Historical Background 

Income Tax was imposed in Nepal by the first Parliamentary Government in 1959. Income Tax Act 1962
was enacted in 1962 replacing business, Profit and Remuneration Tax Act of 1959. The Income Tax Act,
1962 was replaced by Income Tax Act, 1974, which was amended for eight times and existed for a period
of 28 years. The Income Tax Act, 1974 and all the income tax related provisions made under other
special enactment have been repealed and the existing Income Tax Act, 2058 became effective since
Chaitra 19, 2058 (01, April 2002). The Act governs all income tax matters and is applicable throughout the
Kingdom of Nepal. It is also applicable to residents residing wherever outside Nepal. 

1. The Special features of the Act 

- The Act has broadened the tax base. Tax rates are spelled out in the Act itself and the tax rates and
concessions are harmonized on equity grounds. 

- A full-fledged self-assessment system is implemented and the presumptive taxation and current year
taxation system are strengthened. 

- The scope of discretionary interpretation of the tax administration is drastically reduced ensuring
simplicity, uniformity and the transparency. The Act has also defined the power and authority of the tax
administration. 

- The Act has separated administrative and judicial responsibilities by distinguishing civil liabilities of the
taxpayers from criminal liabilities. 

- The appeal system is further streamlined by making it mandatory for the taxpayers to file an objection
with the Inland Revenue Department for administrative review before appealing to the Revenue Tribunal. 

2. Income Heads 

- The Act imposes tax on those activities contributing toward the creation of wealth. Wealth is created with
the help of labor, capital and a capital-labor mix activities that generate income from employment,
investment and business respectively. The Act makes broad classification of income encompassing
almost all income-earning activities. They are :

A. Employment (an individual`s remuneration income from an employment for an income year) 

B. Investment (profits and gains of a person from conducting an investment for an income year) 

C. Business (profits and gains of a person from conducting a business for an income year) 

D. Income and gains are ascertained only after deducting the corresponding expenses. The income from
each business and investment needs to be calculated separately. 

3. Taxing Subjects 

- The taxpayers on whom income tax is imposed are persons. A person can be a natural person, who is
an individual or a couple but includes also a proprietorship, or it can be an artificial person, i.e. an entity.
An entity means a partnership, trust, company, and foreign permanent establishment or government
body. 

- The Act distinguishes between resident and non-resident persons. A resident person is an individual
whose normal place of abode is in Nepal and who is present at any time of the year, or who is present in
Nepal for 183 days or more, or who is an employee of Government of Nepal posted abroad at any time
during the year. 

- A trust is a resident person if it is established in Nepal, or has a resident person as a trustee, or is

4. Income Year 

- For every person the tax is imposed and calculated for an income year. The income year corresponds
with Government’s Fiscal Year, i.e. the period from the start of Shrawan of a year to the end of Ashad of
the following year (mid-July to mid-July). 

5. Assessable Income 

- The assessable income of a person for an income-year from any employment, business, or investment
is : 
A. in the case of a resident person, the person`s income from the employment, business, or investment of
the year irrespective of the location of the source of the income and 
B. in the case of a non-resident person, the person`s income from the employment, business, or
investment of the year but only to the extent the income has a source in Nepal.

- The assessable income does not include any income exempt under sections 11 or 64 of the Act (such
as income from non-business agriculture and agriculture business conducted in the land of the type that is
mentioned in clauses (d) and (e) of section 12 of the Land Act, 2021; income of cooperative society from
business mainly based on agriculture and forest products and cooperative saving and credit scheme
based on rural community; and income of approved retirement fund) 

6. Taxable Income 

- The taxable income of a person for an income-year is equal to the amount as calculated by subtracting
reduction, if any, claimed for the year under section 12 (gifts to an exempt organizations) or 63
( retirement contribution to an approved retirement fund) from the total of the person`s assessable income
for the year from each of the following income heads : 
Business
Employment and 
Investment 

7. Tax Rates 

- The taxable income of a resident individual for an income-year 2066/67 will be taxed at the following
rates: 
Up to Rs.160,000 - 1%

From Rs.160,000 - upto Rs.260,000- @ 15 % plus Rs. 1600

Above Rs. 260,000 - @ 25% plus Rs.16600. 

