Nepal Tax Regime

Legal framework and fiscal year

Nepal's direct-tax system rests on the Income Tax Act, 2058 (2002), administered by the Inland Revenue Department (IRD) under the Ministry of Finance. The Act is a modern, self-assessment statute that consolidated a patchwork of earlier laws into a single code covering employment, business and investment income. Each year the rates, thresholds and concessions are reset by the Finance Act passed with the national Budget; this handbook reflects the Finance Act, 2082, which governs the fiscal year 2082/83 in the Bikram Sambat (BS) calendar, corresponding to 2025/26 in the Gregorian calendar.

Nepal's fiscal year does not follow the Western calendar. It runs from the first of Shrawan to the last day of Ashad — roughly mid-July to mid-July. FY 2082/83 therefore begins on 17 July 2025 (1 Shrawan 2082) and ends on 16 July 2026 (31 Ashad 2082). All statutory deadlines, instalment dates and return-filing windows are expressed in Nepali months (Poush, Chaitra, Ashad, Ashoj), and practitioners must convert carefully when coordinating with foreign counterparties working on a January–December basis.

Taxing jurisdiction and residence

Residents are taxed on worldwide income; non-residents are taxed only on income with a Nepal source. A natural person is resident if present in Nepal for 183 days or more in any 365-day period overlapping the income year, or if their normal place of abode is Nepal. An entity is resident if incorporated in Nepal or effectively managed in Nepal during the year. Foreign-tax credits are available to residents for taxes paid abroad on foreign-source income, capped at the Nepali tax otherwise payable on that income.

The principal taxes covered in this handbook are corporate income tax, personal income tax (including a 1% social security tax and surcharges), withholding tax (Tax Deducted at Source, TDS), value added tax (VAT) at 13%, excise, customs, and a range of smaller levies. Income tax and VAT together supply the bulk of federal revenue, with customs and excise remaining important given Nepal's heavy reliance on imports.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Standard and sector rates

The headline corporate income tax (CIT) rate for FY 2082/83 is 25%, applied to the net taxable profit of resident companies, branches of foreign companies, partnerships and other entities. The Finance Act, 2082 left the core rate schedule unchanged from the prior year. Two categories deviate upward. First, entities engaged in banking, general and life insurance, finance companies, capital markets and telecommunications are taxed at 30%. Second, so-called 'vice' businesses — dealing in cigarettes, bidi, cigars, chewing and powdered tobacco, gutkha, pan masala, liquor, beer and petroleum products — are also taxed at 30%.

In the other direction, special industries (broadly, manufacturing industries other than those producing tobacco and alcohol) and wholly export-oriented enterprises benefit from a reduced 20% rate. This 20% base can be reduced further through the concession regime described below. Cooperatives operating in rural and agricultural areas enjoy full exemption or heavily reduced rates (agricultural and dairy cooperatives are generally exempt; savings-and-credit cooperatives face graduated rates depending on location).

Concessions and incentives

Nepal uses the CIT regime as a development tool, layering rebates on top of the base rate. Special industries providing direct employment to 100 or more Nepali citizens receive a 10% concession on the applicable rate, scaling up to a 30% concession where 1,000 or more are employed. Industries established in undeveloped and remote areas obtain a 70% to 90% concession on the applicable rate for the first ten years of commercial production. Enterprises located in Special Economic Zones (SEZs) receive time-limited full exemptions followed by 50% rebates.

The energy sector is a signature beneficiary: hydropower, solar, wind and bio-energy projects that reach commercial operation before mid-April 2028 receive a 100% income-tax exemption for the first ten years and a 50% rebate for the following five years. Information-technology industries established in IT parks and technology hubs, and businesses exporting IT-enabled services, receive substantial rebates that can lower the effective rate toward single digits on qualifying export earnings. Because these incentives interact and cannot always be stacked, projects should model the effective rate carefully against the Finance Act schedule.

Computing taxable profit

Taxable business income is accounting profit adjusted for tax rules: depreciation follows pooled classes with prescribed rates, interest deductibility is subject to related-party and anti-avoidance limits, and specific provisions govern trading stock, bad debts and repairs. Losses may generally be carried forward for up to seven years (longer for certain infrastructure, hydropower and public-infrastructure BOOT projects). Dividends distributed by a resident company are subject to a 5% final withholding, and because that tax settles the shareholder's liability, corporate profits distributed as dividends are effectively taxed once at the company level plus the 5% distribution tax.

Residence and scope

Resident natural persons are taxed on worldwide income across three heads — employment, business and investment — aggregated into a single figure of taxable income, then run through the progressive slab schedule. Non-residents are taxed on Nepal-source income, typically at a flat 25% or via final withholding on specific payment types. The slabs differ between a single (unmarried) taxpayer and a couple electing to be assessed jointly, with the couple receiving a wider first band.

