Chapter 8

Tax Exemptions, Concessions, Tax

Rates and Withholding Payments
A state formulate and implements income tax
to levy tax on income of a person. However,
certain incomes of some individuals or
entities are specially exempted from income
tax. Furthermore, the act provides some
concessions on tax rate for specified
individual or entities. In this regard, the
Income Tax Act 2058 has specified certain
exemptions and concessions.
Tax Exempt Amounts
Tax exempt amount refers to the tax
free incomes. The tax exempt amounts
are tax free incomes which are not
included in the total income while
calculating taxable income of a person.
And, the expenditure related to such
incomes are not deducted while
calculating the assessable income of a
person. More over tax is not deducted
at source while making the payment of
such exempt amounts. According to
Income Tax Act 2058, Section 10, the
Example 1
Salaries and allowances received by
foreign diplomat (i.e. the Ambassador)
of India working in Nepal are exempt
from tax. However, salaries and
allowances received by Nepalese staff
working in the diplomatic mission are
taxable.
(2) Amount received by an individual
from employment in the public service
of the foreign government of a foreign
country are exempt from income tax.
Example 2
Mr. Subash
Barman is joint
secretary of the
ministry of
Agriculture of
 Example 3
Mr. James Stalker, a
citizen of US, came to
Nepal as a chief Human
Resource Advisor at
USAID Nepal country
office. He is serving
Nepal since last year and
 (4) Amount received by an foreign
individual from employment at the
Government of Nepal's service, on
terms of tax exemption.
Example 4
The Government of Nepal appointed
Mr. Jackson, an USA citizen as a chief of
Earthquake management team. The
Nepal Government agree to pay US $
40,000 per month as salary and other
benefits.
In this case, the total amount received
by Mr. Jackson US$ 500,000 (suppose)
 (5) Amount
paid by Nepal
Government to
widow, elder
citizen or
 Business
Exemptions and
Concessions
All benefits or
rebates provided
to a particular
 (b) Incomes received
by co-operative
societies, registered
and functioning
under co-operative
Act 2048 from
business mainly
  Bee keeping
• Honey production
• Rubber farming
• Floriculture and
production
• Forestry related
business such as
 (c) Income earned
by a person during
an income year from
special industry and
Information
Technology based
industries are taxed
Special or information Normal tax Tax rate for Tax rate for
technology based industry rate special information
providing direct employment industry after technology
to concession based
industry after
concession
(i) 300 or more Nepalese 20% for 18% 22.50%
workers through out special
the year. industry
25% for IT
(ii) 1200 or more Nepalese 20% for SI 16% 25%
workers throughout the 25% for IT
year.
(iii) More than 100 Nepalese 20% for SI 16% 25%
workers including at 25% for IT
least 33% women
downtrodden or
handicapped
throughout the year.
(iv) A special industry operating in
remote area (highly undeveloped area)
is taxed only 10% of the applicable tax
rate (i.e. 90% concession on tax rate) on
its income upto ten years of its
operation.
(v) A special industry operating in
underdeveloped area is taxed only 20%
of the applicable tax rate (i.e. 80%
concession on tax rate) on its income
upto ten years of its operation.
(vi) A special industry operating in
underdeveloped area is taxed only 30%
S.N. Region (Area) Tax rate for Tax rate for
special industry special industry
after concession
(i) Remote 20% 2%
area(Highly
undeveloped)
(ii) Undeveloped 20% 4%
area

