HOW Tax is Calculated in Nepal?

Taxes in Nepal are mandatory, and it is not as simple as most people do not fully understand it until they start filing a return or receive their first paycheck. Even if a person is a government employee, a freelancer earning in US dollars, or a business owner running a retail shop, the Government of Nepal has a tax rule that applies to them.

This article covers every major category of taxation in Nepal as it stands in FY 2082/83 (2025/26), which runs approximately from mid-July 2025 to mid-July 2026. It explains how each tax is calculated, who it applies to, what deductions are available, and how different sectors are treated differently under the law.

The Legal Foundation

Nepal has a tax system that is based on two laws: the Income Tax Act from 2058 BS (2002 AD) and the Value Added Tax Act from 2052 BS (1995 AD). These laws are updated every year when the Finance Act is announced and this usually happens when the national budget is presented by the Finance Minister during the month of Jestha, which’s May or June.

The Inland Revenue Department (IRD), operates under the Ministry of Finance which is in charge of income tax, Value Added Tax, and excise duties. On the hand the Department of Customs is responsible for import and export duties. If you want to pay your taxes you can go to the taxpayer portal at taxpayerportal.ird.gov.np. Every taxpayer, whether you are an individual or a company needs to have a Permanent Account Number, which is also called a PAN so that you can file your tax returns, get deductions, or get tax benefits.

In Nepal people have to calculate and report their tax which is called a self-assessment system. Taxpayers are responsible for figuring out how much tax they owe, and then they have to report it. The Inland Revenue Department makes sure everything is correct and if they find any mistakes they can reassess the tax.

Who Must Pay Tax in Nepal?

Under Section 3 of the Income Tax Act, 2058, the following persons are liable to pay income tax:

• Resident individuals — Salaried employees, self-employed professionals, sole proprietors, and freelancers. Residents are taxed on worldwide income.

• Non-resident individuals — Anyone earning income sourced in Nepal (salary paid by a Nepali employer, rental income from property in Nepal, business profits generated in Nepal). Non-residents are taxed only on Nepal-source income.

• Companies and corporations — Private limited, public limited, and foreign branch offices registered or effectively managed in Nepal.

• Partnerships and joint ventures

• Trusts and cooperatives (with some exemptions for agricultural cooperatives)

A natural person is considered resident if they stay in Nepal for 183 days or more in an income year, or if Nepal is their habitual place of abode. A company is resident if it is incorporated under Nepali law, or if its management is effectively controlled from Nepal.

Part 1: Individual Income Tax

How the Progressive System Works

Nepal uses a progressive tax system for resident individuals. This means income is divided into bands or slabs, and each band or slab is taxed at a different rate. People do not pay the top rate on their entire income only on the portion that falls within that band.

Income is classified under three heads:

• Employment income — salary, wages, bonuses, allowances
• Business income — profits from trade, profession, or self-employment
• Investment income — interest, dividends, rental income, capital gains

Tax Slabs for FY 2082/83 (2025/26)

The slabs below apply to unmarried resident individuals. Married couples receive a higher threshold of NPR 1,00,000 in the first three slabs.

Key points about the slabs:

• The 1% on the first band is the Social Security Tax (SST), not a standard income tax. If an individual contributes to the Social Security Fund (SSF), this 1% is waived.

• Women taxpayers who earn only employment income in Nepal receive a 10% rebate on their total computed income tax.

• Senior citizens also receive a 10% rebate on their income tax liability.

• Married couples benefit from a higher first tax band of NPR 6,00,000 instead of NPR 5,00,000, meaning their SST is NPR 6,000 instead of NPR 5,000, and their subsequent slabs are also shifted upward by NPR 1,00,000.

Step-by-Step Tax Calculation: A Worked Example

Scenario: Unmarried individual, annual income NPR 1,200,000

This gives an average tax rate of approximately 12.1% on total income, even though the marginal rate for the top portion is 30%.

