Why a policy fix is the need of the hour and replacing just a term in this rather odd tax incentive can have far reaching consequences for Nepal's startup and entrepreneurial ecosystem. 

Understanding how taxes work i.e. the “tax concept” is crucial for everyone, especially entrepreneurs. In Nepal, taxes fund public services, but smart policies can also encourage economic growth. One key tax concept that many don’t understand is the concept of tax deduction, which lets you subtract certain expenses from your income so you owe less tax. Interesting, isn’t it! This is something everyone wants i.e. to pay as less tax as possible, but very few understand. 

This article breaks down Nepal’s tax concepts in simple terms, shows how tax deductions help individuals (for example, through life insurance premiums), and then dives into a specific issue affecting startup businesses in Nepal. We’ll explore Section 12(c) of Nepal’s Income Tax Act 2058,  a provision meant to spur startup investment but hasn’t so far and analyze why it isn’t working as intended. We’ll compare Nepal’s approach with successful strategies from the US, UK, and India that incentivize startup investments via tax relief or capital gains exemptions. 

Finally, we’ll offer concrete policy suggestions to reform Section 12(c) (like replacing the word “grant” with “investment” and defining “startup” clearly) and tell you how you can contribute to changing this tax policy. If you care about innovation or run a startup business in Nepal, read on to learn how modernizing our tax framework can empower entrepreneurs and how you can push for change.

What Is a Tax Concept? A Layperson’s Guide to Taxes and Deductions

At its core, a tax is money people and businesses pay to the government. The government uses this money to build roads, pay for schools, provide healthcare, national security, and other public services. The concept of tax involves understanding that this is a mandatory contribution. If you earn income or profits, you’re generally required to share a portion with the state. However, not all income is taxed equally, and that’s where tax deductions come in as an important tax concept.

Tax deductions are specific expenses the government allows you to subtract from your total income, lowering the amount considered taxable. Why would the government let you pay less tax? Often to encourage behaviors that are good for society or the economy. For example, consider how Nepal encourages its citizens to plan for the future or support good causes:

1. Life Insurance Premium: If you buy life insurance, the premiums you pay (up to a certain limit) can be deducted from your taxable income. This means if you earned NPR 800,000 and paid NPR 40,000 in life insurance for your family’s security, you could deduct that amount when calculating your tax. Under current law, a resident individual in Nepal can deduct up to NPR 40,000 of life insurance premiums from their taxable income​. That lowers the income on which tax is calculated, effectively reducing your tax bill. It’s the government’s way of rewarding you for protecting your loved ones.
2. Health Insurance and Retirement Contributions: Similarly, premiums for health insurance (up to NPR 20,000) are deductible, and contributions to approved retirement funds (like pension or social security funds) are deductible as well. Contribution to retirement funds like the Social Security Fund ( up to NPR 500,000) is deductible. These deductions encourage people to insure their health and save for their old age. And if you use your income in these insurance or investment for the future, the Government will not take any taxes. 
3. Donations to Approved Charities: Donations to approved charitable organizations or disaster relief funds can also be deducted up to a limit (typically 5% of your adjusted taxable income or NPR 100,000, whichever is lower). This tax concept encourages philanthropy, you get a tax break for contributing to social causes.

In simple terms, the tax concept of deductions means you don’t pay tax on money you spend or invest on certain beneficial things. For an individual in Nepal, using these deductions can make a big difference. For example, by using a life insurance deduction of NPR 40,000, a Nepali taxpayer could save around NPR 4,000 to NPR 15,600 in taxes (depending on their tax bracket), real money back in their pocket, or looked at another way, a reward for prudent financial planning.

Understanding these basics of Nepal’s tax concept sets the stage for our main topic: how a particular tax deduction aimed at supporting startups works and why it needs improvement.

Tax Deductions and Startups: Section 12(c), A Well-Intended but Flawed Provision

Nepal, like many countries, wants to foster innovation and entrepreneurship. Startups drive new ideas and create jobs, so it makes sense to support them. One way to support startups is through tax policy. In fact, Nepal has taken some steps in this direction. For instance, the government even provides newly registered startups (meeting certain criteria) a corporate tax holiday i.e. no income tax for the first five years of operation​! But again this benefit is limited to paper. More on this later. But, this at least shows the Government’s commitment to helping startup businesses in Nepal thrive by easing their tax burden in the early years.