- The taxable income of a couple, if they chose to be treated as a couple will be taxed at the following
rates; 

Up to Rs.200,000 - 1%

From Rs.200,000 - upto Rs.300,000- @ 15 % plus rs. 2000 

Above Rs. 300,000 - @ 25% plus Rs.17000. 

- Any individual working in prescribed remote area is entitled to deduct prescribed amount as remote area
allowance from taxable income.

- Any individual is entitled to deduct the following amount from taxable amount, if he is having investment
insurance policy :
"Rs. 20,000 amount or the actual premium paid, which ever is less."

- For the purposes of the Act, net gains from the disposal of non-business chargeable assets will be taxed
at the rate of 10 percent. 

- The presumptive tax for individuals conducting small businesses (who have a turnover of Rs.2 million or
an income of Rs.200, 000) in the Metropolitan or Sub-Metropolitans, Municipalities and anywhere else in
Nepal amounts to Rs 5,000 Rs. 2,500 and Rs.1,500 respectively. 

- The taxable income of a non-resident individual is taxed at the rate of 25 percent.

- The taxable income of an entity will be taxed at the rate of 25 percent unless prescribed otherwise. 

- The taxable income of a bank, or financial institution, or general insurance business, or an entity
conducting petroleum work under Petroleum Act, 2040 for an income-year is taxed at the rate of 30
percent. 

- Gain from Lump sum retirement payment made by an approved retirement fund or GON is taxed at the
rate of 5 percent as a final withholding tax.Gain is calculated by deducting 50 percent of the payment or
Rs. 500,000 whichever is higher from the total lump sum payment.

- The taxable income derived by an individual from special industry or export business will be taxed at the
rate of 20 percent.

- The taxable Income derived by an entity engaged in an industrial enterprise or export business or
derived from operating any road, bridge, tunnel, ropeway, or flying bridge. Construction business or any
trolley bus or tram manufacturing business is taxed at the rate of 20 percent. 

- The taxable income of an entity engaged in power generation, transmission, or distribution is taxed at
the rate of 20 percent. 

- The taxable income of an estate of a deceased resident individual or trust of an incapacitated resident
individual will be taxed at the normal tax rate as though the estate or trust was a resident individual. 

- The repatriated income of a foreign permanent establishment of a non-resident person situated in Nepal
will be taxed at the rate of 10 percent. 

- The taxable income of a non-resident person deriving income from providing shipping, air transport or
telecommunication services in Nepal will be taxed at the rate of 5 percent. 

- The taxable income of an entity wholly engaged in the projects conducted by any entity so as to build
public infrastructure, own operate and transfer it to the HMG/N in power generation, transmission, or
distribution for an income-year shall be taxed at the rate of 20 percent.

8. Business Exemptions, Exempt Amounts and Other Concessions 

- The following amounts are exempt from tax : 

A. Amounts derived by a person entitled to privileges under a bilateral or a multilateral treaty concluded
between Government and a foreign country or an international organization; 
B. Amounts derived by an individual from employment in the public service of the government of a foreign
country, provided that, the individual is a resident person solely by reason of performing the employment
or is a non-resident person; and the amounts are payable from the public funds of the country; 
C. Amounts derived from public fund of the foreign country by an individual who is not a citizen of Nepal
or by a member of the immediate family of the individual. 
D. Amounts derived by an individual who is not a citizen of Nepal from employment by Government on
terms of a tax exemption; 
E. Allowances paid by Government to widows, elder citizens, or disabled individuals; 
F. Amounts derived by way of gift, bequest, inheritance, or scholarship, except as required to be included
in calculating income under this Act; 
G. Amounts derived by an exempt organization by way of gift; or other contributions that directly relate to
the organization’s function, whether or not the contribution is made in return for consideration provided by
the organization, and 
H. Pension received by a Nepali citizen retired from the army or police service of a foreign country
provided the amounts are payable from the public fund of that country. 

- An agricultural income derived from sources in Nepal during an income-year by a person, other than the
income from an agriculture business derived by a registered firm, or company, or partnership, or a
corporate body, or through the land above the land holding ceiling as prescribed in the Land Act, 2021, is
exempt from income tax. 

