Class III- Common Exclusions in computing Assessable Income

AMOUNTS EXEMPT UNDER VARIOUS SECTIONS &

FINAL WITHHOLDING PAYMENTS
AGENDA FOR TODAY

 Amounts not to be included in computing business,

employment and investment income and determining the
common exclusion
 Amounts exempted from income tax under various
provisions of the Act
 Definition of exempt organization and taxability of income
derived by such organization
SECTIONS TO BE COVERED
 Sec. 5
 Sec. 6
 Sec. 7 (3), 8 (3) and 9 (3)
 Sec. 10
 Sec. 11 (1), 11 (2) and 11 (2ka)
 Proviso of Sec. 31
 Sec. 54
 Sec. 61
 Sec. 64
 Sec. 69
 Sec. 92
EXCLUSIONS IN COMPUTING ASSESSABLE INCOME
 Following amounts are not included while calculating assessable income
from business (Sec. 7 (3)):
 Amounts exempt u/s 10
 Final withholding payments u/s 92
 Amounts exempt u/s 54 or 69

 Following amounts are not included while calculating assessable income

from investment (Sec. 9 (3)):
 Amounts exempt u/s 10
 Final withholding payments u/s 92
 Amounts exempt u/s 54 or 69
 Amounts to be included while calculating income from business or employment
EXCLUSIONS IN COMPUTING ASSESSABLE INCOME
 Following amounts are not included while calculating
assessable income from business (Sec. 8 (3)):
 Amounts exempt u/s 10
 Final withholding payments u/s 92
 Meals or refreshments provided to all employees under similar
terms
 Any reimbursement fulfilling the employers’ business objective
 Any reimbursement that would otherwise be exempt in calculating
income from business or investment of a natural person
 Any reimbursement that are so small that it is administratively
cumbersome to keep accounting
COMMON EXCLUSIONS

 Amounts exempt under Sec. 10, 54, 69 and final

withholding payments (joint reading of Sec. 7 (3), 8 (3)
and 9 (3))
 Amounts exempt under Sec. 11 and 64 (Proviso of Sec. 6)

 Income not falling under heads business, employment,

investment or windfall gain (Sec. 5)
 Certain compensation income (Proviso of Sec. 31)

 Income of investment insurance business (Sec. 61)

EXCLUDED INCOME [SECTION 5]
 If any income is not falling under following income head, the amount is not taxable
under Income Tax Act:
 Business
 Employment
 Investment
 Windfall Gain
 If any asset is not following asset, the gain on disposal of such asset is not taxable:
 Business asset
 Trading stock
 Depreciable asset
 Non business chargeable asset
 Example: gain from sales of antique watch, gain on disposal of personal domestic asset
such as TV, watch, home furniture, etc.
NON BUSINESS CHARGEABLE ASSET
Non business chargeable
asset

Land Building Interest or securities

in any entity
Except the Except the
following following Except the
following
Dispos Transfer BA, TS, Private Transferr
BA, TS red DA
ed off building Disposed off ed within BA or Benefi Transferre
for less within satisfying both for less than three TS d
three ciary’s
than the following Rs. 10 lakhs generati interes between
Rs. 10 generat conditions on three
ion t in
lakhs except Retire generatio
except commer n except
with ment
Having owned for Having resided for 10 cial fund commerci
real 10 years or more years or more either transacti al
comme continuously continuously or on transactio
rcial intermittently n
transac
tion
MEANING OF PRIVATE BUILDING

Private
building

If the land area occupied by the If the land area occupied by the
building is less than 1 ropani building is 1 ropani or more

Sum of following Sum of following

Value of land area Value of one Value of building

occupied by the building Value of building
ropani land
EXEMPTION UNDER SECTION 6

 The income of a non-resident person that is not having

source in Nepal is exempt from Nepal Income Tax.
AGRICULTURE INCOME [SEC. 11 (1)]
 æs[lif Joj;foÆ eGgfn] ;fj{hlgs jf lghL hldgaf6 afnLgfnL pTkfbg ug]{ jf hldg k|of]u
ug]{ df]xLaf6 s't jf afnL k|fKt ug]{ Joj;fo ;Demg' k5{ .
 Income from agriculture business is taxable in the following three
cases:
 Agriculture income generated through registrated private firm,
partnership, company or corporate body
 Agriculture income generated in the land held by a person in excess of the
land area prescribed by GON for agriculture business purpose u/s 12
(Nga) of Land Related Act, 2021
 Agriculture income generated in the land held by a person in excess of the
land area prescribed by GON for industrial purpose u/s 12 (Gha) of Land
Related Act, 2021
 Agriculture income other than above is exempt
INCOME OF COOPERATIVES [SEC. 11 (2)]

