Introduction to Income Tax System in Nepal
Income tax represents a direct tax levied on the income earned by individuals residing in Nepal or deriving income from sources within Nepal. The Income Tax Act, 2058 (2002) serves as the primary legislation governing income taxation in the country, replacing the previous Income Tax Act of 1974. The Inland Revenue Department, operating under the Ministry of Finance, administers and collects income tax from individuals, businesses, and other entities throughout Nepal.
The taxation system in Nepal follows a self-assessment principle where taxpayers bear the responsibility of calculating their tax liability, filing returns, and making payments within prescribed timeframes. Individual taxpayers include natural persons earning income through employment, business operations, investments, or other sources recognized under tax legislation. The government collects income tax to fund public services, development projects, and administrative operations across the nation.
Nepal operates on a fiscal year running from mid-July (Shrawan 1) to mid-July of the following year, aligned with the Nepali calendar system. This fiscal year framework determines tax calculation periods, filing deadlines, and assessment procedures for individual taxpayers. Understanding the fundamental structure of income taxation helps individuals meet their legal obligations while optimizing legitimate deductions and exemptions available under current tax laws. Medha Law and Partners Is a leading corporate law firm in Nepal.
Legal Framework Governing Individual Income Tax
Income Tax Act 2058 (2002)
The Income Tax Act, 2058 forms the cornerstone of taxation legislation in Nepal, providing comprehensive provisions for assessing, collecting, and administering income tax. Section 2 of the Act defines income broadly to include gains and profits from any source, encompassing employment income, business profits, investment returns, and other receipts. The Act applies to all individuals who are residents of Nepal or who derive income from Nepali sources, regardless of their residential status.
Section 4 of the Income Tax Act establishes the charging provision, stating that income tax shall be charged for each income year on the income of every person. The Act distinguishes between resident and non-resident individuals, with residents subject to tax on their worldwide income while non-residents face taxation only on Nepal-sourced income. This territorial approach to taxation aligns with international tax principles while protecting Nepal’s tax base.
Income Tax Rules 2059 (2002)
The Income Tax Rules, 2059 provide detailed procedural guidelines for implementing provisions contained in the Income Tax Act. These rules specify formats for tax returns, documentation requirements, filing procedures, and administrative processes that taxpayers must follow. Rule 3 outlines the registration requirements for taxpayers, mandating Permanent Account Number (PAN) registration before conducting specified business activities or reaching income thresholds.
The Rules contain schedules prescribing various forms used in tax administration, including return forms for different taxpayer categories, assessment orders, and correspondence templates. Rule 24 details the procedures for filing income tax returns, including methods of submission, authentication requirements, and deadline extensions. These procedural provisions ensure uniformity in tax administration across different revenue offices throughout Nepal.
Relevant Sections and Provisions
Section 7 of the Income Tax Act addresses income from employment, treating salaries, wages, allowances, and benefits as taxable income. The section requires employers to withhold tax at source from employee remuneration and remit it to government accounts. Section 8 covers income from business operations, applying to individuals engaged in trade, profession, or vocational activities. Business income calculation follows accounting principles with adjustments for tax purposes as specified in the Act.
Section 9 deals with investment income, including interest, dividends, rent, and capital gains. These income categories attract specific tax treatments, with some qualifying for reduced rates or exemptions. Section 10 provides for taxation of other income not falling under preceding categories, ensuring comprehensive coverage of all income types. Section 12 establishes the basis for computing taxable income by allowing deductions for expenses incurred in generating income, subject to specified conditions and limitations.
Permanent Account Number Registration
Requirement for PAN Registration
The Permanent Account Number serves as a unique identification code assigned to taxpayers for all tax-related transactions and communications with revenue authorities. Section 90 of the Income Tax Act empowers the Inland Revenue Department to assign PAN to taxpayers and maintain records of registered individuals. Every person liable to pay income tax, value-added tax, or excise duty must obtain PAN before commencing business operations or filing tax returns.