- Incomes derived by cooperative societies, registered under Cooperative Act, 2048 (1991), from
business mainly based on agriculture and forest products such as sericulture and silk production,
horticulture and fruit processing, animal husbandry, diary industries, poultry farming, fishery, tea
gardening and processing, coffee farming and processing, herbiculture and herb processing, vegetable
seeds farming, bee-keeping, honey production, rubber farming, floriculture and production and forestry
related business such as lease-hold forestry, agro-forestry, cold storage established for the storage of
vegetables and business of agricultural seeds, insecticide, fertilizer and agricultural tools (other than
machine operated)and rural community based saving & credit cooperatives are exempt from tax.
Dividends distributed by such societies are also exempt from tax. 

9. Deductions 

- Basically, all actual costs to the extent incurred in generating income from the business or investment
are deducted while calculating a person`s income. This generalization, however, are taken into
consideration in conjunction with the special provisions made in the Act. For example, interests paid by
exempt controlled entity to the parent in the course of conducting a business or investment, are
deductable with some limitations. Other costs such as cost of trading stock, repair and improvement cost
of owned and used depreciable asset, pollution control, research and development are also deductable
with some limitations.

- Depreciation allowances are granted for depreciable assets, which are categorized in 5 classes. The
classes are based upon the average useful life of the assets belonging to one class. The assets of each
class are placed in a pool and a depreciation rate applies to each pool. 

- Allowable limit for repair and improvement cost of owned and used depreciable asset is raised to 7% of
depreciation bases.

- No deductions are granted for the expenses that are of a domestic personal nature, income tax,
government penalties costs in deriving exempt amounts or final withholding payment, dividends
distributed by an entity, costs of a capital nature and cash payment above Rs. 50,000 under prescribed
conditions. 

10. Setoff, Carry forward and Carry back of Losses 

- Losses are in principle deductable but are treated differently depending on whether they result from
conducting a business or an investment and whether they are of domestic or foreign nature. Losses from
a domestic business can be offset against all types and sources of income, whereas losses from a
domestic investment can be offset only against any type of investment income. Foreign losses can be
offset only against foreign income. Foreign business losses can be offset against foreign business income
or investment. Losses from foreign investment can only be offset against foreign investment income. 

- Unrelieved business losses of previous 4 years are allowed to carry forward. 

- In case of electricity projects involving in building power station, generating and transmitting electricity
and the projects conducted by any entity so as to build public infrastructure, own, operate and transfer to
the Government, any unrelieved loss of the previous seven years are allowed to carry forward. 

- If a person incurs a loss for an income-year from any banking and general insurance business, the
person may carry back the loss and deduct it in calculating the income from the business for any of the
five preceding income-years. 

- Special provisions exist in the Act on how to deal with losses incurred in conducting a business of global
long-term contract.

11. Tax Accounting and Timing 

- For tax purposes, an individual is required to maintain his accounts on a cash basis in calculating the
individual`s income from an employment or investment and a company is required to maintain its
accounts on an accrual basis within the basic framework of generally accepted accounting principle. 

- Bad debts are allowed to be written off if a debt claim of a bank or financial institution has become bad
debt as determined in accordance with the prescribed standards. 

- Inclusions and deductions under a long-term contract are calculated according to the percentage of the
contract completed during the year. 

12. Quantification, Allocation and Characterization of Amounts

- Cash payments are quantified as equivalent to the amount of transferred money or the market value of
the asset. In case of a kind payment, it is equivalent to the value of the benefit of the payment.
Compensations, including payments under insurance for income and losses are to be included in the
calculation of income from employment, business or investment. 

- Payments under an annuity, an installment sale or a finance lease are aggregated and the total is
divided into a capital portion and an interest portion calculated according to the Act. 

- Finance lease has been defined either as an agreement with the transfer of ownership at the end of the
agreement or the option of the lessee to purchase the leased asset for a fixed price, or a contract with a
lease term exceeding 75 percent of the asset’s useful life. 