(iii) Underdevelope 20% 6%

d area
 A special industry includes the
manufacturing industry other than
tobacco or alcohol industries like
cigarette, bidi, Khaini, beear etc.
(d) Tax exemption and concession
on the income of an industry
established in Special Economic Zone
(SEZ) and dividend distributed by such
industry are as follows:
 Income of an industry established in
SEZ located at mountainous district and
government specified hill districts is
fully exempt from income tax. Upto the
(e) An individual engaged in exploring and excavating petroleum and
natural gas, if operates transactions commercially within 2075 Chaitra
end is exempt from income tax for first seven years and then taxed at
50% of the applicable tax rate (i.e. 50% concession on tax rate) upto
next three years.
(f) Organized institutions having license for electricity generation,
transmission and distribution, if commercially generation of
electricity, generation and transmission of electricity generation and
distribution of electricity or generation transmission and distribution
of electricity within 2075 Chaitra end are fully exempt from income
tax for the first seven years and then taxed at 50% of the applicable
tax rate (i.e. 50% concession on tax rate).
 Upto next three years such tax facilities are also provided to the
organizations engaged in electricity generation from solar, wind and
organic materials.
(g) The industries related to software development, data processing,
cyber cafe, digital mapping established in Information Technology
Park, Technology Park Bio-tech park as specified by Nepal
Government by publishing notice in Nepal Gazette are taxed at 50% of
the applicable tax rate (i.e. 50% concessions on tax rate).
•
Highly Underdeveloped Area Undeveloped Area (Districts) Underdeveloped Area
(Districts) (District)
Darchula Taplejung Kailali
Bajhang Rolpa Surkhet
Bajura Baitadi Arghakhachi
Humla Rasuwa Palpa
Jumla Gulmi Syangja
Mugu Prabhat Dhading
Kalikot Dadeldhura Lamjung
Dolpha Pyuthan Tanatun
Mustang Doti Gorkha
Manang Salyan Sindhuli
Solukhumbu Panchthar Udayapur
Sankhuwasabha Baglung Dhankuta
Khotang Sindhupalchok Ilam
Bhojpur Kanchanpur
Achham Bardia
Dailekh Dang
Jajarkot Nuwakot
Rukum Daveplanchok
Okhaldhunga Dolakha
Myagdi
Terathum
Ramechaap
 An electricity project, starting
construction within 2071, Bhadra 7 and
produced electricity commercially
within 2075, Chaitra end is enjoy full
tax exemption upto first ten years and
then taxed at 50% of the applicable tax
rate upto next three years.
But persons already having started
commercial production of electricity
before 1st Shrawan, 2066 should be
eligible for facility as prevalent at the
time of obtaining license.
(8) The income earned by
(12) A royalty income earned by a
person from the export of his
intellectual properties is taxed at 75%
of the applicable tax rate (i.e. gets 25%
tax exemption on tax rate).
(13) The income earned by a person
from the sale of intellectual properties
by way of transfer is exemption of 50%
on the applicable income tax rate.
(14) Incomes of the person who gets
business exemption and concession are
calculated separately assuming that
these incomes are earned by a separate
person.
Tax Rates
Income Tax Act 2058 has specified the tax rates
applicable to the different types of tax payers.
Schedule 1 of Income tax act 2058 has included
different tax rates as well as exemptions
applicable to different tax payers depending on
whether the tax payer is an individual or an
entity.
For Individual or Couple:
1 A. resident individual or a resident couple
having taxable income
For individual from employment
For couple Tax Rate is
taxed
Upto Rsas
2,50,000 Upto Rs 3,00,000 1%
Next Rs 1,00,000 Next Rs 1,00,000 15%
Next Rs 21,50,000 Next Rs 21,00,000 25%
Balance Balance 35%
(b) A resident individual or a resident
couple having taxable income from
business or investment only is taxed as
follows:
For individual For couple Tax Rate
Upto Rs 2,50,000 Upto Rs 3,00,000 Nil
Next Rs 1,00,000 Next Rs 1,00,000 15%
Next Rs 21,50,000 Next Rs 21,00,000 25%
Balance Balance 35%

(c) A resident individual or a resident couple

having taxable income from employment,
business and investment is taxed as under:
 For individual For couple Tax Rate
Upto Rs 2,50,000 Upto Rs 3,00,000 1%
Next Rs 1,00,000 Next Rs 1,00,000 15%
Next Rs 21,50,000 Next Rs 21,00,000 25%
Balance Balance 35%

