Introduction

Understanding how your salary is taxed in Nepal can be confusing, especially with various deductions and provisions. This comprehensive guide will help you understand Tax Deduction at Source (TDS), Social Security Fund (SSF) deductions, approved retirement funds, and other tax-saving opportunities available to salaried employees in Nepal.

What is TDS (Tax Deduction at Source)?

TDS stands for Tax Deduction at Source. It’s the amount of tax that your employer deducts from your salary before paying you. Think of it as paying your taxes in advance throughout the year instead of paying a lump sum at the end.

How TDS Works:

• Your employer calculates your estimated annual tax liability

• Deducts a portion of this tax from each month’s salary

• Deposits this amount to the government on your behalf

• You receive your salary after TDS deduction (net salary)

Example: If your monthly salary is Rs. 50,000 and your employer calculates Rs. 5,000 as monthly TDS, you receive Rs. 45,000 as net salary.

Nepal Tax Slabs for FY 2081/82 and 2082/83

FY 2081/82 & 2082/83 Tax Slabs

For Unmarried Individuals:

• 0 - 5,00,000: 1%

• 5,00,001 - 7,00,000: 10%

• 7,00,001 - 10,00,000: 20%

• 10,00,001 - 20,00,000: 30%

• Above 20,00,000: 36%

For Married Individuals:

• 0 - 6,00,000: 1%

• 6,00,001 - 8,00,000: 10%

• 8,00,001 - 11,00,000: 20%

• 11,00,001 - 21,00,000: 30%

• Above 21,00,000: 36%

Understanding Taxable Income

Your taxable income is calculated as: Taxable Income = Total Income - Total Deductions

What Constitutes Total Income?

• Basic Salary

• Dearness Allowance

• House Rent Allowance

• Travel Allowance

• Medical Allowance

• Festival allowance

• Bonus

• Overtime

• Other allowances

• EPF Employer Contribution (if applicable)

• SSF contributions (if applicable)

• Other Compensation related to employment

Social Security Fund (SSF) - Complete Guide

SSF is a mandatory social security scheme for employees in Nepal that provides various benefits including provident fund, gratuity, and medical benefits.

SSF Contribution Structure

Total SSF Contribution: 31% of Basic Salary

• Employee Contribution: 11%

  • Provident Fund: 10%

  • Additional: 1%

• Employer Contribution: 20%

  • Provident Fund: 10%

  • Gratuity: 8.33%

  • Additional: 1.67%

  • SST (Social Security Tax): 1%

How SSF Affects Your Tax

1. SSF Income Addition:

• Your employer’s SSF contributions are added to your income

• This includes: Provident Fund (10%), Gratuity (8.33%), Additional (1.67%)

2. SSF Deductions:

• Your SSF contributions are deductible from taxable income

• This includes: PF Deduction (20%), Gratuity Deduction (8.33%), Additional Deduction (1.67%), SST (1%)

3. Special SSF Benefit:

• If you’re enrolled in SSF, the 1% tax slab is completely waived

• This means you start paying tax from the 10% slab onwards

SSF Example Calculation

Scenario: Basic Salary Rs. 30,000 per month

SSF Income Additions:

• SSF Provident Fund (10%): Rs. 3,000/month

• SSF Gratuity (8.33%): Rs. 2,499/month

• SSF Additional (1.67%): Rs. 501/month

• Total SSF Income: Rs. 6,000/month

SSF Deductions:

• SSF PF Deduction (20%): Rs. 6,000/month

• SSF Gratuity Deduction (8.33%): Rs. 2,499/month

• SSF Additional Deduction (1.67%): Rs. 501/month

• SSF SST (1%): Rs. 300/month

• Total SSF Deductions: Rs. 9,300/month

Net SSF Impact: Rs. 6,000 (income) - Rs. 9,300 (deductions) = -Rs. 3,300 (net deduction)

Employee Provident Fund (EPF)

EPF is another retirement benefit scheme, though less common than SSF in Nepal.