- The Department is given the right to correct and recharacterize arrangements targeted at minimizing the
taxable income or payable tax. This refers to indirect payments, transfer pricing and other arrangements
between associates if the agreement has not been conducted at arm’s length, cases where persons
attempt to split income with other persons, arrangements carried out as part of a tax avoidance scheme
or without any substantial economic effect or of which the form of the arrangement does not reflect its
substance. 

13. Capital Gain Tax 

- The Act has introduced capital gain tax. However, the Act does not cover all such gains i.e. only those
gains, which are received from the disposal of business assets or liabilities and those from the disposal of
non-business assets of an investment of a person, which are regarded as chargeable and will be taxed
accordingly. 

- Business assets comprise assets to the extent to which they are used in a business. Non-business
chargeable assets mean securities or an interest in an entity as well as land and buildings. Both
definitions exclude depreciable assets or trading stock. Not included in non-business chargeable assets
are also private residences of an individual owned and lived in continuously for 1 years or more if they are
not disposed of for more than Rs.5 million. Since profits and gains are different bases of taxation they
need to be calculated separately. 
- The tax is imposed on the net gains, which are the total gains minus the total losses including unrelieved
losses for the current income year and those from a previous income year, which thus can be carried
forward forever. Gains and losses are defined as the difference between incoming and outgoing for the
asset or liability. 

14. Special provisions for Individuals 

- A resident natural person and a resident spouse of the person may, by notice in writing, elect to be
treated as a single individual for a particular income-year. 

- Each spouse of a couple making an election as above with respect to an income-year is jointly and
separately liable with the other spouse for any tax payable by the couple for the year. 

- A resident individual may claim a medical tax credit for an income-year not exceeding Rs 750 for any
approved medical costs paid by the individual him/herself or through others during the year in respect of
the individual. Tax credit limit of Rs. 750/- is calculated by multiplying the total approved medical cost by
15%. Any unrelieved medical costs are carried forward. Medical Tax Credit facility is equally applicable to
all individual taxpayers. 

15. Special provisions for Entity 

- An entity is liable to tax separately from its beneficiary who is defined as any person having an interest
in an entity. Unless stated otherwise in the Act, transactions between an entity and its managers and
beneficiaries are recognized. 

- The profit of entities can either be retained or distributed to its beneficiaries such as shareholders. The
entity can also repay capital or grant collateral benefits to them. Collateral benefit, which can be
characterized as a kind of hidden distribution of profit. Distributions of profits and collateral benefits are
dividends representing a return of interest in capital, and need to be distinguished from repayment of
capital, which is the return of the capital itself. For that the Act provides a profit first rule saying that a
distribution is a return of capital to the extent that it is not a distribution of profits. If the entity repays
capital it is free of tax. 

- Dividends of a resident company are taxed to the company’s shareholders in the form of a final
withholding tax. The re-distribution of such taxed dividend is tax free. Dividends of a non-resident entity,
which are distributed to a resident beneficiary, are taxed by inclusion in calculating the income of the
beneficiary. 

- Besides these general provisions the Act contains detailed provisions for liquidations of entities, for
dealings between an entity and a beneficiary, for changes in control of an entity and for dividend
stripping. 

16. Special Provisions for Retirement Savings 

- The Act distinguishes between the treatment of approved and unapproved retirement fund. In case
where a resident person files an application with the Department intending to get approval for establishing
a retirement fund, the Department shall pronounce the approval as prescribed. 

- An individual who is a beneficiary of an approved retirement fund may claim a reduction of retirement
contributions made to the fund for an income-year The limit of the claim is the lower of Rs. 3,00,000 or
one third of his assessable income for the year. Contributions to an unapproved retirement fund are not
deductable. The income of an approved retirement fund is free of tax where as an unapproved fund itself
is subject to full income tax. 

17. International Taxation 

- For taxation purposes, all payments and gains need to be considered on the basis of the source country
of the payment. Details of the circumstances under which the source rules are defined are given in the
Act. 

- Tax is imposed on the repatriated income of a foreign permanent establishment of a nonresident person
situated in Nepal. 

- A non-resident person carrying on a business of charterer or air transport operator are taxed at a flat
rate on their amounts derived from carriage of passengers, mail or goods which embark in Nepal. The
provision is also applied to nonresident persons who transmit messages by any technical means if the
apparatus is established in Nepal. 