Hints: 1% tax for social security

fund is charged in the
employment income even it is
less than exemption limit amount.
(d) An individual operating
special industry is taxed at 20% in
Remote area A B C D E

Maximum Rs 50,000 Rs 40,000 Rs 30,000 Rs 20,000 Rs 10,000

limit
(exemption)

(g) A resident individual or couple of

pension income have a right to an
additional reduction 25% of basic
exemption or pension income during
the year which ever is less.
(h) A disabled invidiaul or couple have
a right to an additional reduction of
50% of basic exemption from taxable
income.
 Metropolitan or sub metropolitan city Rs 5,000
Municipalities area Rs 2,500
Other places Rs 1,500

Type of vehicle Annual tax per vehicle

Minibus, mini truck, truck, bus, Rs 1500

(m) Annual tax applicable to public transport

Car, jeep, van, microbus
Three-wheeler, auto rickshaw, tempo
Rs 1200
Rs 850

is as follows:
Tractor and power tiller Rs 750

If the owner is an individual, such vehicle tax

will be final.
(h) Gain on disposal of non-business
(h) Gain on disposal of non-business chargeable assets of an individual is
taxed at 10%. However, if ownership of the land and building is more
than 5 years, only 2.5% tax is imposed on the gain. But 5% tax is applied
if the ownership of the land and building is less than 5 years. Similarly,
gain on disposal of share or debentures listed at Security Board of
Nepal is taxed at 5%.
(o) A non resident individual is taxed at flat rate of 25% on taxable income
with source in Nepal and no exemption is allowed. Any withholding
payment made to a non resident is treated as final.
For Entity:
Generally an entity is taxed on a flat rate depending on the nature or types
of the entity's business.
(a) Entities are generally taxed at flat rate of 25%
(b) Entity running special industry is taxed at 20%
Any entity that has operated a bridge, tunnel, road, rope way, sky
bridge after their construction or entity that is engaged in operating
trolley bus or tram, co-operatives (except involved in tax exempt
transactions) are taxed at 20%.
(c) Entity having export income during the year is taxed at 20%.
(d) The taxable income of bank, financial institutions, general insurance
business, liquor and tobacco industry or a petroleum business entity is
taxed at 30%.
(e) Entity engaged in building
public infrastructure, own
operate and transfer (boot) to
Nepal Government is taxed at
20%.
(f) Taxable income of a co-
operative society registered
under co-operative Act 2048 is
taxed at 20% (except relating to
agriculture and forest).
(g) Repatriated income of a
(a) Remuneration Payments (Section 87)
A resident employer is required to withhold tax
at normal rate while making remuneration
payment to employee with a source in Nepal.
Monthly tax deducted source amount is
determined dividing total tax payable for the
year by the twelve.
(b) Investment Returns and Service Fees
(Section 88)
When a resident person pays Nepalese source
investment returns or service fees such as
interest, a natural resource payment, rent,
royalty, service fee, retirement payment, sales
commission and any other returns must with
hold tax (tax deducted at source) on the gross
 On the gain calculated as below:
Total retirement payment in lump sum xxx
Less: 50% of total payment or Rs xxx
500,000 (which even is higher)
Gain from approved retirement fund xxx