Part 2: Tax Deductions Available to Individuals

Nepal’s Income Tax Act allows several deductions that reduce the taxable income before applying the slabs. These are the most commonly used ones:

Starting in fiscal year 2082/83, only certain retirement savings plans qualify for approved deductions. Instead of broad options, now just the EPF, CIT, SSF, and pension schemes covered by the Pension Fund Act count. Other employer-run provident funds? They’re out of scope entirely. What was allowed before no longer applies past this update.

Part 3: Tax Deducted at Source (TDS / Withholding Tax)

Some workers in Nepal do not pay taxes straight to the IRD. Their company takes a cut each month from wages ahead of payday - known as TDS, or withholding tax. What happens is tax gets removed right at the source.

Each year, taxes get figured out ahead of time. The company guesses how much you will earn all year long. From that number, they work out your full-year tax bill instead. Every month, a slice of it - exactly one part in twelve - comes off your pay. Come the next month, firms have until the twenty-fifth day to send reports. That money pulled from wages goes straight into the government’s collection pot.

TDS also applies to other payments:

Part 4: Freelancers and Self-Employed Individuals

Working alone means taxes can shift based on where money comes from. Some earners face different rules just by how they make a living. Income type shapes what gets taxed and how much applies. Not every freelancer pays the same way, details matter behind the scenes.

Most freelancers paid abroad pay exactly percent. Whether it’s one dollar or ten thousand makes no difference. Income lands in dollars, euros, maybe pounds still taxed at that rate. Each payment ties back to a PAN without exception. Paperwork wraps up once per year, no more. Platforms such as Upwork count. So do wire transfers straight into accounts.

Self-employed professionals with Nepal-source business income are taxed under the standard individual slab system. They must calculate advance tax payments in three instalments — in Poush, Chaitra, and Ashadh — if their total estimated tax for the year exceeds NPR 7,500.

NOTE: Professionals like doctors, engineers, or lawyers don’t get access to the easier tax options meant for small vendors. Instead of a flat rate method, they follow the standard process. Auditors and consultants fall into this group too. So do actors and athletes earning from their craft. Their earnings aren’t handled through preset calculations. Full income reporting applies across the board. The simpler turnover-based rules simply do not cover them.

Part 5: Small Business and Presumptive Taxation

To simplify compliance for micro and small businesses, Nepal provides two simplified schemes:

Presumptive Tax (Fixed Annual Amount)

Available to resident natural persons with only Nepal-source business income, annual turnover below NPR 30 lakh, and net income below NPR 3,00,000. The annual tax is fixed regardless of actual profit:

New in FY 2082/83: If a business has zero transactions during the year, no presumptive tax is payable.

Turnover-Based Tax

For businesses with turnover between NPR 30 lakh and NPR 1 crore and taxable income up to NPR 10 lakh. Tax is calculated at a small percentage of turnover rather than profit, with a base amount plus a percentage of revenue above the threshold.

Part 6: Corporate Income Tax

Standard Corporate Rate

Nepal levies Corporate Income Tax (CIT) on companies, firms, partnerships, and other entities. The rate depends on the nature of the business:

Companies listed on the Nepal Stock Exchange (NEPSE) receive a 15% rebate on their applicable tax rate, incentivising public listing.

Sector-Specific Tax Rates and Incentives

Nepal’s tax law provides significant concessions for priority sectors — most of which are embedded in Section 11 of the Income Tax Act:

1. Hydropower

• General hydropower commencing commercial operation before mid-April 2028: 100% exemption for 10 years, then 50% rebate for 5 more years.

• Reservoir or semi-reservoir projects (40 MW or more): 100% exemption for 15 years, then 50% rebate for 6 years.

2. Information Technology

• IT companies and software firms are treated as special industries under the Finance Act 2082 (an extension of the definition), making them eligible for reduced rates and concessions under Section 11.

• Startups with annual turnover under NPR 10 crore receive 100% tax exemption for 5 years.

3. Special Economic Zones (SEZ)

• Mountain or hill area SEZ: 100% exemption for 10 years, 50% thereafter.

