Taxation in Nepal

Income Tax in Nepal

Tax Advisor Nepal

What is income tax in Nepal?

Income tax in Nepal is a direct tax levied on the income earned by individuals and businesses during a fiscal year. It is governed by the Income Tax Act, 2058 (2002) and administered by the Inland Revenue Department. The tax is applicable on income from employment, business, investment, and windfall gains. Resident individuals are taxed on their worldwide income, while non-residents are taxed only on Nepal-sourced income. The tax system follows a progressive rate structure for individuals and a flat rate for companies. Various deductions, exemptions and tax credits are available to taxpayers. Income tax is a major source of revenue for the government and helps fund public services and development projects.

How to file income tax returns in Nepal?

Filing income tax returns in Nepal involves several steps. First, obtain a Permanent Account Number (PAN) from the Inland Revenue Office. Maintain proper financial records throughout the year. Calculate your total taxable income from all sources. Determine applicable deductions and exemptions. Compute the tax liability using prescribed rates. Fill out the appropriate income tax return form, either manually or electronically. Attach required supporting documents like financial statements and tax payment receipts. Submit the completed return to your local tax office or file online through the IRD portal before the due date. Pay any remaining tax due along with the return. Keep a copy of the filed return and payment receipts for your records. Seek assistance from a tax professional if needed.

What are the income tax slabs in Nepal?

Nepal employs a progressive tax rate system with different slabs for individuals. For the fiscal year 2023/24, the tax slabs are:

- First NPR 500,000: 1% (social security tax)

- Next NPR 200,000: 10%

- Next NPR 300,000: 20%

- Next NPR 1,000,000: 30%

- Above NPR 2,000,000: 36%

For couples filing jointly:

- First NPR 600,000: 1% (social security tax)

- Next NPR 200,000: 10%

- Next NPR 300,000: 20%

- Next NPR 900,000: 30%

- Above NPR 2,000,000: 36%

Additional tax of 20% applies on income between NPR 2,000,000 to 5,000,000, and 30% on income above NPR 5,000,000. Various deductions and exemptions can reduce taxable income. Different rates apply for non-residents and certain types of income.

How to calculate income tax in Nepal?

Calculating income tax in Nepal involves several steps:

1. Determine your total income from all sources (employment, business, investments).

1. Subtract applicable deductions and exemptions to arrive at taxable income.

1. Apply the progressive tax rates to different income slabs.

1. Add any additional taxes on higher income levels.

1. Subtract tax credits like foreign tax credit or medical tax credit.

1. Account for advance tax payments or tax deducted at source.

For example, if your taxable income is NPR 800,000:

- First 500,000 x 1% = 5,000

- Next 200,000 x 10% = 20,000

- Remaining 100,000 x 20% = 20,000 Total tax = 45,000

Consider using tax calculation software or consulting a tax professional for accurate calculations, especially for complex tax situations.

What is the due date for income tax filing?

The due date for filing income tax returns in Nepal is typically within three months after the end of the fiscal year, which runs from mid-July to mid-July (Shrawan to Ashad). This means the standard deadline falls around mid-October (end of Ashwin). However, taxpayers can request a three-month extension, pushing the deadline to mid-January (end of Poush). It’s important to note that while the filing deadline can be extended, the tax payment deadline remains the same. Advance tax installments are due throughout the year. Failure to file or pay taxes by the due date can result in penalties and interest charges. The Inland Revenue Department may announce specific dates each year, so it’s advisable to check for any updates or changes to ensure timely compliance.

Are there income tax exemptions in Nepal?

Yes, Nepal offers various income tax exemptions. Agricultural income earned by individuals is exempt. Certain cooperatives and community organizations enjoy tax exemption. Incomes of diplomatic missions and international organizations are typically exempt. Retirement payments up to specified limits are tax-free. Disabled individuals and those working in remote areas receive additional exemptions. Donations to approved charities are deductible up to certain limits. Special economic zones offer tax holidays for qualifying businesses. Export-oriented industries receive partial exemptions. Income from specific government bonds may be tax-exempt. Medical expenses and life insurance premiums are deductible within limits. However, these exemptions are subject to specific conditions and may change with annual finance acts, so it’s crucial to verify current regulations.

How to check income tax status in Nepal?

Checking your income tax status in Nepal involves several methods. The primary way is through the Inland Revenue Department’s online portal. Register for an online account using your Permanent Account Number (PAN) and other details. Once logged in, you can view your tax filing history, payment status, and any outstanding liabilities. For those without internet access, visiting the local tax office is an option. Provide your PAN and they can check your status in their system. You can also call the IRD’s helpline for basic status inquiries. Keep all tax-related documents, including filed returns and payment receipts, for reference. If you’ve used a tax professional, they can often check your status on your behalf.

What are the penalties for late income tax?