EPF Contribution Structure

Total EPF Contribution: 20% of Basic Salary

• Employee Contribution: 10%

• Employer Contribution: 10%

EPF Tax Treatment

1. EPF Income Addition:

• Employer’s 10% contribution is added to your income

2. EPF Deductions:

• Total EPF contribution (20%) is deductible from taxable income

Example: Basic Salary Rs. 40,000/month

• EPF Income Addition: Rs. 4,000/month (employer’s 10%)

• EPF Deduction: Rs. 8,000/month (total 20%)

• Net EPF Impact: Rs. 4,000 - Rs. 8,000 = -Rs. 4,000 (net deduction)

Approved Retirement Fund - Understanding the 1/3 Rule

The government allows deductions for approved retirement fund contributions with specific limits.

Key Provisions:

1. Deduction Limit:

• Maximum deduction allowed: 1/3 of total income OR Rs. 5,00,000, whichever is lower

2. What Qualifies:

• SSF contributions (all components)

• EPF contributions

• CIT (Citizen Investment Trust) contributions

• Other approved retirement fund contributions

Example Calculation:

Scenario: Total annual income Rs. 12,00,000

Retirement Fund Contributions:

• SSF Total: Rs. 1,11,600 (31% of basic salary)

• EPF Total: Rs. 96,000 (20% of basic salary)

• CIT: Rs. 50,000

• Total Retirement Contributions: Rs. 2,57,600

Deduction Limit Calculation:

• 1/3 of total income: Rs. 12,00,000 ÷ 3 = Rs. 4,00,000

• Maximum allowed: Rs. 4,00,000 (lower of 1/3 income or Rs. 5,00,000)

• Actual deduction: Rs. 2,57,600 (since it’s less than the limit)

Other Important Deductions

1. Life Insurance Premium

• Limit: Maximum Rs. 40,000 per year

• What qualifies: Premiums paid for life insurance policies

• Example: If you pay Rs. 50,000 in life insurance premiums, only Rs. 40,000 is deductible

2. Medical Insurance Premium

• Limit: Maximum Rs. 20,000 per year

• What qualifies: Health insurance premiums

• Example: If you pay Rs. 25,000 in medical insurance, only Rs. 20,000 is deductible

3. Insurance of Private Building

• Limit: Maximum Rs. 5,000 per year

• What qualifies: Insurance premiums for your residential property

• Example: If you pay Rs. 8,000 in building insurance, only Rs. 5,000 is deductible

Female Tax Rebate

Female employees in Nepal are eligible for a special tax rebate.

Provisions:

• Rebate Amount: 10% of total tax liability

• Eligibility: All female employees

• Application: Automatically applied when female option is selected

Example:

• Total tax liability: Rs. 50,000

• Female rebate: Rs. 50,000 × 10% = Rs. 5,000

• Final tax payable: Rs. 45,000

Employment Status and Tax Calculation

1. Full Year Employment

• Works for the entire fiscal year

• Tax calculation based on 12 months

• Standard calculation method

2. Joined in the Middle

• Employee joins during the fiscal year

• If had previous employment, consider the income and TDS deducted in previous employment

• If no previous employment, Tax calculation based on remaining months

• Example: Joined in month 4, tax calculated for 9 months if no previous employment.

3. Terminated in the Middle

• Employee leaves during the fiscal year

• Tax calculation based on months worked

• Example: Left in month 8, tax calculated for 8 months and can be adjusted in the last month of the employment

• If TDS already deducted is higher as it is calculated assuming whole year employment, it can be adjusted against the next employment within that fiscal year.