• Other SEZ: 100% exemption for 5 years, 50% thereafter.

• Dividends from SEZ companies: 100% exempt for 5 years, 50% for the next 3 years.

4. Green Energy (New in FY 2082/83)

• Green hydrogen production industries: 100% tax exemption for 5 years.

• EV charging machine manufacturing and assembly: 100% tax exemption for 5 years.

5. Manufacturing and Special Industries

• Special manufacturing industries: 20% rate (or up to 50% rebate on standard rate depending on employment generated and investment size).

• Industries in undeveloped or underdeveloped areas receive further rebates of 70–90% on the applicable rate.

6. Tourism (Hotels and Resorts)

• Hotels and resorts have been added to the definition of “special industry” under Finance Act 2082, qualifying them for manufacturing-sector concessions.

Important rule: If an entity qualifies for more than one concession under Section 11, it may only avail itself of one benefit — whichever is most favourable.

Part 7: Capital Gains Tax

Capital gains tax applies when an asset is sold at a profit. The rate differs based on the asset type and how long it was held.

Land and Buildings

Capital gains tax on property is collected as advance tax at the Land Revenue Office at the time of registration. Properties sold for less than NPR 10,00,000 are exempt from capital gains classification.

Shares and Securities

Part 8: Value Added Tax (VAT)

VAT is Nepal’s largest source of indirect tax revenue. It was introduced on 16 November 1997, replacing the old sales tax, entertainment tax, contract tax, and hotel tax. The rate has been a flat 13% since introduction and remains unchanged for FY 2082/83.

Who Must Register for VAT?

A business must register for VAT within 30 days of crossing any of the following annual turnover thresholds:

Businesses below these thresholds may register voluntarily — common practice for exporters who want to claim VAT refunds on their inputs.

How VAT Is Calculated?

VAT is charged on the sale price of taxable goods and services. Businesses collect VAT from customers and then subtract the VAT they paid on their own purchases (input VAT credit). The net difference is remitted to the IRD.

Formula:

VAT Payable: Output VAT (collected from customers) − Input VAT (paid to suppliers)

Example:

• A trader sells goods worth NPR 1,00,000
• Output VAT: 1,00,000 × 13%: NPR 13,000
• Input VAT paid on purchases: NPR 7,000
• Net VAT remitted to IRD: NPR 6,000

VAT returns must be filed by the 25th of every Nepali month.

VAT-Exempt Items (Schedule 1)

The following categories of goods and services are VAT-exempt under Schedule 1 of the VAT Act 2052. Businesses dealing exclusively in exempt items are not required to register for VAT:

• Basic agricultural produce (unprocessed vegetables, fruit, cereals, pulses)
• Live animals and raw meat
• Eggs and dairy products (unprocessed)
• Seeds and fertilizers
• Healthcare services and medicines
• Educational services and textbooks
• Public transportation services
• Financial services
• Religious and Social welfare services

New in FY 2082/83: Digital payment services have been exempted from VAT, a policy measure aimed at encouraging cashless transactions.

Zero-Rated Items (Schedule 2)

Some goods and services are taxed at 0% VAT — meaning no VAT is charged on sales, but the supplier can still claim back input VAT credit. This primarily applies to exports and certain goods and services supplied to persons outside Nepal.

Part 9: Customs Duty on Imports

Nepal’s import duty system is administered by the Department of Customs under the Customs Act, 2064, using the Harmonized System (HS) 2022 classification codes. The customs tariff is published annually through the Finance Act.

Structure of Import Taxes

When goods enter Nepal, multiple taxes apply in layers:

CIF (Cost, Insurance, and Freight) is the customs valuation basis — meaning the declared value must include the cost of the goods, shipping, and insurance to the Nepal border point.

Import Duty Bands

Recent FY 2082/83 changes include: increased duty on frozen vegetables (10% to 15%), increased duty on mixed spices (20% to 30%), and reduced duty on cashew nuts (15% to 10%) to support food processing industries.