Slab schedule for FY 2082/83

The Finance Act, 2082 retained the individual slab structure introduced the prior year, including the top 39% tranche. The first band carries only a 1% levy — this is the social security tax (SST), a distinct charge that must be deposited into a dedicated revenue account rather than the general income-tax account. The SST does not apply to sole proprietors on business income, to pension income, or to employees who contribute to the Social Security Fund (SSF); for them the first band is effectively nil.

The two upper bands are built from a 30% statutory rate plus a surcharge on the tax itself: a 20% surcharge lifts the 30% rate to an effective 36% on income between NPR 2,000,000 and NPR 5,000,000, and a 30% surcharge lifts it to an effective 39% above NPR 5,000,000. This is the highest effective marginal rate a resident individual faces. Reliefs that reduce taxable income include contributions to an approved retirement fund (deductible up to prescribed caps), life-insurance premiums (deductible up to NPR 40,000), health-insurance premiums (up to NPR 20,000), and remote-area and pension allowances.

Employers operate PAYE withholding on salary using the slab schedule, remitting monthly. Investment income earned by individuals — bank interest, dividends, and gains — is typically collected by final withholding, so many salaried taxpayers with only wage and simple investment income have no separate filing obligation, their tax having been settled at source.

Domestic TDS rates

Nepal operates an extensive Tax Deducted at Source (TDS) system. For many passive-income categories the deduction is a final tax, meaning the recipient owes no further Nepali tax and files no return on that amount. Dividends are withheld at 5% (final for both residents and non-residents). Interest is generally withheld at 15%, though a reduced 5% applies to interest paid by resident banks and financial institutions to resident natural persons on deposits. Royalties, service fees paid on a PAN (non-VAT) bill, commissions and consultancy fees are generally withheld at 15%; service payments supported by a VAT invoice attract a lower 1.5% deduction. Rent on land and buildings paid by a withholding agent is deducted at 10%.

Payments to non-residents and repatriation

Nepal-source income of a non-resident is taxed by withholding: dividends at 5%, interest and royalties commonly at 15%, and certain service and contract payments at 5%. A branch of a foreign company that repatriates its Nepal profit pays a 5% tax on the repatriated amount, a branch-remittance charge analogous to a dividend withholding. These are the domestic statutory rates applied before any treaty relief.

Tax treaties

Nepal has concluded double-taxation avoidance agreements with a number of partners, including India, China, and several other Asian and European states. Treaties can reduce the domestic withholding rates on dividends, interest and royalties and allocate taxing rights over business profits and permanent establishments. Because domestic rates are moderate, treaty benefits matter most for cross-border interest and royalty flows and for defining when a foreign enterprise creates a permanent establishment in Nepal. Treaty relief is not automatic; the withholding agent should obtain residence certification and confirm eligibility before applying a reduced rate.

Transfer pricing

Section 33 of the Income Tax Act empowers the IRD to re-allocate income and deductions between associated persons to reflect arm's-length pricing, aligning Nepal's approach with the OECD Transfer Pricing Guidelines. The Transfer Pricing Directives, 2081 elaborate on methods, comparability analysis and documentation expectations. While Nepal does not yet impose a formal, standalone transfer-pricing return or a mandatory master/local file for all taxpayers, entities with controlled cross-border or related-party transactions are strongly advised to keep contemporaneous documentation justifying their pricing, as the IRD can and does make adjustments on audit.

General and specific anti-avoidance

The Act contains a general anti-avoidance rule (GAAR) allowing the IRD to recharacterize or disregard arrangements entered into primarily to obtain a tax benefit, together with specific rules on income splitting and transfers of assets between related parties. Chapters covering special situations (Sections 26 to 45) address partnerships, joint ventures, trusts and estates, and the arm's-length treatment of related-party dealings. These provisions give the administration broad power to counter artificial structuring.

Thin capitalization and interest limits

Nepal limits excessive related-party debt financing. Interest deductions on borrowings from controlling associated persons (and from exempt-income entities) are restricted where they exceed a proportion of the borrower's income before such interest, with disallowed amounts eligible to carry forward. Combined with the arm's-length principle, these rules constrain profit-stripping through inflated intra-group interest, a common focus of IRD scrutiny for foreign-owned subsidiaries and branches.

There is currently no comprehensive controlled-foreign-company (CFC) regime of the type found in some OECD countries, but the worldwide-taxation of residents, the foreign-tax-credit cap, and the anti-avoidance and transfer-pricing rules together limit the scope for shifting Nepali profits offshore. Cross-border groups should nonetheless expect the IRD to test the substance of arrangements involving low-tax jurisdictions.

Value added tax

VAT is Nepal's principal indirect tax, levied at a single standard rate of 13% on the supply of most goods and services and on imports. A limited set of supplies is exempt (basic agricultural products, certain education and health services, financial services) and exports are zero-rated, allowing exporters to reclaim input VAT. Compulsory VAT registration is triggered where annual taxable turnover exceeds NPR 5,000,000 for goods (with a lower threshold for services and mixed activity), and certain businesses must register regardless of turnover. Registered persons file monthly VAT returns and remit net VAT within 25 days of each Nepali month-end.