Rule 3 of the Income Tax Rules specifies categories of persons required to register for PAN, including individuals whose annual income exceeds the tax exemption threshold, those engaged in business requiring VAT registration, and persons subject to tax withholding obligations. Additionally, individuals seeking to open bank accounts, register vehicles, purchase property, or enter into government contracts must obtain PAN as a prerequisite. The mandatory nature of PAN registration ensures proper tracking of taxpayer activities and facilitates efficient tax administration.
PAN Registration Process
Individuals can register for PAN through multiple channels, including physical submission at Inland Revenue Offices or online registration through the Inland Revenue Department’s electronic portal. The online registration system allows applicants to complete the entire process remotely, receiving their PAN certificate electronically upon successful registration. Applicants must access the IRD’s official website, navigate to the taxpayer registration section, and complete the online application form with required personal information. Medha Law and Partners Is a leading law firm in Nepal.
Documents Required for PAN Registration:
- Citizenship certificate or passport (for Nepali citizens)
- Passport and visa documents (for foreign nationals)
- Recent passport-sized photographs
- Proof of residential address
- Business registration certificate (for business owners)
- Partnership deed (for partners in firms)
- Contact information including mobile number and email address
The registration process requires applicants to provide personal details such as full name, date of birth, permanent address, temporary address, contact information, and occupation details. For individuals engaged in business activities, additional information regarding business type, location, and registration details becomes necessary. The system validates submitted information against citizenship databases and other government records to prevent duplicate registrations and ensure data accuracy.
PAN Certificate Issuance
Upon successful verification of submitted information and documents, the Inland Revenue Department issues a PAN certificate containing the taxpayer’s unique nine-digit identification number. The certificate displays the taxpayer’s name, address, PAN number, and registration date. Individuals receive their PAN certificates electronically through email or can collect physical copies from the revenue office where they submitted their application.
The PAN number follows a specific format consisting of nine digits, with the first three digits indicating the taxpayer category and registration office, the middle five digits representing a sequential number, and the final digit serving as a check digit for validation purposes. Taxpayers must quote their PAN on all correspondence with tax authorities, payment challans, tax returns, and official documents requiring tax identification. Loss or damage of PAN certificates requires immediate reporting to the revenue office for issuance of duplicate certificates upon payment of prescribed fees.
Types of Income Subject to Tax
Employment Income
Employment income encompasses all remuneration received by individuals for services rendered under employer-employee relationships. Section 7 of the Income Tax Act defines employment income to include basic salary, allowances, bonuses, commissions, perquisites, retirement contributions, and any other benefits received in cash or kind. Employers must withhold tax from employee remuneration before payment and remit the deducted amount to government accounts within specified timeframes.
The taxable employment income calculation includes various components beyond basic salary. Dearness allowance, festival allowance, overtime pay, performance bonuses, and commission payments form part of taxable remuneration. Facility-based benefits such as housing, vehicles, telephone services, and education expenses provided by employers also constitute taxable perquisites valued at prescribed rates. However, certain allowances receive exemption treatment under tax laws, reducing the overall tax burden on employees.
Business and Professional Income
Individuals engaged in trade, manufacturing, service provision, or professional practice generate business income subject to taxation under Section 8 of the Income Tax Act. Business income includes profits from sole proprietorships, professional practices, freelance activities, and contractual services. The Act requires taxpayers to maintain proper books of accounts recording all business transactions, income receipts, and expense payments throughout the fiscal year.
Professional income arises from practice of specialized skills and knowledge in fields such as medicine, engineering, law, accounting, architecture, and consultancy. Professionals operating independent practices must register for PAN, maintain accounting records, and file annual tax returns declaring their professional receipts and allowable expenses. The difference between gross receipts and deductible expenses determines the taxable professional income subject to applicable tax rates.
Investment Income
Investment income includes returns generated from financial assets and property holdings owned by individuals. Section 9 of the Income Tax Act categorizes investment income into interest income, dividend income, rental income, and capital gains. Banks, financial institutions, and other payers must withhold tax at source from interest and dividend payments before crediting amounts to investor accounts. The withheld tax serves as advance payment against the taxpayer’s annual tax liability.