Exempt Cooperative

Exemption as to income tax and

dividend tax

Regardless of operating area of cooperatives Based on operating area of cooperative

cooperatives involved in transactions mentioned in Involved in financial transactions in

next slide Rural Municipality
EXEMPTION ALL OVER NEPAL
1. Sericulture and silk production 12. Honey production
2. Fruit farming, production and 13. Rubber farming
processing 14. Agro and forest based industries
3. Animal husbandry such as Leasehold forestry, agro
4. Dairy industry forestry, etc. that are business
5. Poultry farming related to commercial forestry
6. Fishery 15. Cold storage for vegetable storage
7. Tea farming and processing 16. Trading of seeds, animal fodder,
feeds, pesticides, fertilizers, and
8. Coffee farming and processing agriculture tools (except those
9. Herbal farming and processing operative through machineries)
10. Production of vegetable seeds
11. Bee keeping
INTEREST INCOME UP TO RS. 25,000 [SEC. 11 (2KA)

 Interest earned (by a natural person (presumed)) to the

extent of Rs. 25,000 per annum on deposit from the
following is exempt from tax:
 Cooperatives mentioned in slide 12 and 13
 Micro finance institution operating in Rural Municipality

 Rural development bank operating in Rural Municipality or

 Post Office Saving Bank operating in Rural municipality

 TYC: what happens if the interest is Rs. 26,000?

COMPENSATION INCOME EXEMPT FROM TAXATION
[PROVISO OF SEC. 31]
 Compensation against Loss of Physical Part of a Resident
Natural Person [Proviso (1) of Sec. 31]
 In case both the following conditions are satisfied, any
compensation shall not be included in income:
 The compensation shall be received by a Resident natural person
 Such compensation shall be in relation to the physical loss (bodily injury) of
such person sustaining personal accident
 Restriction on claim of Medical Tax Credit against treatment
of injury
 The amount incurred for the treatment of such physical part shall
not be claimed as Medical Tax Credit.
COMPENSATION INCOME EXEMPT FROM TAXATION
[PROVISO OF SEC. 31]
 Compensation against Death of a Natural Person [Proviso
(2) of Sec. 31]
 Compensation received by any person against the death of a
natural person shall not be included in income

 Note that- in this case, the deceased natural person or

the recipient shall not necessarily be a resident.
DIVIDEND INCOME- TAXABILITY AND EXEMPTION [SEC.
54]
Dividend distribution

By resident entity By non-resident entity

Inclusion in business or
By partnership or company Other resident entity investment income

Redistribution of profit on which

First distribution Exempt
dividend tax is already levied

Taxable on final
withholding basis Exempt
INCOME OF INVESTMENT INSURANCE BUSINESS [SEC. 61]

 The following amount of investment insurance business is not

included in income:
 premiums derived during the year by the person as insurer,
including as re-insurer, in conducting the business
 proceeds derived during the year by the person under any contract
of re-insurance, guarantee, security or compensation in respect of
payments made by the person in the capacity of insurer
 The above amounts shall not be treated as incomings related
to the assets of the insurer
 Investment insurance contract is not treated as asset or
liability of the insurer
INCOME OF RETIREMENT FUND [SEC. 64]

 Contribution of beneficiary in retirement fund is not

income of retirement fund and the amount is not
included in income
 Beneficiary’s interest in retirement fund is not liability of
retirement fund
 Retirement payment to beneficiary is not expense of
retirement fund
 Income of approved retirement fund is exempt from tax
Exemption under Sec. 69