Beyond helping startups directly, Nepal also tried to encourage investment in startups by private individuals. This is where Section 12(c) of the Income Tax Act 2058 comes in. Introduced a few years ago, the intention behind Section 12(c) was admirable: motivate individuals to put seed money into startups by offering them a tax deduction. In theory, it sounds great, if you help fund a startup, you get a break on your taxes. The proposal was on the same line too. But when the law was approved, a certain word was added rendering the whole provision ineffective. 

What exactly does Section 12(c) say? In simple terms, it allows a taxpayer to deduct up to NPR 100,000 per startup in seed funding from their taxable income, for up to five startups in a year. In the best case, a generous investor could support five startups and knock NPR 500,000 off their taxable income that year. However, there’s a big catch in the law: this deduction only applies if the funding is given as a grant, not as an investment for ownership. In other words, you only get the tax deduction if you give the money to the startup with no strings attached (essentially a donation). If you instead invest the money in exchange for shares or some ownership stake in the startup, Section 12(c) says you get nothing, meaning no tax deduction at all​

The policy clearly meant well. Lawmakers wanted to unlock more seed capital for startups by rewarding those who provide funds. They may have thought providing a grant (gift) is purely altruistic and thus especially worthy of a tax reward. The intention was to encourage a flow of money to early-stage companies that might otherwise struggle to find financing.

Unfortunately, by insisting on the “grant only” clause, the law has a flaw that makes it largely ineffective. As one commentator put it, a single word “grant” turned what could have been a powerful incentive into a rarely used provision, costing Nepal’s startup ecosystem dearly.

Let’s break down why this well-intended tax concept isn’t working in practice.

Why Section 12(c) Isn’t Working for Startup Investment

To put it bluntly, how many people are willing to give large sums of money to a private startup for free? Startups aren’t charities, they are businesses. Founders aren’t asking for donations; they are usually looking for investors who will take a stake in the company. But Section 12(c) only rewards giving, not investing. This creates a mismatch between the policy and real-world behavior.

Here are the key reasons Section 12(c) fails to support startup investment effectively:

1. Investors Want Ownership, Not Just Goodwill: If you’re willing to risk your hard-earned money on a young startup, you typically do so because you believe in the venture’s potential and hope to share in its success (by owning equity that could increase in value). The current law gives you no incentive if you take that normal route. You could invest NPR. 1 lakh in a startup and receive shares, but you’ll get no immediate tax benefit for doing so. Meanwhile, if you simply give NPR. 1 lakh as a grant, you can deduct that from your income. The result? The law is effectively telling you: “Either act like a philanthropist  i.e. give money with no stake or return, and we’ll cut your taxes, or if you invest like a businessperson, you get no help.” This is backwards for encouraging entrepreneurship. It discourages the very people we need i.e. the angel investors, from investing in startups, because the tax break only comes with a scenario (giving money away) that most financially sensible people won’t choose.
2. No Upside, Limited Downside Protection: Let’s compare the outcomes. If you follow Section 12(c) as written and give a startup NPR 100,000 as a grant, you indeed reduce your taxable income by that amount. If you’re in, say, the 30% tax bracket, that saves you NPR 30,000 in tax (30% of 100k). You’re still out of pocket NPR 70,000 net (because you gave 100k but saved 30k). And what do you get in return? Maybe a thank you, and the satisfaction of helping a startup but no ownership, no share of future profits. On the other hand, if you invest NPR 100,000 in the startup for some shares, you don’t get the immediate tax savings. You pay full tax on that money as if you never invested (because from the tax perspective, it’s like you just kept the money). However, you now own a piece of the company. If the company grows, your shares could be worth many times more, that’s your potential upside. Right now, the tax code doesn’t acknowledge that you took a risk until you actually sell those shares (and then you’d pay tax on any gains). So in the short run, investing appears much less attractive than granting, except that granting has zero potential upside. It’s a pure loss of principal with a partial tax consolation.
3. Human Nature and Logical Behavior: Most people with money to support startups (let’s call them angel investors) will naturally think in terms of investment, not charity. The current setup “makes logical investment behavior look financially irresponsible”​. Giving away money just to get a tax break is rarely going to make sense, as we illustrate in the example below. Thus, Section 12(c) in its current form has seen very few takers. It’s a case of a policy that exists on paper but has little real-world impact on boosting startup funding.