Interest income arises from deposits in banks, lending transactions, bonds, debentures, and other debt instruments. Dividend income represents distributions from corporate profits to shareholders holding equity investments. Rental income derives from leasing residential or commercial property to tenants, with net rental income calculated after deducting property taxes, maintenance expenses, and depreciation allowances. Capital gains result from disposal of capital assets at prices exceeding their acquisition cost, with holding period determining applicable tax rates.
Other Sources of Income
Section 10 of the Income Tax Act addresses income from other sources not covered under employment, business, or investment categories. This residual category includes prizes, awards, royalties, gifts exceeding specified thresholds, casual receipts, and income of indeterminate nature. Income from lottery winnings, game shows, competitions, and similar events falls under this category and attracts taxation at specified rates.
Royalty income received by individuals for use of intellectual property, patents, copyrights, trademarks, or technical know-how constitutes other income subject to withholding tax by payers. Gifts received during marriage, inheritance, or from relatives within specified degrees of relationship enjoy exemption from taxation. However, gifts from non-relatives exceeding prescribed thresholds become taxable in the recipient’s hands. Income from cancelled debts, keyman insurance policies, and unauthorized business activities also falls under the other sources category.
Tax Rates for Individuals
Tax Slabs and Rates for Resident Individuals
The Income Tax Act prescribes progressive tax rates for resident individuals, with tax liability increasing as income rises through defined brackets. For the current fiscal year, individuals with annual income up to NPR 500,000 enjoy complete exemption from income tax. This threshold amount applies separately to married couples filing jointly, effectively doubling the exemption limit for families where both spouses earn income.
Tax Rate Structure for Individuals:
- Income from NPR 0 to NPR 500,000: 1% (effectively exempt due to rebate)
- Income from NPR 500,001 to NPR 700,000: 10%
- Income from NPR 700,001 to NPR 2,000,000: 20%
- Income from NPR 2,000,001 to NPR 5,000,000: 30%
- Income above NPR 5,000,000: 36%
The progressive rate structure ensures that taxpayers contribute proportionately based on their capacity to pay, with higher income earners facing greater tax obligations. The first NPR 500,000 of income remains exempt, with each additional rupee taxed at applicable marginal rates as income increases through the brackets. This marginal tax system prevents sudden jumps in tax liability when income crosses bracket thresholds.
Taxation of Non-Resident Individuals
Non-resident individuals face taxation only on income derived from sources within Nepal, with worldwide income remaining outside the tax net. Section 6 of the Income Tax Act defines non-residents as natural persons who do not satisfy residence criteria specified in Section 5. Non-residents pay tax at a flat rate of 25% on most categories of Nepal-sourced income, without benefit of progressive rate slabs available to residents.
Specific categories of non-resident income attract withholding tax at source, with payers responsible for deducting and remitting tax before making payments to non-residents. Interest payments to non-residents face withholding at 15%, dividend income attracts 5% withholding, and royalty payments suffer 15% tax deduction at source. These final withholding taxes discharge the non-resident’s tax obligation, eliminating the need for return filing in most cases.
Special Provisions for Senior Citizens
The Income Tax Act recognizes the reduced earning capacity and increased needs of elderly citizens by providing enhanced exemption thresholds and preferential tax treatment. Senior citizens aged 60 years and above receive additional tax benefits compared to regular taxpayers, acknowledging their life stage and limited income sources. These provisions aim to provide financial relief to retired individuals depending primarily on savings and pension income.
Senior citizens benefit from an increased annual exemption threshold, with the first NPR 600,000 of their income remaining tax-free compared to NPR 500,000 for regular taxpayers. This additional exemption of NPR 100,000 reduces tax liability for elderly individuals with modest retirement income. The progressive tax rates apply to income exceeding the exemption threshold, calculated in the same manner as for other individual taxpayers.
Calculation of Taxable Income
Gross Income Computation
Taxable income calculation begins with determining gross income from all sources during the fiscal year. Taxpayers must aggregate employment income, business profits, investment returns, and other receipts to arrive at total gross income. Employment income includes salary, allowances, bonuses, and the value of perquisites provided by employers. Business income represents gross receipts from trading, manufacturing, or service activities before deducting business expenses.