CONTROLLED FOREIGN ENTITY

MEANING OF CONTROLLED FOREIGN ENTITY
 “Controlled foreign entity (CFE)” means a non-resident entity
 in which a resident person owns an interest, directly or indirectly through one or
more interposed non-resident entities; and
 where the person is associated with the entity or would be if the person and not
more than four other resident persons were associated
 In order for a non-resident entity to qualify as CFE, the CFE must be
controlled by a resident either singly or if not more than four other
resident were associated with CFE
 The Act does not explain how control is tested. However, as per prevailing
practice, control is demonstrated through:
 Controlling voting rights, i.e. holding majority shares
 Controlling boards
 Subsidiary of subsidiary is subsidiary
TAXABILITY OF INCOME OF CFE
 Income of CFE is taxed to beneficiary controlling such CFE under
pass through approach
 The income is taxable under equity method of accounting, i.e.
income of CFE is treated as income of controlling resident persons
to the extent of their beneficial interest (Investment account is
debited and income is credited)
 Tax paid including any dividend tax on actual distribution in foreign
country with regard to income is treated as foreign tax and such tax
can be claimed as foreign tax credit
 Actual dividend distributed by CFE to resident beneficiary is exempt
from tax (i.e. distribution decreases the value of investment debiting
the cash or bank account)
DIVIDEND EXEMPT FROM TAXATION

 Dividend distributed by cooperatives mentioned in Sec.

11 (2)
 Redistribution of such dividend by resident co. or
partnership on which dividend tax is already levied as per
the Act
 Distribution of profit by resident entity other than
company and partnership
 Receipt of actual dividend from controlled foreign entity
INCOME EXEMPT UNDER SEC. 70
 The income of a non-resident air transport, water transport or land
transport operator or chartered service provider is exempt to the
extent it is generated as part of transshipment, i.e. if a passenger or
mail, livestock or other tangible assets embark from Nepal as a
result of transshipment is exempt from tax
 Further, the income generated by non-resident air transport, land
transport or water transport operator or chartered service provider
is exempt when the amount is not related to embarkment of
passenger, mail, livestock or other tangible asset from Nepal
 Income of non-resident telecommunication operator is exempt in
Nepal if the income is earned by such operator from such
equipments that are not installed in Nepal
EXEMPT AMOUNTS- INCOME EXEMPT UNDER BILATERAL
OR MULTILATERAL AGREEMENT OR TREATY [SEC. 10 (KA)]
 If all the following conditions are satisfied, any amount derived by any
person is exempted from tax under this clause:
 There shall be a bilateral or multilateral agreement between/among GON and
any foreign country or multilateral organizations
 The agreement must contain clauses for exemption of specified income of
specified person from levy of tax in Nepal
 The person specified in the agreement must earn the amounts specified in the
agreement in Nepal
 The exemption of income tax is subject to the amounts mentioned in the
agreement.
If the person derives any other income in Nepal, such amount forms part
of taxable income.
Example: Income of UN officials accredited to diplomatic facility by Secretary
General of UN
EXEMPT AMOUNT- INCOME OF EMPLOYEE OF FOREIGN
DIPLOMATIC MISSION IN NEPAL [SEC. 10 (KHA)
 Income derived by a natural person from an employment
in public service of a foreign government is exempt from
income tax, if both the following conditions are satisfied:
 The individual is a resident of Nepal solely by reason of
performance of employment in Nepal or he is a non-resident of
Nepal; and
 The payment of the income is made from the public fund of the
foreign government.
TEST YOUR CONCEPT
 Mr. Clinton is working in an embassy representing USA and come to Nepal on 1st Ashwin
20X1. His salary and other emoluments are paid by the country he represents. He declared
the following sources of Income during the year 20X1/X2:
 Salary of Rs. 280,000 per month
 Dearness allowance Rs. 150,000 per month
 Foreign Allowance Rs. 80,000 per month
 He runs a handicraft business in Nepal and earned net profit of Rs. 375,000 in the Income Year
20X1/X2.
 He was a member of Royal Gulf Club of Nepal. He won a prize of Rs. 150,000 from the game.
 However he claimed the following expenses
 Renewal of Membership & Subscription Rs. 50,000
 Golf Expenses Rs. 32,000
 Donation to a school of Remote District Rs. 50,000
School recognized as Exempt organization by IRD)
 Tax deducted at Source in Nepal Rs. 2,000
EXEMPT AMOUNTS- EMPLOYEE OF FOREIGN DIPLOMATIC
MISSIONS [SEC. 10 (GA)]
 If all the following conditions are satisfied, any amount
derived by a natural person or his/her close family member is
exempt from tax:
 The natural person or his/her close family member shall not be a
citizen of Nepal
 The natural person is employee in the public service of foreign
government
 The natural person is resident of Nepal only because of his/her
employment or is a nonresident of Nepal during such Income Year
 The amount derived by the natural person or his/her close family
member shall be paid from the public fund of foreign government
EXEMPT AMOUNTS- NATURAL PERSON IN SERVICE OF
GOVERNMENT OF NEPAL [SEC. 10 (GHA)]
 If all the following conditions are satisfied, any amount of
a natural person is exempted under this clause:
 The person shall be a natural person,
 The person shall not be citizen of Nepal,

