Understanding Income Taxes in Nepal: A Guide for Individuals

Residential Status

Taxation of individuals in Nepal is primarily based on their residential status during the relevant tax year. The residential status of individuals is determined independently for each tax year and is ascertained based on their physical presence in India during the relevant tax year and past years.

A natural person is considered a resident of Nepal for an income year if he/she satisfies any of the following conditions:

1. Regular abode is inside Nepal
2. Present in Nepal for 183 days or more during a period of 365 consecutive days
3. An employee of the Government of Nepal (GoN) deputed in a foreign country

It should be noted that residential status is normally based on the tax laws of Nepal but is also influenced by Double Tax Avoidance Agreement (DTAA).

A natural person who doesn’t satisfy the above conditions are considered non-residents as per the Income Tax Act.

Taxation Basis

For a resident person, the total income earned all over the world (Global Income), is assessable income irrespective of the country the income was generated in. Income of a resident person is taxable whether they are in Nepal or not.

For a non-resident person, only the income generated from a source located in Nepal is taxable whereas income from a source located outside Nepal is not.

The table below explains the taxability of resident and non-resident persons.

The resident person having foreign income will be allowed foreign tax credit under Section 71. It is worth noting that foreign tax credit is given even if Nepal has not entered into a Double Tax Avoidance Agreement (DTAA) with the country or not.

Tax Rates for Resident Natural Person

The Income Tax slab for individuals as per the annual budget for Fiscal Year 2021/22 (2078/79 BS) is as under. The tax rate is also influenced by marital status. But the husband and wife should elect to be treated as couples; the option does not get activated automatically. A declaration from the non-earning spouse is required for this election. It should be noted that the rates are general tax rates for proprietorship firms, and may differ based on the nature of business, business concessions and facilities offered.

The 1% tax on employment should be deposited in a separate revenue account with the Inland Revenue Department (IRD) under Code 11211 as a Social Security Tax. As per Schedule 1, 1% tax shall not be levied on the income earned by way of pension, in the case of a taxpayer registered as a sole trading firm, and on the income of an individual making contribution to a pension fund or contributory Social Security Fund (SSF).

Tax Rates for Non-Resident Natural Person

Taxable income of a non-resident natural person shall be taxed at 25%. Non-resident natural persons are allowed to claim “Remote Area Benefit.”  The tax rates for dividends, interest and royalties are as under:

• Dividends taxed at a rate of 5%
• Interest taxed at a rate of 15%
• Royalties taxed at a rate of 15%

Allowable Deductions for Resident Persons

The allowable deductions for resident natural persons under Income Tax Act, 2002 (2058) is as under:

Contribution to Approved Retirement Fund (ARF)

The ceiling of allowable reduction in ARF (other than Social Security Fund) is as under:

1. 1/3^rd of Assessable Income.
2. Rs. 3,00,000
3. Actual contribution to ARF.

The ceiling of allowable reduction in ARF (contribution made on Social Security Fund) is as under:

1. 1/3^rd of Assessable Income.
2. Rs. 5,00,000
3. Actual contribution to Social Security Fund (SSF).

Contribution to Prime Minister Recovery Fund and National Reconstruction Fund

The contribution made to the Prime Minister Recovery Fund and the National Reconstruction Fund can be deducted in full without any limit from the taxable income of the person.

Donation and Gifts Made to Exempt Organisations

Under Section 12 of the Income Tax Act, where an individual makes donation or gifts to exempt organisations, deductions is limited to the following amounts:

1. 5% of the adjusted taxable income
2. Rs. 1,00,000
3. Actual amount of donations

Allowable Reductions for Resident Persons

There are various reductions available to resident natural persons under the Income Tax Act which is as under:

Remote Area Benefit

Under Schedule 1 of Section 5 of the Act, for an individual working in a remote area as specified by the GoN, a maximum sum of Rs. 50,000 for the remote allowance shall be deducted as prescribed from the taxable income. The remote area and deduction amount is classified as under:

Government of Nepal Employees Deriving Foreign Allowances

As per Schedule 1 Section 6, in case of GoN employees working with the country’s diplomatic missions abroad, only 25% of the foreign allowances are to be included in their income from employment.

Pension Income

As per Schedule 1 Section 9, where any resident natural person has a pension income, tax shall be computed only on the amount remaining after subtracting an additional 25% of Rs. 5,00,000 for a single natural person or Rs. 6,00,000 for couples from the taxable income.

Incapacitated Natural Persons

As per Schedule 1 Section 10, where any resident individual is a person with disability, tax shall be computed only on the amount remaining balance after subtracting from the taxable income an additional 50% of Rs. 5,00,000 for the individual or in Rs. 6,00,000 for the couple.

Life Insurance Premium

As per Schedule 1 Section 12, where any resident individual has procured investment insurance, tax shall be computed, in accordance with this section, only in the amount that remains after deducting the annual premium paid for such insurance or Rs. 40,000, whichever is lesser, from the taxable income.

Lower of the following amount will be deducted:

1. Life insurance premium
2. Rs. 40,000

Health Insurance Premium

As per Schedule 1 Section 16, where any resident individual has procured health insurance from any insurance company, tax shall be computed, in accordance with this section, only in the amount that remains after deducting the annual premium paid for such insurance or Rs. 20,000 rupees, whichever is lesser, from the taxable income.

Lower of the following amount will be deducted:

1. Health Insurance Premium
2. Rs. 20,000

House Insurance Premium

A resident natural person who has insured private building in his/her ownership with resident insurer/insurance company shall be entitled to a deduction.

Lower of the following amount will be deducted:

1. House Insurance Premium
2. Rs. 5,000

Tax Credits for Resident Persons

Income Tax Act provides tax credit in the form of female tax credit, medical tax credit and foreign tax credit which are as under:

Female Tax Credit

As per Schedule 1 Section 11, where any resident individual is a woman earning income only as remuneration, such an individual shall get a 10% exemption from the tax amount to be paid by her.

Medical Tax Credit

Medical tax credit cannot be claimed when deductions for health insurance premium have already been taken.

As per Section 51, medical tax credit can be claimed on the amount to be set by 15% of the approved medical treatment expenditure or Rs. 750, whichever is lower.

Lower of the following amount will be provided as credit:

1. 15% of the approved medical treatment expenditure.
2. Rs. 750

Foreign Tax Credit

If any resident person has paid tax on income outside Nepal, such person can claim foreign tax credit and while claiming such credit, each country must be considered separately.

Amount of credit shall be the lower of:

1. Total foreign income included in assessable income in Nepal as multiplied by the average rate of tax on total income
2. Actual tax paid in foreign country.

Conclusion

The Income Tax in Nepal is based on the residential status and the tax is progressive in nature for resident natural person whereas it is levied at fixed rate for non-resident natural person.  Resident person enjoys multiple deductions, reductions, and tax credits whereas it is limited to non-resident person