Investment income aggregation requires adding interest receipts, dividend income, rental receipts, and capital gains realized during the year. Other income includes prizes, awards, royalties, and miscellaneous receipts not fitting other categories. The gross income figure serves as the starting point for calculating taxable income, subject to adjustments for allowable deductions and exemptions prescribed under tax legislation.
Allowable Deductions and Expenses
Section 12 of the Income Tax Act permits deductions for expenses incurred wholly and exclusively in deriving assessable income, subject to specified conditions and limitations. Business taxpayers can deduct direct costs of goods sold, operational expenses, salary payments, rent, utilities, depreciation, and finance charges from gross business receipts. Employment expenses generally receive limited deduction treatment, with specific allowances enjoying exemption rather than deduction status.
Common Allowable Deductions:
- Business operational expenses
- Cost of goods sold in trading businesses
- Salary and wages paid to employees
- Rent for business premises
- Depreciation on business assets
- Interest on business loans
- Professional fees and consultancy charges
- Repairs and maintenance expenses
- Insurance premiums for business assets
- Bad debts written off during the year
Investment income deductions include expenses incurred in earning interest, dividends, or rental income. Property owners can deduct local taxes, insurance, repairs, and maintenance costs from gross rental receipts. Depreciation allowances calculated at prescribed rates reduce the cost basis of depreciable assets used in income generation. However, personal expenses, capital expenditure, and payments for prohibited activities face disallowance under tax laws.
Exempt Income Categories
The Income Tax Act provides exemptions for specified categories of income to promote social welfare, encourage savings, and support particular sectors. Section 11 lists various exempt income categories, including agricultural income derived from land situated in Nepal, income from life insurance payouts, and receipts from provident fund withdrawals. These exemptions either receive complete exclusion from tax calculations or partial exemption up to specified limits.
Major Exempt Income Categories:
- Agricultural income from farming activities
- Income from life insurance policy maturity
- Provident fund withdrawals after completion of service
- Gifts received during marriage ceremonies
- Inheritances from deceased relatives
- Pension income up to specified limits for senior citizens
- Certain allowances for government employees
- Income of diplomatic personnel
- Scholarships and grants for education
- Income from approved retirement funds
Some exemptions apply universally to all taxpayers, while others remain available only to specific categories such as senior citizens or government employees. Taxpayers must exclude exempt income from gross income calculations and disclose exempt receipts separately in their tax returns. Proper classification of exempt versus taxable income ensures accurate tax computation and prevents disputes with revenue authorities during assessments.
Tax Deductions and Rebates
Life Insurance Premium Deductions
Section 12 of the Income Tax Act allows individuals to claim deductions for life insurance premiums paid during the fiscal year, encouraging long-term savings and financial security. Taxpayers paying premiums for life insurance policies taken on their own life or their spouse’s life can deduct the premium amount from their gross income. The deduction remains available whether premiums are paid for term insurance, endowment policies, or whole life insurance products.
The maximum deduction for life insurance premiums stands capped at NPR 25,000 per fiscal year for individual taxpayers. This limitation applies to the total of all life insurance premium payments during the year, regardless of the number of policies held. To claim this deduction, taxpayers must obtain receipts from insurance companies and attach copies to their tax returns. The insurance policies must remain in force, and premiums must be actually paid during the relevant fiscal year to qualify for deductions.
Contribution to Provident Fund
Employer and employee contributions to approved provident fund schemes qualify for tax deductions under Section 12(2) of the Income Tax Act. Employees contribute a portion of their salary to provident fund accounts maintained by employers or approved fund managers. These contributions accumulate over the employment period, generating retirement savings for employees. Both employee contributions deducted from salary and employer contributions on behalf of employees receive favorable tax treatment.
Employee contributions to approved provident funds receive deduction treatment up to 31% of the employee’s basic salary or NPR 300,000, whichever is less. This provision encourages employees to build retirement savings through systematic contributions during their working years. The accumulated provident fund balance, including contributions and accrued interest, becomes available to employees upon retirement, resignation, or termination of employment. Withdrawals from provident funds after completion of employment remain exempt from taxation.