 The person shall be appointed in the employment of GON by

Nepal Government, and
 The terms of appointment shall include the condition of
exemption of his income from Income Tax
EXEMPT AMOUNTS- SOCIAL SECURITY PAYMENTS [SEC. 10
(NGA)]
 Social security payments made by Government of Nepal,
Province government or local government is exempt from tax
 Test Your concept:
 World Organization for Elder Care, an International Non Government
Organization has obtained approval from Government of Nepal to
distribute Rs. 5,000 per month as Elderly Allowance to all elder
citizens exceeding 75 years of age in Jumla district of Nepal. As
such, Dhan Bahadur Buda received Rs. 60,000 during the year
20X2/X3. Is the amount taxable?
What would be your answer, if Dhan Bahadur obtained such
allowance from Government of Nepal, itself?
EXEMPT AMOUNT- GIFT, BEQUEST, INHERITANCE AND
SCHOLARSHIP [SEC. 10 (CHA)]
 Gift, bequest, inheritance and scholarship related to
business, employment and investment income is taxable
under business, employment and investment head
 If Gift, bequest, inheritance and scholarship are not
related to business, employment and investment ; such
Gift, bequest, inheritance and scholarship are exempt
from tax.
EXEMPT INCOME- PENSION INCOME OF NEPALI CITIZEN
[SEC. 10 (JA)]
 If all the following conditions are satisfied, pension
income of a natural person is exempt:
 The person shall be a citizen of Nepal,
 The entitlement to pension income shall be as a result of
retirement after serving as army or police personnel of foreign
government (i.e. ex- armymen or ex- policeman)
 Pension income shall be derived from the public fund of foreign
government
TEST YOUR CONCEPT
 Mekh Thapa, a Nepali national, is a retired civil servant of Indonesia. He
derived pension income of Rs. 2,000,000 during Income year 20X2/X3
from the public fund of Indonesian government. Is the pension income
taxable?
Would your answer be different: if he were retired army official of
Indonesian national army?
 Mr. Hukum Bahadur Thapa is a Nepali national retired from the service of
Indian army. After his retirement, he comes to his village at remote
Lamjung and is involved in agriculture activities in the land, which is
within the land limit prescribed by Government of Nepal. He is also
involved in poultry farming, the sales of which are Rs. 1,900,000 and
profit is Rs. 199,000 during the income year 2072/73. His income from
Pension from public fund of Government of India is Rs. 50,000 per
month. He generated Rs. 500,000 from crop farming in his own land.
EXEMPT AMOUNT- INCOME OF GOVERNMENTS AND NRB

 Income of Government of Nepal, Province government or

local government is exempt from tax [Sec. 10 (jha)]
 Amounts derived by Nepal Rastra Bank as per its
objective is exempted from income tax [Sec. 10 (Yna)]
EXEMPT ORGANIZATION AND TAXABILITY OF ITS
INCOME
EXEMPT ORGANIZATION