Excise and customs

Excise duty applies to a defined list of goods — alcohol, tobacco, motor vehicles, aerated and sugary drinks, cement and other products — at specific or ad valorem rates set annually by the Finance Act, and functions both as a revenue source and a public-health/environmental instrument. Customs duty is significant given Nepal's landlocked, import-dependent economy; rates are set in the customs tariff and vary widely by product, with agricultural inputs and capital machinery often favored and finished consumer and luxury goods taxed heavily. Import transactions typically bear customs duty, excise (where applicable) and 13% VAT at the border.

Education service fee and other levies

Nepal imposes an education service fee on payments made abroad for foreign education (tuition and related remittances by students studying overseas), collected at the point of foreign-exchange remittance, alongside a health-service tax on certain private hospital and clinic services. Other charges include a telephone-ownership/telecommunications service fee, a road-construction and maintenance fee on fuel, vehicle taxes administered at provincial level, and a range of environmental and 'green' levies introduced in recent Finance Acts. Property-related transaction taxes (registration fees and, in municipalities, land and house taxes) are largely administered at the local-government level under Nepal's fiscal-federalism structure.

Registration and self-assessment

Every taxpayer must obtain a Permanent Account Number (PAN) from the IRD; businesses meeting the VAT thresholds additionally register for VAT. Nepal operates on self-assessment: the taxpayer computes liability, files the return and pays, with the IRD retaining powers of amended assessment, jeopardy assessment and audit selection. Filing is increasingly electronic through the IRD taxpayer portal, and e-TDS and e-VAT filing are standard. Large taxpayers are administered through a dedicated Large Taxpayers Office.

Penalties and interest

Late payment of tax attracts interest at 15% per annum (commonly applied as 1.25% per month) on the outstanding amount. Late filing of returns triggers fixed fees calculated by reference to turnover or a per-annum charge, and failure to withhold or deposit TDS exposes the paying agent to the tax plus interest and penalties. Additional penalties apply for non-registration, failure to keep records, false or misleading statements, and repeated default. Because payment obligations are not suspended by a filing extension, interest continues to run on unpaid tax even where the return deadline has been pushed back.

Disputes and appeals

A taxpayer disputing an assessment first seeks administrative review (objection) within the IRD, generally after depositing a portion of the disputed tax and the undisputed amount. If unsatisfied, the taxpayer may appeal to the Revenue Tribunal, a specialist judicial body, and thereafter on points of law to the higher courts. Recent Finance Acts have periodically offered settlement and waiver windows allowing taxpayers to close disputed or arrears cases on concessional terms, which can be attractive where the underlying position is weak or litigation costs are disproportionate.

The Nepali fiscal year

All deadlines key off the income year running from 1 Shrawan to 31 Ashad (mid-July to mid-July). Converting Nepali months to Gregorian dates is essential: Poush end falls around mid-January, Chaitra end around mid-April, Ashad end around mid-July, and Ashoj end around mid-October. The dates shift by a day or two each year because the BS calendar is lunisolar.

Advance tax and returns

Taxpayers with substantial business or investment income pay advance (instalment) income tax in three tranches during the year: 40% of estimated liability by the end of Poush (mid-January), 70% cumulatively by the end of Chaitra (mid-April), and 100% by the end of Ashad (mid-July). The annual income-tax return is due within three months of year-end — by the end of Ashoj (mid-October). In practice the IRD routinely grants a further extension to the end of Poush (mid-January), but any balance of tax must still be paid by the original due date to avoid interest. VAT and TDS returns are monthly, due within 25 days of each Nepali month-end.

Establishing and financing a presence

Foreign investors typically operate through a private limited company registered with the Office of the Company Registrar, with foreign direct investment approved under the Foreign Investment and Technology Transfer Act and channelled through the Department of Industry and the Nepal Rastra Bank (the central bank governs inbound and outbound foreign exchange, capital repatriation and loan registration). A minimum FDI threshold applies, and certain sectors are restricted or reserved. Branch operation is possible but the 5% profit-repatriation tax and permanent-establishment exposure make a subsidiary the common choice.

Repatriation and treaty planning

Profits are repatriated as dividends (5% final withholding) or, for a branch, on remittance (5%). Interest and royalty flows to a foreign parent bear 15% domestic withholding unless a treaty reduces it, so financing and IP structures should be checked against Nepal's treaty network. Because thin-capitalization and transfer-pricing rules apply, intra-group debt and service charges must be priced and documented at arm's length. Repatriation also requires central-bank clearance and evidence that Nepali tax has been settled.

Compliance culture and risk points

The most frequent practical pitfalls are TDS: withholding agents are strictly liable for under-deducted or unremitted tax, and TDS is a heavily audited area. Other common issues include VAT input-credit denials where documentation is incomplete, disputes over the classification of 'special industry' concessions, and the Nepali-calendar deadline conversions that trip up foreign finance teams. Engaging a local licensed practitioner for statutory audit (mandatory for most companies), PAN/VAT registration and monthly filings is standard practice.