Medical and Education Expenses
The tax law recognizes the financial burden of medical treatment and education expenses on families by providing deduction opportunities for specified categories of payments. Medical expenses incurred for treatment of serious diseases and health conditions qualify for deductions up to prescribed limits. Similarly, education expenses for dependent children receive deduction treatment, reducing the taxable income of parents supporting their children’s education.
Medical expense deductions apply to payments made for treatment of kidney disease, cancer, heart disease, brain surgery, organ transplantation, and other life-threatening conditions. Taxpayers can deduct actual medical expenses up to NPR 750 for self or dependent family members, or 15% of assessable income, whichever is less. Documentation from recognized medical institutions becomes mandatory for claiming medical expense deductions. Education fee payments for dependent children studying in schools, colleges, or universities qualify for deductions up to NPR 50,000 per child annually.
Social Security Fund Contributions
Employees covered under the Social Security Fund scheme established by the Social Security Act receive tax benefits for contributions made to the fund. The Social Security Fund provides benefits for workplace injuries, medical treatment, maternity, retirement, and dependent family members. Both employers and employees contribute to the fund based on prescribed percentages of employee remuneration, with contribution rates varying based on coverage categories.
Employee contributions to Social Security Fund accounts receive deduction from assessable income, reducing tax liability. The deductible amount includes mandatory employee contributions deducted from salary by employers and remitted to the Social Security Fund. These contributions build social security benefits for employees, providing financial protection against specified contingencies. The tax deduction for social security contributions applies in addition to other allowable deductions such as provident fund and insurance premiums.
Investment in Bonds and Securities
The government periodically issues special bonds and securities offering tax incentives to encourage savings and channel funds toward development projects. Citizens Savings Bonds, infrastructure bonds, and debentures issued by specified institutions may qualify for tax deductions or exemptions under special provisions. Interest income from certain government securities receives exemption from taxation, enhancing after-tax returns for investors.
Investment in approved long-term savings schemes operated by banks and financial institutions may qualify for tax benefits subject to conditions specified in annual Finance Acts. These schemes typically require investors to lock in funds for specified periods, restricting premature withdrawals. The tax benefits take the form of deductions for investment amounts or exemptions for interest income, depending on scheme provisions. Taxpayers claiming investment-related deductions must maintain investment certificates and submit copies with their tax returns.
Tax Return Filing Procedures
Who Must File Tax Returns
Section 91 of the Income Tax Act mandates filing of income tax returns by all taxpayers having assessable income during a fiscal year. Individuals whose total income exceeds the exemption threshold must file returns even if no tax liability arises after applying deductions and rebates. Persons engaged in business or professional activities requiring PAN registration must file returns regardless of profit or loss positions. Employees subject to tax withholding by employers generally must file returns to report complete income and claim refunds of excess tax deducted.
Categories Required to File Tax Returns:
- Individuals with annual income exceeding NPR 500,000
- Business owners and professionals with PAN registration
- Employees receiving salary above exemption thresholds
- Individuals subject to tax assessments in previous years
- Persons claiming refunds of excess tax withheld
- Non-residents receiving Nepal-sourced income
- Individuals disposing of capital assets during the year
- Partners in partnership firms regardless of income levels
Even taxpayers with income below exemption thresholds may voluntarily file returns to establish income documentation for visa applications, loan approvals, or government contract participations. Return filing creates official records of income and tax compliance, supporting various administrative and financial transactions. The Inland Revenue Department encourages voluntary return filing to expand the tax base and promote compliance culture.
Return Filing Deadlines
The Income Tax Act establishes specific deadlines for filing income tax returns based on taxpayer categories and income types. For individuals deriving income from business or professional activities, returns must reach revenue offices by Poush end (mid-January) of the fiscal year following the income year. This extended deadline recognizes the time required for business taxpayers to prepare financial statements and complete accounting processes.
