Nepal's tax system is governed by the Income Tax Act, 2002, which outlines the framework for income taxation for individuals and entities. Employers in Nepal have significant responsibilities related to withholding income tax from employee salaries and contributing to social security schemes. Understanding these obligations is crucial for compliant payroll management and ensuring employees meet their tax responsibilities. The fiscal year in Nepal runs from Shrawan 1st to Ashad end (typically mid-July to mid-July). Tax rates and regulations are subject to annual review and potential adjustments in the government's budget announcement, usually around late May or early June.
Compliance with tax laws and social security regulations is mandatory for all employers operating in Nepal, whether they are local or foreign entities. This includes accurate calculation of tax liabilities, timely withholding and deposit of taxes, and proper reporting to the Inland Revenue Department (IRD) and the Social Security Fund (SSF). Adhering to these requirements helps avoid penalties, interest, and legal issues, ensuring smooth business operations and positive employee relations.
Employer Social Security and Payroll Tax Obligations
Employers in Nepal are primarily required to contribute to the Social Security Fund (SSF) for their employees. The SSF is a mandatory scheme covering various benefits, including medical treatment, health protection, maternity, accident and disability, dependent family, and old-age security (pension and gratuity).
Contributions to the SSF are shared between the employer and the employee. The total contribution rate is a percentage of the employee's basic salary.
| Contributor | Contribution Rate |
|---|---|
| Employer | 20% |
| Employee | 11% |
| Total | 31% |
The employer is responsible for deducting the employee's 11% contribution from their salary and adding their own 20% contribution before remitting the total 31% to the SSF on a monthly basis.
Apart from SSF, some older provident fund schemes (like the Employees Provident Fund - Karmachari Sanchaya Kosh) and gratuity schemes may still apply based on employment contracts or specific industry regulations, although the SSF is becoming the primary mandatory scheme. Contributions to these funds also involve employer and employee portions and are typically calculated as a percentage of basic salary.
Income Tax Withholding Requirements
Employers are required to withhold income tax from employee salaries under the Pay As You Earn (PAYE) system. The amount of tax to be withheld depends on the employee's total taxable income and their marital status. Taxable income includes basic salary, allowances, bonuses, and other perquisites, after accounting for eligible deductions and allowances.
Nepal's income tax system for individuals is progressive, with increasing tax rates applied to higher income brackets. The tax slabs and rates for the fiscal year 2024/2025 (relevant for 2025) are expected to follow a structure similar to previous years, subject to potential minor adjustments in the budget. The rates differ for individuals who are single and those who are married and filing jointly (or as a couple).
Income Tax Slabs and Rates (Expected for FY 2024/2025)
-
For Single Individuals:
Annual Taxable Income (NPR) Tax Rate Up to 600,000 1% 600,001 to 800,000 10% 800,001 to 1,100,000 20% 1,100,001 to 2,000,000 30% Above 2,000,000 36% -
For Couples (Married Individuals Filing Jointly):
Annual Taxable Income (NPR) Tax Rate Up to 700,000 1% 700,001 to 900,000 10% 900,001 to 1,200,000 20% 1,200,001 to 2,000,000 30% Above 2,000,000 36%
The 1% tax rate on the lowest slab is often referred to as a social security tax or health insurance tax and is generally not subject to the basic exemption threshold. The higher rates apply to income exceeding the respective thresholds.
Employers must calculate the annual tax liability for each employee based on their projected annual income and applicable tax slabs, taking into account eligible deductions and allowances. This annual tax liability is then typically divided by 12 (or the number of payroll periods) to determine the monthly tax amount to be withheld. Adjustments may be needed during the year if an employee's income or circumstances change.
Employee Tax Deductions and Allowances
Employees can benefit from various deductions and allowances that reduce their taxable income, thereby lowering their income tax liability. Employers need to consider these when calculating the monthly tax withholding, provided the employee submits the necessary documentation or declarations.
Common deductions and allowances include:
- Social Security Fund (SSF) Contributions: The employee's mandatory 11% contribution to the SSF is deductible from taxable income.
- Provident Fund Contributions: Contributions to recognized provident funds (like EPF or others) are deductible, typically up to a certain percentage of salary or a maximum limit.
- Insurance Premiums: Premiums paid for life insurance and health insurance are deductible up to specified limits.
- Medical Expenses: A certain amount spent on medical treatment can be claimed as a deduction, often up to a fixed annual limit, upon submission of valid 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.
- Donations: Donations made to approved charitable organizations can be deductible, usually up to a certain percentage of taxable income or a fixed limit.
- Retirement Contributions: Contributions to approved retirement schemes beyond mandatory provident/social security funds may also be deductible.
It is the employee's responsibility to inform the employer about eligible deductions and provide supporting documentation or declarations as required by the employer and tax regulations. Employers must maintain records of these deductions for tax reporting purposes.
Tax Compliance and Reporting Deadlines
Employers in Nepal must adhere to strict deadlines for tax withholding, deposit, and reporting. Key compliance requirements include:
- Monthly Tax Deposit: Income tax withheld from employee salaries must be deposited with the Inland Revenue Department (IRD) or designated banks by the 25th day of the following month (Nepali calendar month).
- Monthly Withholding Statement: Employers are required to file a monthly withholding statement (Form 10) detailing the tax withheld from each employee. This must also be submitted by the 25th day of the following month.
- Annual Tax Statement: An annual statement summarizing the total income paid and tax withheld for each employee during the fiscal year must be prepared and submitted to the IRD. The deadline for this annual statement (often part of the employer's annual income tax return) is typically within three months of the end of the fiscal year (i.e., by mid-October).
- Tax Clearance Certificate: Employers need to obtain an annual tax clearance certificate after filing their annual income tax return and settling any outstanding tax liabilities.
Failure to comply with these deadlines can result in penalties, interest charges, and other legal consequences. Accurate record-keeping of payroll, tax calculations, and withholding is essential.
Special Tax Considerations for Foreign Workers and Companies
Foreign workers and companies operating in Nepal face specific tax considerations:
- Tax Residency: An individual's tax liability in Nepal depends on their residency status. A foreign individual is generally considered a tax 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 Identification Number (TIN): Foreign employees earning income in Nepal are required to obtain a Tax Identification Number (TIN) from the IRD.
- Withholding Tax: Employers of non-resident foreign employees must withhold income tax on their Nepal-sourced income according to the applicable tax rates for individuals.
- Double Taxation Agreements (DTAs): Nepal has entered into Double Taxation Agreements with several countries. These agreements can provide relief from double taxation for foreign workers and companies, potentially affecting their tax obligations in Nepal. The provisions of the relevant DTA should be considered.
- Permanent Establishment (PE): A foreign company's tax obligations in Nepal depend on whether it has a Permanent Establishment (PE) in the country. If a PE exists, the company is liable for corporate income tax on the profits attributable to the PE. Employing staff in Nepal can be a factor in determining PE status.
- Social Security for Foreigners: Generally, contributions to the mandatory Social Security Fund (SSF) are required for all employees working under an employment contract in Nepal, including foreign nationals, unless exempted by specific agreements or regulations.
Foreign companies employing staff in Nepal, even without a registered local entity, may have employer obligations, including payroll processing, tax withholding, and social security contributions. Utilizing an Employer of Record (EOR) service can help foreign companies navigate these complex local compliance requirements without needing to establish a legal entity in Nepal.