To underscore this, consider a real-life example in Nepali context:

Example: Grant vs Investment, How a रु 5 Lakh Outlay Affects Your Tax

Suppose you are an individual earning NPR 2.5 million (25 lakhs) a year from salary or business. That puts you in a high tax bracket (let’s assume roughly 30% for simplicity). Your approximate income tax would be about NPR 560,000 (5.6 lakhs) in a year if you claim no special deductions – that’s your tax payable with no grant or investment​

Now, say you want to support startups with NPR 500,000 (5 lakhs). You have two options:

1. Option 1: Give 5 lakhs as grants (e.g. NPR 100k each to five startups, utilizing the maximum allowed by Section 12(c)). In this case, you can deduct the full NPR 500,000 from your taxable income. Instead of being taxed on 2.5 million, you’re taxed on 2.0 million. This could slash your tax bill from about 5.6 lakhs down to roughly NPR 3.8 lakhs​. You save NPR 1.8 lakhs in tax. That sounds good, but remember you gave away 5 lakhs. In net terms, you spent 5 lakhs to end up 1.8 lakhs richer (by way of tax saving), which means you’re 3.2 lakhs poorer overall​. 

You have no stake in those startups’ future to show for your generosity – it was essentially a donation.

1. Option 2: Invest 5 lakhs in startups (say, buy equity in one or more startups totaling NPR 500,000). What is your tax outcome? Well, you get no immediate deduction, so your taxable income stays at 2.5 million and your tax remains ~5.6 lakhs. You saved  रु 0 in tax. You do own shares in the startups, though. If one of them becomes the next big success, that equity could be worth a lot. However, that payoff (if it comes at all) is years down the road, and you might have to pay capital gains tax on it then. If the startups fail (a realistic possibility in high-risk ventures), you lose some or all of your 5 lakhs investment and Nepal’s tax code doesn’t give you a special break for that loss either.

Ask yourself: Would you give away 5 lakhs just to save 1.8 lakhs in tax? Probably not, and neither would most people​.

Option 2 is what most rational investors would prefer – at least there’s a chance of getting your money back with profit – but the current law doesn’t reward Option 2 at all. Therefore, Section 12(c) is not actually spurring significant new investment in startups. It’s a classic case of policy not aligning with practical motives.

In summary, the “grant-only” requirement is the Achilles’ heel of this tax concept. By trying to force pure altruism, the law ended up discouraging any action. Startups in Nepal aren’t getting the seed funding boost that was envisioned. Meanwhile, other countries have found smarter ways to use tax incentives to drive startup investment. Let’s take a quick look at how the US, UK, and India do it, to see what Nepal can learn.

How Other Countries Incentivize Startup Investment (and Why Nepal is Lagging)

Around the world, governments recognize that investing in a startup is risky, many startups fail, but those that succeed can repay investors many times over. To encourage more people to take these risks (which ultimately create jobs and innovation), countries have designed tax reliefs that make the deal sweeter for investors. Here’s a look at three examples and how Nepal compares:

Looking at the table, a pattern emerges: Nepal’s current policy is an outlier. The US rewards success (no tax on big gains), the UK rewards both the act of investing (immediate relief) and success (no CGT) and even cushions failure, and India provides routes to funnel existing capital into startups tax-free. All these are logical incentives aligning with investor behavior – investors are more willing to risk money if they see a potential for higher after-tax returns or at least some protection if things go south.

Nepal, however, only rewards an action that yields no return to the investor (grants). It’s easy to see why this hasn’t catalyzed a wave of funding for startups. As a result, Nepal’s startups often rely on personal savings, limited bank loans, or foreign investors/accelerators,  channels that are insufficient or hard to come by. To truly unlock domestic capital for innovation, Nepal needs to reform its approach.