Exempt organization

By way of registration with IRD Suo Moto

Social, religious, charitable or An amateur sporting association

educational organizations of public established for the purpose to promote Political parties registered with
nature established without any profit social or sporting amenities without Election commission
motive having an aim to distribute the income
among its members
REGISTRATION OF EXEMPT ORGANIZATION AND TAX
EXEMPTION CERTIFICATE
 The organization shall file an application at IRD accompanying the
following details for status as TEO:
 Copy of registration Certificate, in case the organization is required to be
registered under prevailing law.
 Copy of by-law forming/establishing the organization- for organization under
Societies Registration Act- it is a Bidhan & for company not distributing profit- the
document shall be Memorandum of Association or Articles of Association
 Copy of Permanent Account Number Certificate, and
 Copy of audited financial statements, if any
 IRD shall examine the documents so obtained and register the
organization as TEO and provide a Certificate of Registration as TEO.
 IRD may prescribe certain organizations as TEO without requiring
registration
RENEWAL OF TAX EXEMPTION CERTIFICATE
 Tax exemption certificate shall be renewed within six months of the
end of fiscal year
 The exempt organization shall file an application to renew tax
exemption certificate in the format prescribed by IRD along with
following documents:
 Proof of filing of annual income returns
 Proof of submission of withholding tax returns in relation to all taxes
withheld by organization as withholding agent
 Proof of payment of withholding taxes in relation to tax withheld by the
organization as withholding agent during the year
 The tax exemption certificate is renewed, if it is found that tax
exemption facility is in order as per law at the time of investigation
EFFECT OF FAILURE TO RENEW TAX EXEMPTION
CERTIFICATE
 If an exempt organization fails to renew its exemption
certificate within six months of the end of fiscal year, the
certificate cannot be renewed. (IRD circular dated
2073/08/03).
 However, the facility of de novo may be used to obtain tax
exemption certificate. It means, the organization shall
register again as tax exempt organization following
procedures under Rule 3.
TAXABILITY OF INCOME DERIVED BY EXEMPT
ORGANIZATIONS
 The following income of exempt organization is exempt from tax
[Sec. 10 (chha)]:
 Donation,
 Gift, or
 Any contribution directly related to the objective of an exempt organization
only when the person making contribution does not expect or receive any
consideration against such contribution (unrestricted grants)
 The above income is taxable in case the organization provides
benefits to any person from its assets or income, except in the
following circumstances when the same is provided:
 while completing the work as per the objective of organization, or
 as a consideration for any assets or service received.
TEST YOUR CONCEPT
 An international non-governmental institution had invited a tender for providing computer
education to street children. One of the competitors, amongst various others, was an NGO (a
tax exempted entity) having its object providing facilities and vocational training to street
children, was awarded the tender. Is the gain from this activity exempt from tax for the NGO?
 Nirdhan Samaj Sewa is a not for profit organization registered in Kathmandu. It has obtained
tax exemption certificate from IRD. During the year 20X1/X2, the organization received the
following incomes:
 Membership Fees Rs. 275,000
 Interest Rs. 170,000
 Donation Rs. 450,000
 Dividend Income Rs. 1,200,000
 Net Profit from running a School Rs. 120,000
Nirdhan Samaj Sewa has claimed that as it is a TEO, it is not obliged to pay tax and thus, has
filed an application for refund of WHT on Interest amounting to Rs. 30,000. Justify its claim
on the basis of the provisions of Income Tax Act, 2058.
FINAL WITHHOLDING PAYMENTS
LIST OF FINAL WITHHOLDING PAYMENTS [SEC. 92 (1)]

Payment Condition
Dividend If paid by resident company or partnership
Rent irrelevant
Gain from investment insurance If paid by resident person
Gain from unapproved If paid by resident person
Retirement Fund
Interest Paid by resident bank, financial institution,
cooperative, entities issuing bonds or listed
company to:
(a) Natural person not related to operation of
business
(b) Exempt organization
LIST OF FINAL WITHHOLDING PAYMENTS [SEC. 92 (1)]
Payment Condition
Listed in Sec. 87, 88, 89 If paid to a non-resident person
All types of retirement (a) Made by approved retirement fund
payments (except pension (b) Made by Government of Nepal
income) (c) Made by resident person
Meeting fee To the extent of Rs. 20,000 per meeting
Occasional lecture fee
For setting question paper N/A
For checking answer sheets
Windfall gain N/A
Return from Mutual fund If paid to natural person
Transport rent or vehicle rent If paid to natural person other than that received by private
firm
AGENDA FOR TOMORROW

 Withholding taxes
 Sec. 87, 88, 88Ka and 89