Individuals receiving only employment income or investment income face a later deadline of Kartik end (mid-November) of the fiscal year following the income year. This category includes salaried employees, pensioners, and investors who do not operate businesses. The later deadline accommodates the simpler income structures and reduced documentation requirements for non-business taxpayers. However, taxpayers must ensure timely filing within prescribed deadlines to avoid penalties and interest charges on late submissions.
Return Forms and Formats
The Inland Revenue Department prescribes different return forms for various taxpayer categories, with each form designed to capture relevant income and deduction information. Individual taxpayers file returns using forms specified in the Income Tax Rules schedules. Form 1.1 applies to individuals deriving income from business or profession, requiring detailed income statements and balance sheets. Form 1.2 serves individuals receiving income from employment, requiring salary details and tax withheld information.
Key Return Forms for Individuals:
- Form 1.1: Return for individuals with business or professional income
- Form 1.2: Return for individuals with employment income only
- Form 1.3: Return for individuals with income from all sources
- Form 1.4: Return for non-resident individuals
Each form contains sections for personal information, income details, deduction claims, tax calculations, and signature authentication. Taxpayers must complete all applicable sections accurately, providing supporting schedules and documentation. The forms require disclosure of income from all sources, including exempt income, to enable revenue authorities to assess compliance and accuracy. Electronic versions of return forms are available on the IRD website for download and submission through online channels.
Online Return Filing Process
The Inland Revenue Department operates an electronic filing system allowing taxpayers to submit income tax returns through the internet. The online filing portal provides convenient access for taxpayers to complete and submit returns without visiting revenue offices physically. Users must first register on the IRD portal using their PAN details and create login credentials. The system guides users through return preparation with built-in validations and calculations.
Steps for Online Return Filing:
- Access the Inland Revenue Department’s official portal
- Login using PAN and registered credentials
- Select the appropriate return form based on income category
- Enter personal information and contact details
- Input income details from various sources
- Claim applicable deductions and exemptions
- Review calculated tax liability and payments made
- Upload required supporting documents
- Submit the completed return electronically
- Download and save the acknowledgment receipt
The online system automatically calculates tax liability based on entered income and deduction data, reducing calculation errors. Taxpayers can save partially completed returns and resume filing later before the deadline. Upon successful submission, the system generates an acknowledgment containing a unique return filing number for future reference. This electronic acknowledgment serves as proof of filing compliance and can be retrieved from the portal for verification purposes.
Physical Return Submission
Taxpayers preferring traditional filing methods can submit paper returns at designated Inland Revenue Offices serving their jurisdiction. Physical submission requires printing completed return forms, attaching supporting documents, and delivering them to revenue office counters during business hours. The receiving officer stamps and dates the return copy, providing acknowledgment of receipt. Taxpayers should retain copies of submitted returns and acknowledgments for their records.
When filing physical returns, taxpayers must ensure completeness and accuracy of all information provided. Incomplete returns or those lacking required attachments face rejection, requiring resubmission within deadlines. The revenue office staff review submitted returns for apparent errors or inconsistencies and may request clarifications or additional information. Physical filing requires taxpayers to maintain organized documentation and allow sufficient time for potential interactions with revenue personnel.
Documents Required for Tax Filing
For Salaried Individuals
Employees filing income tax returns must gather employment-related documents proving income receipts and tax deductions. Employers typically provide annual salary statements detailing monthly compensation, allowances, deductions, and tax withheld. These statements serve as primary evidence of employment income and advance tax payments. Additional documents include appointment letters, salary slips, promotion orders, and benefit statements showing perquisites received during the year.
Documents for Salaried Taxpayers:
- Annual salary statement from employer
- Monthly salary slips for the fiscal year
- Tax Deducted at Source certificates
- Provident fund contribution statements
- Life insurance premium payment receipts
- Medical expense bills and prescriptions
- Education fee receipts for dependent children
- Bank account statements showing salary credits
- Previous year’s tax return acknowledgment
Employees claiming deductions for insurance premiums, medical expenses, or education fees must obtain and preserve receipts from service providers. Insurance companies issue annual premium statements showing amounts paid during the fiscal year. Medical institutions provide detailed bills itemizing treatment costs and medications purchased. Educational institutions issue fee receipts confirming payments for tuition and related charges.
