innovation story. But instead of asking them to donate and lose their money entirely, why not invite them to invest? With one simple change, replacing the word grant with investment, the law could open the doors for thousands of individuals to participate in and benefit from the growth of Nepal’s startup ecosystem.

This small adjustment could lead to a massive shift in how early-stage businesses are funded, how citizens engage with the economy, and how Nepal positions itself as a hub for innovation in South Asia.

Additional Resources:

• Private Company Registration in Nepal- The Ideal Business Structure to Kickstart Your Entrepreneurial Journey
• Nepal’s Social Security Fund (SSF): Registration, Contribution & Benefits Explained (2025) 
• Salary and Tax Calculator in Nepal: Simplifying Your Financial Planning

• Tax Calculator Nepal: Instantly Calculate Your Take-Home Salary Online