Nepal's tax system is primarily governed by the Income Tax Act, 2002, and regulations related to social security and other employment-related contributions. Employers operating in Nepal are responsible for withholding income tax from their employees' salaries under the Pay As You Earn (PAYE) system and remitting it to the government. Additionally, employers must contribute to various social security schemes designed to provide benefits such as retirement pensions, medical coverage, and accident insurance for their workforce. Compliance with these obligations is crucial for businesses to operate legally and ensure their employees receive their entitled benefits, contributing to a stable and productive work environment.
Understanding these tax and social security requirements is essential for both domestic and international companies employing staff in Nepal. The fiscal year runs from Shrawan 1 to Ashad last (typically mid-July to mid-July). The information provided here reflects the tax laws and rates generally applicable for the fiscal year that will encompass the majority of the 2025 calendar year, based on current legislation.
Employer Social Security and Payroll Tax Obligations
Employers in Nepal are required to contribute to social security schemes for their employees. The primary scheme is the Social Security Fund (SSF), which is gradually replacing older systems like the Provident Fund (PF) and Gratuity for newly registered entities and employees.
Under the SSF, contributions are made by both the employer and the employee based on the employee's basic salary. The total contribution rate is 31% of the basic salary, divided between the employer and employee as follows:
| Contributor | Contribution Rate |
|---|---|
| Employer | 20% |
| Employee | 11% |
| Total | 31% |
These contributions cover various benefits under the SSF, including medical treatment, health protection, maternity scheme, accident and disability scheme, dependent family scheme, and old-age security scheme (pension and gratuity). Employers are responsible for deducting the employee's share from their salary and adding their own contribution before remitting the total amount to the SSF monthly.
For entities or employees not yet fully transitioned to the SSF, contributions may still be required for the Provident Fund (PF) and Gratuity as per older regulations or specific organizational policies, though the SSF is the mandated system for new registrations. The standard PF contribution rate is 10% each from employer and employee, and Gratuity is typically one month's basic salary per year of service, paid annually or upon separation. However, the SSF is the prevailing system.
Income Tax Withholding Requirements
Employers are obligated to withhold income tax from employee salaries on a monthly basis under the PAYE system. The amount of tax to be withheld depends on the employee's income level, marital status, and eligible deductions and allowances. The tax rates are progressive, increasing with income.
The income tax slabs and rates for individuals for the fiscal year relevant to 2025 are generally as follows:
For Single Individuals:
| Annual Taxable Income (NPR) | Tax Rate |
|---|---|
| Up to 400,000 | 1% |
| 400,001 to 500,000 | 10% |
| 500,001 to 700,000 | 20% |
| 700,001 to 1,000,000 | 30% |
| Above 1,000,000 | 36% |
For Married Individuals (Filing Jointly):
| Annual Taxable Income (NPR) | Tax Rate |
|---|---|
| Up to 450,000 | 1% |
| 450,001 to 550,000 | 10% |
| 550,001 to 750,000 | 20% |
| 750,001 to 1,000,000 | 30% |
| Above 1,000,000 | 36% |
Note: The 1% tax rate applies to the first slab and is typically treated as a health insurance tax or social security tax credit, effectively making the first slab tax-free for regular income earners if they are covered by health insurance or SSF.
Employers must calculate the annual tax liability for each employee based on their projected annual income and then divide this by 12 to determine the monthly withholding amount. Adjustments may be needed during the year if the employee's income or deduction status changes.
Employee Tax Deductions and Allowances
Employees in Nepal can benefit from various deductions and allowances that reduce their taxable income. Employers must consider these when calculating the monthly tax withholding, provided the employee submits necessary documentation or declarations.
Common deductions and allowances include:
- Provident Fund (PF) and Social Security Fund (SSF) Contributions: Employee contributions to approved PF schemes or the SSF are deductible from taxable income.
- Insurance Premiums: Premiums paid for life insurance (up to a certain limit, e.g., NPR 25,000 annually) and health insurance (up to a certain limit, e.g., NPR 20,000 annually) are deductible.
- Medical Expenses: A certain amount (e.g., up to NPR 1,000 per month or NPR 12,000 annually) for medical expenses incurred by the employee or their dependent family members may be deductible, often requiring supporting bills.
- Remote Area Allowance: Employees working in designated remote areas may be eligible for a special allowance that is tax-exempt up to a certain limit, varying by the remoteness category of the location.
- Donations: Donations made to approved charitable organizations may be deductible up to a certain percentage of taxable income or a specified limit.
- Retirement Contributions: Contributions to approved retirement funds other than PF/SSF may also be deductible.
Employees are typically required to declare their eligible deductions and allowances to their employer at the beginning of the fiscal year or when their circumstances change. Employers must maintain records of these declarations and supporting documents.
Tax Compliance and Reporting Deadlines
Employers have several key deadlines for tax compliance and reporting in Nepal:
- Monthly Tax Deposit: Income tax withheld from employee salaries (TDS - Tax Deducted at Source) and SSF contributions must be deposited with the respective government authorities (Inland Revenue Department for TDS, Social Security Fund for SSF) by the 25th day of the following month.
- Quarterly TDS Statement: Employers are required to file a quarterly statement detailing the TDS deducted and deposited. The deadlines are typically:
- Mid-October (for the period mid-July to mid-October)
- Mid-January (for the period mid-October to mid-January)
- Mid-April (for the period mid-January to mid-April)
- Mid-July (for the period mid-April to mid-July)
- Annual Income Tax Return: Employers must file an annual income tax return (often Form 10) by the end of Ashwin (typically mid-October) following the end of the fiscal year. This return summarizes the total income paid, deductions allowed, and tax withheld for all employees during the year.
- Annual SSF Contribution Details: Annual reporting to the Social Security Fund is also required, summarizing contributions made throughout the year.
Timely filing and payment are crucial to avoid penalties and interest charges.
Special Tax Considerations for Foreign Workers and Companies
Foreign individuals working in Nepal and foreign companies employing staff locally face specific tax considerations:
- Tax Residency: An individual's tax liability in Nepal depends on their residency status. A person is generally considered a resident if they stay in Nepal for 183 days or more in a 365-day period. Residents are taxed on their worldwide income, while non-residents are taxed only on their income sourced in Nepal.
- Tax Rates for Non-Residents: Non-resident individuals are subject to a flat tax rate of 25% on their income sourced in Nepal, without the benefit of the progressive tax slabs or basic exemption threshold available to residents.
- Double Taxation Treaties (DTTs): Nepal has entered into DTTs with several countries. These treaties aim to prevent double taxation of income and may provide relief or reduced tax rates for residents of treaty countries working in Nepal. The provisions of the relevant DTT should be consulted.
- Permanent Establishment (PE): A foreign company may become subject to corporate income tax in Nepal if its activities constitute a Permanent Establishment under the Income Tax Act or a relevant DTT. Employing staff locally can be a factor in determining PE status.
- Employer Obligations: Foreign companies employing staff in Nepal, whether local or expatriate, are subject to the same employer obligations regarding income tax withholding (PAYE) and social security contributions (SSF) as domestic employers. This applies even if the foreign company does not have a registered branch or subsidiary in Nepal, depending on the nature and duration of activities.
- Work Permits and Visas: Employing foreign workers requires compliance with immigration laws, including obtaining necessary work permits and visas, which is often linked to tax registration and compliance.
Navigating these requirements can be complex, and foreign entities often benefit from understanding their specific obligations based on their structure and activities in Nepal.
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