How to Fix Section 12(c): Policy Suggestions to Boost Startup Investments

The good news is that the solution to this problem is relatively simple. We’re not asking for massive new programs or heavy government spending – just a tweak in the tax law to align it with common sense. Here are two specific policy suggestions to reform Section 12(c) and ignite investment in Nepali startups:

1. Replace “grant” with “investment” in Section 12(c). In the language of the law, remove the restriction that funding must be an अनुदान (grant) and explicitly allow equity investments to qualify for the tax deduction. This single change would open the door for any individual who invests seed capital in a Nepali startup to deduct that investment from their taxable income (up to the existing limits). It straight away aligns the incentive with what startups actually need – investors, not donors. If this change is made, someone who puts, say, NPR 1 lakh into a startup for shares would get the same tax break that they currently would only get by giving it away. This would encourage private investment in startups and unlock seed capital from professionals and diaspora investors that are currently sitting on the sidelines. In essence, Nepal would be saying: “We value your investment in our startups – we’ll tax you a little less for betting on our entrepreneurs.” That’s how you motivate behavior. Importantly, appropriate checks can be put in place (for example, requiring that the investment be in a certified startup business and perhaps a holding period to prevent abuse) – but the core idea is to reward investment, not just charity.
2. Clearly define “startup” for the purpose of this tax deduction. We need to specify what counts as a “startup business” eligible for this incentive, so the provision is targeted and not abused by unrelated businesses. Fortunately, the government has recently provided definitions in other regulations. For instance, an amendment to the Industrial Enterprises Regulation has defined startup businesses along the lines of those leveraging innovative knowledge/technology and having annual turnover below a certain threshold (like NPR 1 crore)​

We should incorporate a similar definition here. One approach could be to reference that existing definition: e.g., “startup business as defined by [relevant regulation/year].” By doing so, we ensure only genuine early-stage companies benefit. Clarity will also help implement the law without confusion. If policymakers want to refine it, they could add conditions like “registered for less than X years” or “recognized by a government startup registry” – but the key is to have a consistent, clear definition of startup in the tax law itself. This removes ambiguity and builds confidence that the incentive is for the right targets.

In addition to these two main changes, Nepal could consider a few other complementary measures in the future, inspired by global best practices:

1. Increase the Deduction Limit or Scope (Optional): The current cap of NPR 100,000 per startup might be relatively low for today’s funding needs. While the immediate priority is to make the deduction usable (by allowing investments), later on the government could evaluate if the limit should be raised to encourage larger angel investments (for example, many startups could use NPR 500k or 1 million from an angel; the government might allow the deduction on a higher amount to match that need). Even allowing fewer startups but higher per startup deduction could be beneficial. This is a secondary suggestion, even the current Rs.100k x 5, if fully utilized by many investors, would be a great start.
2. Introduce Capital Gains Relief for Startup Investments: To truly emulate the success of the US and UK, Nepal might in the future introduce a provision that if someone holds an investment in a startup for a certain number of years, any gain on selling that investment is partially or fully exempt from capital gains tax. This would incentivize long-term backing of startups and make the payoff more attractive. However, this is a more complex policy move. The simplest immediate fix remains changing “grant” to “investment.”

The above suggestions have been echoed by startup advocates and experts. In fact, a prominent Nepali entrepreneur and policy advisor noted that just one word change, grant to investment, could “align our tax policy with global standards” and unlock a flood of funding​

It’s rare that a policy problem has such a clear and easy solution. Nepal doesn’t need to reinvent the wheel; it just needs to bring its tax concept up to date with how modern startup ecosystems work.

Call to Action: Let’s Advocate for a Startup-Friendly Tax Policy

Policies change when citizens speak up. If you agree that Nepal should modernize its tax framework to better support startups, now is the time to raise your voice. The government, through the Inland Revenue Department (IRD), is often open to suggestions, especially when preparing the annual budget​.

Entrepreneurs, investors, and concerned citizens can play a part by recommending this change to Section 12(c) to our policymakers.

Here’s how you can help:

Step 1: Send a Recommendation Email to Policy Makers. We’ve provided a sample template below in both English and Nepali. You can copy these and send them to the IRD at policyird@ird.gov.np. You might also consider sending it to your Member of Parliament or the Ministry of Finance’s suggestion portal if one is available. The more people voice the need for this change, the more likely it will be addressed.

Sample Email Template – English

To: policyird@ird.gov.np
 Subject: Recommendation to Amend Section 12(c) of Income Tax Act 2058

Dear Sir/Madam,

I hope this message finds you well. I am writing as a concerned citizen and supporter of Nepal’s startup community. As part of the consultation process for the upcoming fiscal budget, I would like to suggest a small but impactful policy change regarding Section 12(c) of the Income Tax Act 2058.