The Green Tax (New in FY 2082/83)

The Finance Bill 2082 introduced a Green Tax on environmentally sensitive imports collected at customs points. This applies to a list of goods deemed to have significant environmental impact, with rates specified in Annex 1 of the Finance Bill. The objective is both environmental regulation and additional revenue from goods like certain plastics and pollutant-heavy products.

Customs Duty Calculation: A Simple Example

Import: A weaving machine with CIF value of NPR 1,00,000

• Basic Customs Duty (5%): NPR 5,000
• Customs Value for VAT: NPR 1,05,000
• VAT (13% on NPR 1,05,000): NPR 13,650
• Total landed tax: NPR 18,650
• Total landed cost: NPR 1,18,650

This illustrates how even a modest customs duty rate significantly inflates the total landed cost once VAT is applied on top.

Part 10: Excise Duty

Excise duty is levied on the manufacture or import of specific goods considered either luxury or socially regulated. It is administered by the IRD and is separate from VAT, though VAT is calculated on top of the excise-inclusive value.

Common Excise Duty Categories

EV tax rates for FY 2082/83 remain unchanged from FY 2081/82, though they are higher than earlier years when the government was actively encouraging EV adoption.

Part 11: Other Taxes and Levies

1. Luxury Tax

A 2% luxury tax is collected on high-value goods and services including diamond and precious stone jewellery worth more than NPR 10 lakh at the time of sale, and certain luxury services. This applies to the purchase amount.

2. Windfall Gain Tax

Prizes, awards, and lottery winnings are subject to a 25% windfall gain tax. However, rewards up to NPR 5,00,000 received for contributions in literature, art, culture, sports, journalism, science, or technology are exempt from this tax.

3. Road Development Fund Fee

An annual vehicle tax charged to maintain and improve road infrastructure. Unlike other taxes charged at purchase, this is collected every year. EVs pay a flat rate based on motor power capacity; conventional vehicles pay based on engine cc.

4. Fuel Levies

Several specific levies apply to petrol and diesel:

• Infrastructure Development Levy: NPR 10 per litre (collected at customs)

• Road Maintenance Fee: NPR 4 per litre (petrol) / NPR 2 per litre (diesel)

• Pollution Control Fee: NPR 1.50 per litre (collected at point of sale, deposited to IRD by the 25th of the following month)

5. Foreign Employment Service Fee

Agencies licensed to conduct foreign employment services must collect 1% of the amount charged from persons going for foreign employment. This fee is deposited to the IRD within the 25th of the following month.

6. Digital Service Tax (DST)

Non-resident digital service providers offering services to Nepali customers are subject to 2% DST on the transaction value. Annual transactions up to NPR 30 lakh are exempt. The Finance Act 2082 has clarified that non-residents are no longer subject to both Digital PE income tax obligations and DST simultaneously.

Part 12: Tax Filing Deadlines and Compliance

Understanding when to file is as important as knowing how much to pay. Nepal’s tax calendar follows the Bikram Sambat fiscal year (mid-July to mid-July).

Penalties for Non-Compliance

Interest piles up fast when taxes arrive late, 15% each year on unpaid tax under Section 119 of the Income Tax Act, plus administrative penalties. The IRD may also initiate re-assessment proceedings.

Special amnesty provisions in FY 2082/83:

• VAT non-filers: File returns and pay VAT with only 25% of interest by end of Poush 2082 — remaining interest, penalties, and additional fees waived.

• Excise duty non-filers: Pay excise with 50% of late fees by end of Poush 2082 — remaining late fees and penalties waived.

Part 13: Non-Resident Nepalis (NRNs) and Foreign Nationals

Only those living outside Nepal but making money within its borders must pay taxes just on what they earn there. Foreigners pulling income from Nepali sources fall under this rule too.