Late filing and payment of income tax in Nepal incur significant penalties. For late filing, a fee of 0.1% of the gross assessable income is charged per annum, with a minimum of NPR 100 per month. Late payment of tax attracts an interest penalty of 15% per annum on the outstanding amount. If tax is not paid within 35 days of the due date, an additional 10% penalty may be imposed. Failure to submit estimated tax returns or making incorrect estimates can result in interest charges. For non-compliance with tax withholding obligations, penalties can reach 100% of the tax amount. Criminal penalties, including fines and imprisonment, may apply for tax evasion or fraudulent reporting. These penalties underscore the importance of timely compliance with tax obligations.

How to claim income tax refunds in Nepal?

Claiming income tax refunds in Nepal involves a specific process. First, ensure you’ve overpaid your taxes, which often occurs due to excessive tax deducted at source. File your income tax return accurately, clearly showing the overpayment. Submit a written application for refund to your local Inland Revenue Office, attaching relevant documents like tax payment receipts and bank statements. The tax office will verify your claim and may conduct an audit if necessary. If approved, you’ll receive a refund voucher. Present this voucher at the designated bank to receive your refund. Alternatively, you can request to adjust the overpaid amount against future tax liabilities. The refund process can take several months, so patience is necessary. Keep following up with the tax office if there are delays.

What income is taxable in Nepal?

In Nepal, a wide range of income is subject to taxation. Employment income, including salaries, wages, bonuses, and allowances, is taxable. Business income from any trade, profession, or vocation is taxed. Investment income such as interest, dividends, and rental income falls under taxable income. Capital gains from the sale of assets, including property and shares, are taxable. Royalties and fees from intellectual property are subject to tax. Foreign-sourced income of resident individuals is taxable in Nepal. Retirement benefits exceeding certain thresholds are taxed. Income from occasional transactions or windfall gains, like lottery winnings, is taxable. Even barter transactions can be subject to tax based on the fair market value of goods or services exchanged. However, specific exemptions and deductions may apply to certain types of income.

How to pay income tax online in Nepal?

Paying income tax online in Nepal involves several steps. First, register on the Inland Revenue Department’s (IRD) online portal using your Permanent Account Number (PAN). Once registered, log in to your account and select the ‘Payment’ option. Choose the type of tax you’re paying (income tax, advance tax, etc.). Enter the required details including the amount. Select your preferred payment method – options typically include internet banking, mobile banking, or e-wallets. Follow the prompts to complete the transaction. After payment, you’ll receive a confirmation receipt. Save this for your records. The IRD system should automatically update your tax account, but it’s wise to verify this after a few days.

What is the income tax rate for businesses?

The income tax rate for businesses in Nepal varies based on the type of entity and industry. Standard businesses are generally taxed at a flat rate of 25% on taxable income. However, certain sectors face different rates. Banks, financial institutions, and insurance companies are taxed at 30%. Businesses involved in petroleum products, tobacco, or alcohol also face a 30% rate. Special industries and export-oriented businesses may qualify for reduced rates of 20%. Businesses operating in Special Economic Zones can enjoy tax holidays or reduced rates. Cooperatives face progressive rates based on their location. Small businesses with turnover below certain thresholds may opt for turnover-based taxation. It’s crucial to consult the latest Finance Act for current rates and any industry-specific provisions.

What are allowable deductions for income tax?

Nepal allows several deductions when calculating taxable income. Contributions to approved retirement funds are deductible, subject to limits. Life insurance premiums up to NPR 40,000 can be deducted. Health insurance premiums up to NPR 20,000 are deductible. Donations to registered charitable organizations are deductible up to 5% of adjusted taxable income or NPR 100,000, whichever is lower. Business expenses that are necessary and reasonable for income generation are generally deductible. Depreciation on business assets is allowed at prescribed rates. Interest on business loans is deductible. For individuals working in remote areas, additional deductions apply. Medical expenses can be claimed as a tax credit. Losses from previous years can be carried forward and deducted, subject to certain conditions.

How to register for income tax in Nepal?

Registering for income tax in Nepal involves obtaining a Permanent Account Number (PAN). Visit your local Inland Revenue Office or use the online PAN registration system. For individuals, provide your citizenship certificate or passport, recent photograph, and proof of address. Business entities need to submit their registration documents, VAT certificate (if applicable), and details of owners/directors. Fill out the PAN application form with accurate information. Pay the required fee. Once processed, you’ll receive your PAN card and certificate. This unique number is essential for all tax-related transactions. For businesses, register for VAT if your turnover exceeds the threshold. After registration, you’re required to file tax returns annually. Keep your registration details updated with the tax office. Failure to register when required can result in penalties.

How does income tax affect NRNs?

Income tax affects Non-Resident Nepalis (NRNs) in several ways. NRNs are taxed only on their Nepal-sourced income, unlike residents who are taxed on worldwide income. The standard tax rate for NRNs is 25% on taxable income. However, certain types of income like dividends, interest, and royalties may be subject to lower withholding tax rates as per tax treaties. NRNs can’t claim the same deductions and exemptions available to residents. They’re not eligible for progressive tax rates or tax-free thresholds applicable to residents. NRNs selling property in Nepal may face capital gains tax. Income from services provided in Nepal, even if paid abroad, is taxable. NRNs should be aware of their tax obligations to avoid penalties and legal issues when dealing with Nepal-sourced income.