Step-by-Step Tax Calculation Example

Let’s calculate TDS for a comprehensive example:

Employee Details:

• Basic Salary: Rs. 45,000/month

• Dearness Allowance: Rs. 30,000/month

• House Rent Allowance: Rs. 15,000/month

• Marital Status: Married

• Fiscal Year: 2081/82

• Enrolled in SSF

• Female employee

• Life Insurance Premium: Rs. 35,000/year

• Medical Insurance: Rs. 15,000/year

Step 1: Calculate Total Income

• Basic Salary: Rs. 45,000 × 12 = Rs. 5,40,000

• Dearness Allowance: Rs. 30,000 × 12 = Rs. 3,60,000

• House Rent Allowance: Rs. 15,000 × 12 = Rs. 1,80,000

• SSF Income Additions: Rs. 6,000 × 12 = Rs. 72,000

• Total Income: Rs. 11,52,000

Step 2: Calculate Deductions

• SSF Deductions: Rs. 9,300 × 12 = Rs. 1,11,600

• Life Insurance Premium: Rs. 35,000 (within limit of Rs. 40,000)

• Medical Insurance: Rs. 15,000 (within limit of Rs. 20,000)

• Total Deductions: Rs. 1,61,600

Step 3: Calculate Taxable Income

• Taxable Income = Rs. 11,52,000 - Rs. 1,61,600 = Rs. 9,90,400

Step 4: Calculate Tax (SSF waiver applies)

• 0 - 6,00,000: Rs. 0 (waived due to SSF)

• 6,00,001 - 8,00,000: Rs. 2,00,000 × 10% = Rs. 20,000

• 8,00,001 - 9,90,400: Rs. 1,90,400 × 20% = Rs. 38,080

• Total Tax: Rs. 58,080

Step 5: Apply Female Rebate

• Female Rebate: Rs. 58,080 × 10% = Rs. 5,808

• Final Tax: Rs. 52,272

Step 6: Calculate Monthly TDS

• Annual TDS: Rs. 52,272

• Monthly TDS: Rs. 52,272 ÷ 12 = Rs. 4,356

Tips for Tax Optimization

1. Maximize Retirement Fund Contributions

• Contribute to SSF if available

• Consider CIT contributions to utilize 1/3 limit or 5 lakhs

• Utilize the full 1/3 limit

2. Optimize Insurance Deductions

• Maintain life insurance up to Rs. 40,000 limit

• Get health insurance up to Rs. 20,000 limit

• Consider building insurance up to Rs. 5,000

3. Plan Your Allowances

• Structure salary to include deductible allowances

• Utilize remote allowance if applicable

• Consider approved retirement fund contributions

4. Employment Planning

• Plan job changes considering fiscal year

• Understand tax implications of mid-year employment changes

Common Mistakes to Avoid

1. Ignoring SSF Benefits

• Many employees don’t realize SSF waives the 1% tax slab

• SSF provides significant tax savings

2. Not Utilizing Deduction Limits

• Failing to claim maximum allowed deductions

• Not maintaining proper documentation

3. Incorrect Employment Status

• Not updating employment status when changing jobs

• Incorrect months calculation for partial year employment

4. Missing Female Rebate

• Female employees forgetting to claim the 10% rebate

• Not updating personal information

Documentation Requirements

Keep Records For:

• Salary slips

• SSF/EPF contribution certificates

• Insurance premium receipts

• Remote allowance documentation

• Employment contracts and termination letters

For Tax Filing:

• Form 16 (TDS certificate from employer)

• Investment proofs

• Insurance premium receipts

• Bank statements for interest income

Conclusion

Understanding Nepal’s salary TDS provisions can help you optimize your tax liability and maximize your take-home pay. Key takeaways:

1. SSF provides significant tax benefits - both through deductions and 1% slab waiver

2. Retirement fund contributions are highly beneficial with the 1/3 rule

3. Insurance premiums offer good tax savings within limits

4. Female employees get an additional 10% rebate

5. Employment status affects tax calculation significantly

Use our Nepal Salary TDS Calculator to calculate your exact TDS and understand how different factors affect your tax liability. The calculator considers all the provisions discussed in this guide and provides detailed breakdowns for better understanding.

Remember, tax laws can change, so always consult with a tax professional for the most current information and personalized advice.

This guide is for educational purposes. For specific tax advice, please consult with a qualified tax professional or chartered accountant.

Need help calculating your TDS? Try our free Nepal Salary TDS Calculator for accurate calculations with detailed breakdowns.