- A tax credit may be claimed for any foreign income tax paid with respect to foreign source income. The
tax credits are calculated separately for assessable foreign income sourced in each country and will not
exceed the average rate of Nepal income tax applied to the assessable foreign income. 

18. Administration and Documentation 

- The Department is charged with the responsibilities of administering the Act and the provisions thereto.
Government is empowered to enact Rules. Accordingly, the Department may also issue public circulars
serving the purpose to achieve consistency in the administration of the Act and to provide guidance to
persons affected by the Act. 

19. Record Keeping and Information Collection 

- The Department may specify the form of documents required under the Act. It may issue a Permanent
Account Number and require the taxpayer to show it in any return, statement or other documents used for
the purposes of this Act. 

- Every taxpayer is required to maintain, in Nepal and in Nepali or in English language, documents as
prescribed by the Department, which are necessary to explain information to be provided in a return,
enable an accurate determination of the tax payable and substantiate deductions and outgoing. The
documents must be retained for at least 5 years after the end of the income year to which they are
relevant. If the documents are not in Nepali or English, the taxpayer may be requested to provide at his
expense a Nepali translation by an approved translator. 

- The Act grants, every officer with authorization from the Department, comprehensive rights to access to
information, such as, full and free access to any premises, place, document or other assets situated in
Nepal and right for seizure of any document that may be material in determining the tax liability of the
taxpayer. Every officer of the Department will regard and deal with all documents and information coming
into his possession or knowledge as secret and will not disclose it to a court, tribunal or other person
except in cases explicitly allowed in the Act. 
20. Installment Payment

- There is a provision of payment of Income Tax of the current year by 3 installments i.e. 40%, 70% and
100% by the end of Poush, Chaitra and Ashad respectively.

21. Annual Statement of Estimated Tax Payable

- Every person who is an instalment tax payer for an income year is required to file annual statement of
estimated tax by the end of Poush. Presumptive taxpayer and those who have only income from final
withholdings need not file the estimate.

22. Returns of Income and Assessments 

- In general, every taxpayer should file a signed return of income not later than 3 months after the end of
each income year. 

- Unless explicitly requested by the Department, no returns are required from taxpayers who have no tax
payable for the year or are resident individuals who have income exclusively from an employment having
a source in Nepal, who have only one resident employer at a time during the year and who do not claim a
deduction of their taxable income by gifts to exempt organizations. 

- Unless an assessment has been amended or reduced by order of the Revenue Tribunal or of a court,
the Department may amend an assessment within 4 years in order to adjust the assessed person’s
liability to tax in such manner as, according to the Department’s best judgment, is consistent with the
intention of the Act. An assessment may be amended at any time in cases of fraud.

- Where the department makes a jeopardy or amended assessment, it will serve a written notice on the
taxpayer. 

23. Administrative Review and Appeal

- A taxpayer who is aggrieved by a review able decision may file an objection within 30 days after the
decision is made. In doing so, such Taxpayer has to deposit 50% of due amount. The Department may
extend this period for another 30 days upon request. The Department may stay or amend or do
necessary corrections with regard to these review able decisions. If the Department fails to serve a
taxpayer with a notice of an objection decision, within 90 days, the taxpayer may elect to treat the
Department as having refused his objection and appeal to the Revenue Tribunal. 

24. Offences 

- Offences are dealt with in the Act in a sense of criminal offences of taxpayers as well as tax
administrators. They lead to punishment in the form of fines and imprisonment on conviction. The
offences attracting both a fine and the imprisonment include failures to comply with the Act, failures to pay
tax, maintaining documentation or filing income returns and statements of estimated tax, making false or
misleading statements, impeding or coercing the tax administration, offences by the authorized and
unauthorized persons, offences of aiding or abetting, etc. In case if the Tax return file is not submitted
within the period prescribed by the act, the late fee will be charged at the rate of 0.1% per year of the
turnover. 
25. The Super Act 

- The Act is made super in regard to all income tax matters. No other Acts except this Act shall be made
capable to make changes, amendment and other tax related provisions other than the provisions relating
to imposition, assessment, reduction, increment, exemption, or remission of tax to be made by amending
this Act itself by annual Finance Acts.