For Business Owners and Professionals
Individuals operating businesses or professional practices face more extensive documentation requirements reflecting the complexity of business transactions. Business taxpayers must maintain complete books of accounts throughout the year, recording all income and expense transactions systematically. Financial statements including profit and loss accounts and balance sheets become mandatory attachments to tax returns, prepared following accounting standards and tax regulations.
Documents for Business Taxpayers:
- Complete books of accounts for the fiscal year
- Audited financial statements if turnover exceeds thresholds
- Sales invoices and purchase vouchers
- Bank statements for business accounts
- Cash book and ledger records
- Stock registers and inventory statements
- Fixed asset registers with depreciation schedules
- Expense vouchers with supporting bills
- VAT registration certificate and returns
- Partnership deed for partnership firms
Businesses exceeding prescribed turnover thresholds must obtain audit reports from chartered accountants certifying the accuracy of financial statements and tax computations. The audit report accompanies the tax return, providing independent verification of declared income and expenses. Professional service providers maintain fee registers documenting client billings and payment receipts throughout the year.
For Investors and Property Owners
Individuals deriving income from investments and property holdings must gather documentation proving income receipts and related expenses. Banks and financial institutions provide interest certificates stating amounts credited to depositor accounts during the fiscal year. Dividend-paying companies issue dividend vouchers showing amounts distributed and tax deducted at source. Stock brokers furnish transaction statements detailing securities purchases, sales, and resulting capital gains or losses.
Documents for Investment Income:
- Bank interest certificates from all financial institutions
- Dividend vouchers from investee companies
- Rental agreements for properties leased
- Property tax payment receipts
- Maintenance and repair bills for rental properties
- Share transaction statements from brokers
- Mutual fund statements showing investments and redemptions
- Capital gains computation worksheets
- Property ownership documents
- Previous year’s investment records
Property owners leasing residential or commercial real estate maintain rental agreement copies, tenant payment receipts, and expense vouchers for property maintenance. Local government bodies issue property tax payment receipts confirming payment of municipal taxes. Insurance companies provide property insurance premium receipts and claim settlement documents if applicable during the year.
Tax Payment Methods
Advance Tax Payment
Section 95 of the Income Tax Act requires taxpayers to pay advance tax in installments during the income year based on estimated annual liability. This advance payment system ensures regular revenue flow to the government and reduces taxpayer burden at year-end. Business taxpayers and professionals with significant non-salary income must calculate estimated tax liability and pay advance tax in three installments during the fiscal year.
Advance Tax Installment Schedule:
- First Installment: 40% of estimated tax by Poush end (mid-January)
- Second Installment: 70% of estimated tax by Chaitra end (mid-April)
- Third Installment: 100% of estimated tax by Asadh end (mid-July)
Taxpayers estimate their annual income based on previous year figures, current year projections, and business performance indicators. The estimated income undergoes tax calculation at applicable rates, determining the advance tax obligation. Each installment represents cumulative payment, with subsequent installments covering the remaining balance. Failure to pay advance tax installments attracts interest charges calculated at rates specified in tax regulations.
Tax Deducted at Source
The withholding tax system requires payers of specified income categories to deduct tax before making payments to recipients. Employers withhold tax from employee salaries based on applicable tax rates and remit deducted amounts to government accounts monthly. Banks deduct tax from interest payments exceeding threshold amounts before crediting depositor accounts. Companies withhold tax from dividend distributions before paying shareholders.
Section 87 of the Income Tax Act establishes withholding tax obligations for various payment categories. The payer becomes responsible for calculating applicable withholding rates, deducting appropriate amounts, and remitting collections to designated government accounts within prescribed timeframes. Withholding tax serves as advance payment against the recipient’s annual tax liability, with excess deductions refundable upon return filing. Recipients receive tax deduction certificates from payers, documenting withheld amounts for claiming credit in tax returns.