• General NRN income (rent, dividends, business profits): Flat 25%

• Income from shipping, air transport, or telecom through Nepal territory: 2%

• Income from shipping, air transport, or telecom sourced in Nepal: 5%

• Profits sent overseas by foreign businesses operating locally now face : extra 5% charge on transfers

A full month of base pay given as a Dashain bonus won’t be taxed. When extra payments go beyond that amount, they get included with yearly earnings, then charged based on applicable slab rates.

Conclusion

Back in 2026, Nepal had already reshaped its taxes into something broader and clearer compared to ten years earlier, yet people new to the system often found it heavy to carry. Because income tax climbs with earnings, while value-added tax stays fixed, confusion sometimes lingers at the edges. Different business areas face different company rates, which adds unevenness across industries. On top of that, customs and excise layers pile up, making oversight feel like threading through narrow paths. Following every rule matters; missing one can cost dearly, even by accident.

Think about taxes in Nepal like stacking boxes, each one heavier but only weighing part of your total load. Not every rupee gets taxed at the highest level, so someone pulling in 12 lakh ends up around 12%, far below what the top bracket suggests. That gap happens since rates climb step by step, not all at once. Contributions count too, money put into social security or health plans trims how much you owe, sometimes by hundreds of thousands. Pick those options if possible; they’re built into the rules, not gifts. Businesses face different math altogether - the kind of work matters more than office space or staff numbers. Banks fork over 30% even when tiny, yet energy firms might sit untouched for years depending on where power flows. Rules bend based on field, not scale.

Each year, new tax rules arrive via the Finance Act, check what applies now at ird.gov.np or talk with someone trained in taxes before sending paperwork. These numbers here? They follow the plan drawn up in the Finance Bill 2082, shaping how things work from mid-2025 into mid-2026.

Frequently Asked Questions (FAQs)

1. Who needs to pay tax in Nepal?

Any resident individual, non-resident earning Nepal-source income, companies, partnerships, cooperatives, and trusts must pay tax. Residents are taxed on worldwide income, while non-residents are taxed only on income earned in Nepal.

2. What is the income tax system in Nepal?

Nepal follows a progressive tax system, meaning income is taxed in slabs. Higher income is taxed at higher rates, and only the portion of income within each slab is taxed at that rate.

3. What are the income tax slabs in Nepal for FY 2082/83?

Tax starts from 1% on the first NPR 500,000 (SST) and goes up to: 10%, 20%, 30%, 36%, 39% (highest bracket)

Rates increase step by step, not on the full income.

4. What is Social Security Tax (SST) in Nepal?

The first 1% tax on income up to NPR 500,000 is called SST. It is waived if you are registered and contributing to the Social Security Fund (SSF).

5. What deductions can reduce taxable income?

Common deductions include: SSF contribution (11%), Provident Fund (PF), Citizen Investment Trust (CIT), Life insurance premium, Health insurance premium, Donations (limited %), and Home loan interest (in some cases)

6. Do freelancers need to pay tax in Nepal?

Yes. Freelancers must pay tax on all income, including foreign earnings (Upwork, PayPal, etc.). Foreign income is taxed under standard individual slab rates, and advance tax may be required.

7. What is TDS (Tax Deducted at Source)?

TDS is tax deducted directly from income by employers or payers before you receive payment. It applies to salaries, rent, interest, dividends, services, and payments to non-residents.

8. What is VAT in Nepal and who must register?

VAT is a 13% tax on goods and services. Businesses must register if turnover exceeds: NPR 50 lakh (goods), NPR 30 lakh (services or mixed)

VAT is collected from customers and paid to the IRD after deducting input tax.

9. How is capital gains tax applied in Nepal?

Capital gains tax applies when selling property or shares:

• Property: 5%–7.5% (individuals)

• Listed shares: 5%–7.5% depending on holding period

• Unlisted shares: 10% (individuals), 15% (entities)

10. What happens if you don’t file taxes on time in Nepal?

Late filing leads to: 15% annual interest on unpaid tax, Additional penalties, Possible reassessment by IRD.

Some amnesty schemes may reduce penalties in specific fiscal years.