• Commission paid by a resident

employment company to a non-
resident person is withheld at 5%.
• Payment against lease of aircraft is
withheld at 10%.
• Service fees payment to service
providing resident firm or person
• However, tax is not deducted at source for the following
payments:
• Payment of remuneration to an individual for published articles
in newspapers, setting a question paper, examining answer
sheet.
• Interest paid to resident bank and financial institutions.
• Inter-regional inter-change fees paid to the bank issuing credit
card.
• Payments relating to business made by an individual and other
payments except house rent.
• Payments that are exempt from tax such as remuneration
payment up to exemption limit.
• Interest or fees paid by Nepal Government to foreign
government or international organization as per the agreement
made between Nepal Government and International
organization.
• Annual interest payment up to Rs 10,000 by rural community
based micro finance, rural development bank, postal service
bank, co-operative society (based on agriculture and forest
product).
• Payment made to mutual fund for dividend and interest
• Payment of dividend by a resident
company
• Payment made by resident person for
gain on investment insurance.
• Retirement payment made by an
approved retirement fund or by Nepal
Government.
• Payment made by a resident person for
gain from unapproved retirement
fund.
• Interest paid to an individual by the
bank and financial institutions and
company issuing bond and debenture
(c) Withholding
on causal Gains
(section 88 ka)
Causal gain such
as lottery win,
windfall gain and
– If the gain is
resulting from
disposal of
interest in an
entity listed.
• Payment of dividend by a resident
company
• Payment made by resident person for
gain on investment insurance.
• Retirement payment made by an
approved retirement fund or by Nepal
Government.
• Payment made by a resident person for
gain from unapproved retirement
fund.
• Interest paid to an individual by the
bank and financial institutions and
company issuing bond and debenture
Withholding payments Withholding rate Advance or Final withholding

Remuneration payments Normal Advance

Natural resource payments, service fee, 15% Advance

commission, royalty, sales bonus
House rent relating to business and rent from 10% Advance
other assets
House rent received by an individual other 10% Final
than conducting business with source in
Nepal
Interest paid by a resident bank and financial 5% Final
institution to an individual with source in
Nepal and which is not related to business
Interest received bank relating to business 15% Advance
and from unrecognized sector
Dividend received from a resident company 5% Final
or a partnership firm
Meeting fee and allowance 15% Final

Retirement payment from an approved 5% Final

retirement fund or by Nepal Government
Gain from investment insurance 5% Final

Gain from unapproved retirement fund 5% Final

Payment of commission by a resident 5% Advance

employment company to a non-resident
person
Payment of service fees to service providing 1.5% Advance
natural persons registered at VAT
Lease payment and for aircraft 10% Advance

Causal gain (lottery and prize win, windfall 25% Final

gain)
Gain from commodity future market 10% Advance

Payment of contract more than Rs 50,000 1.5% Advance

Part time salary/teaching on an occasional 15% Final

•If the non resident
person received the
payment, the
advance tax is
treated as final.
6. Expenses
Personal or Domestic Expenses
All expenses or costs incurred by individuals to satisfy their personal needs
are referred as personal expenses. Following expenses are included as
personal or private expenses
(a) Interest paid for a loan borrowed for personal purpose.
(b) Personal expenses of an individual such as costs for the provision of
shelter as well as meals, refreshment, entertainment or other leisure
activities.
(c) Expenses incurred in communting between the person's home and at a
place at which the business or investment is conducted. However,
communting in the course of conducting business or investment is
allowed for deduction.
(d) Expenses incurred in acquiring clothing for the individual that is suitable
for wearing outside of work (i.e. cost of work dress, uniform, apron etc.
are allowed for deduction).
(e) Expenses incurred for education and training of an individual. However,
the expenses incurred for education that is directly related to a business
or investment conducted by the individual and which does not lead to a
degree or diploma is allowed for deduction.
(f) The expenses of a domestic or personal nature also include costs incurred
by another person in respect of individual. However, in the following
conditions such expenses are not treated as personal or domestic
expenses.
(i) If the payment is included in
calculating the income of the individual.
For example, salary paid to employees
are allowed for deduction because
employees include such payments in
their incomes.
(ii) If the individual makes a return
payment of an equal market value to the
person as a consideration for the
payment. For example, expenses
incurred for selling goods and services
to customers are allowed for deduction
but the expenses incurred on goods
(a) If payment is
made to Nepal
Government, a
constitutional
body, a