When you get paid, it seems easy: you work, you get paid. But there is a lot more work that goes behind the scenes that determine how much you pay in taxes. If you are a salaried worker, you probably have a payslip with confusing, perplexing terms that are all centered around taxes. Most people are scared or overwhelmed by these terms. Once you break it down, it is not really that complicated.
What Is a Tax Slab?
A tax slab is essentially a range of income that is taxed at a specific rate. Nepal follows a progressive tax system, which means that as your income increases, different portions of your income are taxed at different rates.
Tax Rate
| For Individual | For Couple | Tax Rate |
| Up to Rs.5,00,000 | Up to Rs.6,00,000 | 1%* |
| Next Rs.2,00,000 | Next Rs.2,00,000 | 10% |
| Next Rs.3,00,000 | Next Rs.3,00,000 | 20% |
| Next Rs.10,00,000 | Next Rs.9,00,000 | 30% |
| Next Rs.30,00,000 | Next Rs.30,00,000 | 36% |
| Balance (above 50,00,000) | Balance (above 50,00,000) | 39% |
Common Misconceptions About Tax Slabs
One of the biggest misconceptions is that moving into a higher slab means your entire income is taxed at that higher rate. That’s not how it works. Only the portion that falls into the higher slab is taxed at that rate.
Another common misunderstanding is ignoring the role of exemptions and deductions. Even if your income falls within a certain slab, your taxable income may be lower due to various exemptions. That’s why understanding slabs alone isn’t enough—you need to understand how your income is calculated.
What Is Taxable Income?
Components Included in Taxable Income
Taxable income is the portion of your total earnings on which tax is actually calculated. It is not your full salary—it’s your salary after adjusting for exemptions, deductions, and allowable reductions.
In employment, taxable income generally includes:
1) Payments of wages, salary, leave pay (including salary in lieu of leave and encashment of accumulated home, sick etc. leave), overtime pay, fees, commissions, prizes, gifts, bonuses.
2) Payments of any personal allowances including any cost of living, subsistence allowance, rent allowance, entertainment allowance and transportation allowance.
Except
Travelling and daily allowance (TADA)
Meeting allowance
Widow, Elder citizen, Disabled allowance paid by government
3) Reimbursement of personal expenses of employees by employer.
4) Payments for the restriction accept related to employment or agreement to any conditions of the employment.
5) Payments for termination or loss of service or compulsory retirement
6) Contribution to retirement fund by employer.
7) Amounts required to be included in employment due to change in tax accounting.
8) Transfer of the asset: In case of the transfer of the asset from employer to employee, the market value of such asset is included in the employee’s income.
9) Vehicle facility for personal and official purpose
a) Vehicle facility provided by employer
i) Vehicle provided with driver, fuel and maintenance expenses.
0.5% of annual salary
ii) Provided vehicle only.
0.5% of total annual salary
iii) Provided only driver, fuel, and maintenance expenses
All amounts received from employers include in income.
b) Vehicle facility provided by other than employer
1% of the market value of a vehicle should be included in the income.
10) House facility (including rent-free accommodation) for personal purpose:
House facility provided by employer
2% of total annual salary
House facility provided by other than employer,
25% of actual rent
11) Expenses incurred by employer for the provision of domestic assistants, food, household utilities of employee the
12) Difference of actual interest and interest as pre market rate in case of a soft loan
13) Compensation received
14) Personal expenses of employee directly paid by the employer
What Is Non-Taxable Income?
Types of Income That Are Not Taxed
Non-taxable income refers to income that is legally exempt from tax. These are specific categories of earnings or benefits that the government chooses not to tax, often to encourage savings, welfare, or specific behaviors.
Non-Taxable Income include:
– Exempt amount under section 10 of Income Tax Act 2058.
– Final withholding payments
– Meals and refreshments on similar terms.
– Discharge or reimbursement of expenses used for employer’s business purpose or employer’s admissible deductions from business or investment.
– Payments of small amounts
– Payment of an amount not exceeding Rs.500 at a time as the payment of a small amount in this respect for a provision of tea, stationery, gifts, reward, awards, emergency medical treatment or other similar expenses approved by the Department.
– Special provision of exemption for retirement payment and leave pay
– till 2058/12/18) to any natural person as principal, interest and bonus in consideration of employee’s and employer’s contribution in Employees
– Medical expenses up to Rs.1,80,000 payable at the time of discharge or retirement to that employee who was working on job at the commencement of the Act.
Allowable Reductions, Exemptions, and Tax Credits for Salaried Individuals
Understanding tax doesn’t stop at knowing what is taxable and what is not. To truly manage your tax efficiently, you need to understand three important layers: allowable reductions, exemptions, and tax credits.
Allowable reduction or common expenses
1) Retirement contribution to recognized retirement fund
1/3 of total assessable income
Or, Actual contribution to ARF (employer + employee + CIT)
Or, Maximum limit: Rs. 5,00,000
→ Whichever is lower is allowable
2) Donation
a) Donation to exempt organization
5% of adjusted taxable income
Or, Maximum limit: Rs. 1,00,000
Or, Actual donation
→ Whichever is lower is allowable
b) Donation incurred by a company for heritage/sports infrastructure
10% of assessable income
Or, Maximum limit: Rs. 10,00,000
Or, Actual donation
→ Whichever is lower is allowable
Note: Applicable only for companies, requires IRD pre‑approval
c) Donation to Prime Minister Disaster Relief Fund or Reconstruction Fund
– Fully allowable (no limit)
Common Tax Exemptions for Salaried Employees
1) Statutory exemption limit: Statutory exemption limit of Rs.5,00,000 for individuals (single) and Rs.6,00,000 for couples is allowed to deduct while computing taxable income.
2) Remote area allowance as an additional exemption limit: Remote area allowance is applicable to all natural persons as an exemption in addition to the statutory exemption limit for income from employment, business or investment (i.e. Rs.50,000, 40,000, 20,000 and 10,000 forA, B, C, D and Eclass respectively).
3) Additional exemption for pension income: 25%of statutory exemption limit Or, Actual pension (whichever is lower)
4) Insurance of private building: Actual Insurance premium paid for residential building Or 30,000, MaximumlimitRs. 5000 (whichever is lower)
5) Life insurance premium: IncomeTaxAct, 2058 hasprovided the facility of exemption life insurance premium Rs. 40, 000 per year or Actual amount, (whichever is lower )
6) Additional Exemption for persons with physical disability: 50%of statutory exemption limit is deducted from taxable income for disabled persons.
7) Foreign allowance: 75% of foreign allowance is to be deducted from taxable income for Nepalese diplomats.
8) Health insurance premium: Income Tax Act, 2058 has provided the facility of exemption for the health insurance premium paid to residentinsurancecompany. Allowable limit is Rs. 20,000 per year or actual health insurance paid, whichever is
Tax Credit (Less from tax liability)
1) Medical Tax Credit
15% of eligible/approved medical cost
Maximum limit: Rs. 1,500
→ Whichever is lower is allowable
Carry forward of medical tax credit is permitted
2) Foreign Tax Credit
Not more than the average rate of income tax of Nepal
Average tax rate is calculated as per prescribed method
3) Female Employment Tax Credit (Rebate)
If a resident individual is a woman having remuneration income only
She is entitled to a rebate of 10% on total tax liability
4) Tax Deducted at Source (TDS)
5) Advance Tax Paid
6) Excess Tax Paid in Last Year
Comprehending how your income is divided and how it is taxed is more than just knowing the law; it’s knowing your options. Tactic smart decisions in your savings, investments, and salary negotiations. It is all in your control. Familiar yourself with the tax process and you can optimize the way your money is spent.