Section 12(c) currently allows a tax deduction for seed capital provided to startups only if the funding is given as a grant. While this provision was well-intended to support Nepal’s startup ecosystem, the “grant only” limitation severely reduces its practical impact. Individuals are unlikely to give substantial funds away without receiving equity or some return, especially given normal investment behavior and the current tax rates in Nepal.

I respectfully recommend two improvements to Section 12(c):

1. Replace the word “grant” with “investment”. This change would allow seed capital provided as an equity investment in a startup to also qualify for the tax deduction. It aligns the tax incentive with real-world behavior and would unlock much-needed capital for early-stage businesses, as people would be rewarded for investing (not just donating).
2. Define “startup” clearly. For clarity and proper targeting, please define what qualifies as a “startup” for this provision – for example, a company within a certain age limit, below a certain revenue threshold, and registered in Nepal, perhaps aligning with the definition in the recent Industrial Enterprises rules. This ensures the benefit is limited to genuine startups and avoids ambiguity.

With these adjustments, Section 12(c) could become a powerful catalyst for investment in Nepali innovation. A detailed explanation of how the current law affects investor decisions – and how these tweaks could dramatically improve its effectiveness – is available here (for reference and further rationale):

1. https://khatapana.com/blogs/450/seed-capital-for-startups-in-nepal-grant-or-invest
2. https://khatapana.com/blogs/448/grant-or-investment-in-startups-to-lower-tax-rate-

In summary, this modest change in wording can have an outsized impact: it will help channel domestic capital toward Nepal’s most promising startups, fostering innovation, job creation, and economic growth. It signals that Nepal is serious about supporting startups not just in words but in practice.

Thank you for your consideration. I am at your disposal for any further information or discussion.

Sincerely,
[Your Name]
[Your City], Nepal
[Your Contact]

नमूना इमेल ढाँचा – नेपाली

सेवामा: नीति विभाग, आन्तरिक राजस्व विभाग (IRD)
 विषय: आयकर ऐन २०५८ को दफा १२(ग) संशोधनको सुझाव

महोदय/महोदया,

आगामी आर्थिक वर्षको बजेट तयारीको सन्दर्भमा नेपालको स्टार्टअप उद्यमशीलता प्रवर्द्धन गर्ने हेतुले आयकर ऐन २०५८ को दफा १२(ग) सम्बन्धी प्रावधानमा सानो संशोधनको लागि यो निवेदन प्रस्तुत गर्न चाहन्छु। हालको व्यवस्था अनुसार करदाताले स्टार्टअप व्यवसायलाई बीउ पूँजी अनुदानको रूपमा प्रदान गरेमा मात्र सो रकम आफ्नो करयोग्य आम्दानीबाट कट्टी गर्न पाउँछन्। यो प्रावधानको लक्ष्य राम्रो भए तापनि “अनुदान” मात्र हुने सर्तका कारण यसको व्यवहारिक प्रभाव अत्यन्तै सीमित भएको छ। स्टार्टअपमा सहयोग गर्न इच्छुक व्यक्तिहरूलाई स्वामित्व (इक्विटी) प्राप्त हुने गरी लगानीको स्वरूपमा पूँजी प्रदान गर्दा कर छुट नपाइने वर्तमान अवस्थाले यो प्रोत्साहन उपाय कागजमै सिमित भएको देखिन्छ।

यस प्रावधानमा निम्न संशोधनको प्रस्ताव गर्न चाहन्छु:
१. “अनुदान” भन्ने शब्दलाई “लगानी” ले प्रतिस्थापन गरियोस्। यसले स्टार्टअपमा गरिएको इक्विटी लगानीलाई पनि सोही बीउ पूँजी कर छुटको दायरामा ल्याउनेछ। वास्तविक व्यवहार अनुसार लगानीलाई प्रेरित गर्नु यस उपायको मूल उद्देश्य हो, जसले नयाँ व्यवसायहरूका लागि आवश्यक पूँजी प्रवाह बढाउन मदत गर्नेछ।
२. “स्टार्टअप” को स्पष्ट परिभाषा समावेश गरियोस्। यो कर छुट लिन योग्य स्टार्टअप व्यवसायको दायरालाई स्पष्ट पार्न आवश्यक छ। उदाहरणका लागि, निर्धारित पूंजीगत कारोबार सीमा भित्रका र नवप्रवर्तनशील प्रविधि वा विचार उपयोग गर्ने, हालसालै स्थापना भएका व्यवसायहरूलाई “स्टार्टअप” भनेर परिभाषित गर्न सकिन्छ (औद्योगिक व्यवसाय ऐन/नियमावलीअनुसार)। यसले कार्यान्वयनमा हुने अन्योल हटाउँछ र प्रोत्साहन सही लक्ष्यमा केन्द्रित हुन्छ।