Self-Assessment Payment
Taxpayers calculate their final tax liability while preparing annual returns, comparing it against advance payments and withholding tax credits. Any shortfall between calculated liability and advance payments requires payment of self-assessment tax before filing returns. The tax return accompanies proof of self-assessment tax payment, completing the annual compliance cycle. Revenue offices verify payment receipts against declared liabilities during return processing.
Payment Procedure for Self-Assessment Tax:
- Calculate total tax liability based on annual income
- Deduct advance tax payments and withholding tax credits
- Determine remaining tax payable
- Generate payment challan from IRD portal or obtain from revenue office
- Make payment at designated banks or through online channels
- Obtain payment receipt with transaction details
- Attach payment proof to tax return during submission
Electronic payment facilities enable taxpayers to transfer self-assessment tax amounts through internet banking, mobile banking, or electronic payment gateways. The payment system generates electronic receipts confirming successful transactions, eliminating paper-based payment procedures. Taxpayers should retain payment confirmation records for verification purposes and future reference during potential assessments or audits.
Payment of Additional Tax After Assessment
Tax assessments by revenue authorities may result in determination of additional tax liability beyond amounts declared in taxpayer returns. Assessment orders specify additional tax due, applicable interest charges, and payment deadlines. Taxpayers receiving assessment orders must pay demanded amounts within prescribed periods to avoid further interest accumulation and penalty imposition. Assessment orders provide detailed calculations explaining adjustments made to declared income and resulting tax differences.
Taxpayers disagreeing with assessment determinations can file appeals with higher authorities while making payment of undisputed tax portions. The appeal process allows taxpayers to challenge erroneous assessments, incorrect computation, or improper disallowance of deductions. However, appeal filing does not suspend payment obligations for assessed taxes. Revenue authorities may initiate recovery proceedings for unpaid assessment demands through bank account attachments, property seizure, or other enforcement mechanisms.
Penalties and Interest for Non-Compliance
Late Filing Penalties
Section 117 of the Income Tax Act imposes penalties for failure to file income tax returns within prescribed deadlines. Taxpayers filing returns after the deadline but before receiving assessment notices face penalties calculated as a percentage of tax liability. The penalty rate varies based on delay duration, increasing progressively for extended periods of non-filing. These penalties aim to encourage timely compliance and compensate for administrative costs of pursuing delinquent taxpayers.
The penalty for late return filing stands at NPR 5,000 or 0.02% of assessed tax liability for each day of delay, whichever is higher. However, the total penalty amount cannot exceed the assessed tax liability. Taxpayers filing returns within three months after the deadline face reduced penalty rates compared to those filing after longer delays. The penalty calculation begins from the day following the filing deadline and continues until the return submission date.
Interest on Late Tax Payment
Taxpayers failing to pay advance tax installments, self-assessment tax, or assessed tax within deadlines face interest charges on unpaid amounts. Section 119 of the Income Tax Act prescribes interest at 15% per annum on delayed tax payments, calculated from the due date until the actual payment date. Interest charges apply separately to unpaid advance tax installments, self-assessment shortfalls, and assessment demands, accumulating until full payment completion.
The 15% annual interest rate translates to approximately 1.25% per month on overdue tax amounts. Interest calculations follow the compound interest method, with unpaid interest amounts added to the principal tax liability for subsequent period calculations. The significant interest burden motivates taxpayers to maintain payment discipline and avoid delays. However, genuine hardship cases may receive interest waivers or reductions upon application to revenue authorities with supporting evidence.
Penalties for Tax Evasion
Deliberate tax evasion through concealment of income, falsification of accounts, or fraudulent deductions attracts severe penalties under Section 120 of the Income Tax Act. Tax evasion differs from simple non-compliance, involving intentional acts to reduce tax liability through illegal means. Discovered evasion cases result in penalties equal to 100% of evaded tax amounts, effectively doubling the taxpayer’s burden beyond the original tax liability.
Acts Constituting Tax Evasion:
- Deliberate concealment of income or receipts
- Maintaining false books of accounts
- Claiming fictitious expenses or deductions
- Providing false information in tax returns
- Suppressing material facts affecting tax liability
- Creating artificial transactions to reduce tax
- Using forged documents for tax claims
- Misrepresenting facts during assessments or audits