माथि सुझाएका सानातिना संशोधनले दफा १२(ग) लाई कागजी प्रावधानबाट वास्तविक प्रभावमा रुपान्तरण गर्न सक्छ। यसले निजी क्षेत्रका लगानीकर्ता लाई स्टार्टअपमा लगानी गर्न हौसला दिनेछ र नेपालको नवप्रवर्तन क्षेत्रमा नयाँ ऊर्जा थपिनेछ। रोजगारी सिर्जना र अर्थतन्त्रको वृद्धि समेत यो कदमबाट सम्भव हुने हुँदा, तपाईंको सकारात्मक पहलको लागि हार्दिक अनुरोध गर्दछु।

यस विषयमा थप विवरण र तर्कसहितको विश्लेषण यस लिंकमा उपलब्ध छ: 

1. https://khatapana.com/blogs/450/seed-capital-for-startups-in-nepal-grant-or-invest
2. https://khatapana.com/blogs/448/grant-or-investment-in-startups-to-lower-tax-rate-

आवश्यक परेमा थप जानकारी उपलब्ध गराउन म सदा तयार रहनेछु।

धन्यवाद,
[तपाईँको नाम]
[ठेगाना], नेपाल
[सम्पर्क विवरण]

Step 2: Spread the Word. Share this issue and the suggested solution with others who care about startups and economic growth in Nepal. Talk to fellow founders, investors, professional networks, and even your local representatives. The more awareness, the more momentum for change. Consider sharing an article like this one or writing on social media about why a simple change in our tax law can unleash a wave of startup investments.

By taking these steps, you aren’t just sending an email, you’re signaling to the government that citizens want a more innovation-friendly Nepal.

Step 3: Speak Up. Raise your voices here either in support or otherwise or even suggest another alternative. But don’t just ignore this because as Dr. Martin Luther King said: 

“The ultimate tragedy is not the oppression and cruelty by the bad people but the silence over that by the good people.”

Conclusion: Modernizing Nepal’s Tax Framework to Support Innovation

Nepal stands at a crossroads: we have a young, dynamic population brimming with ideas, and many ambitious startup businesses in Nepal are eager to grow. Aligning our tax concept and policies with this reality is a small but significant part of building an environment where innovation can thrive. Modernizing Section 12(c) is a quick win, it costs the government little, yet yields potentially huge benefits by unlocking private investment. It would show that Nepal’s tax framework is keeping pace with the times and learning from global best practices.

In this deep dive, we explained how tax deductions work and why they exist, to incentivize positive actions. It became clear that when it comes to startups, Nepal’s specific tax deduction needed a tweak to actually encourage investment, not just generosity. By making that change, and possibly adopting other supportive measures (like those proven in the US, UK, and India), Nepal can create a virtuous cycle: more investment leads to more startups succeeding, which leads to more jobs and innovation, which in turn grows the economy and the tax base.

The call to action is simple: let’s urge our policymakers to make this common-sense reform. It’s an empowering thought that by speaking up and understanding these tax concepts, even non-experts can influence policy that shapes our nation’s future. Together, we can push for a tax system that not only collects revenue but also boldly invests in Nepal’s brightest ideas and entrepreneurs.

In the end, modernizing Nepal’s tax framework isn’t just about a law or a section, it’s about believing in our innovators and giving them the support to build tomorrow’s Nepal. Let’s make it happen.

Additional Resources:

• Seed Capital for Startups in Nepal: Grant or Investment? Let’s Fix It Now!
• ‘Grant’ or ‘Investment’ in Startups to Lower Tax Rate in Nepal!
• Government Finally Defines “Startup” Business in Nepal
• Tax Rate in Nepal: A Comprehensive Guide to Tax Slabs, Deductions, and Tax Calculator Tools