Tax implications on Income from Employment

Income from Employment refers to considerations provided by the employer such as salary, wages, bonus,
commissions etc. It is also known as Contract of Service. For Tax purposes it is calculated in Cash Basis
so remuneration derived by any individual from employment in any income year shall be computed as the
income earned by that person in that year.
The following payments made by an employer to an individual in any income year shall be included in
computing the remuneration earned by such individual from employment in that income year:
a. Amount for wages, salary, leave, amount for overtime work, prizes and gifts, fee, commission,
payment for other facilities,
b. Dearness Allowance, Remote area allowance, medical allowance, or any kind of allowance
c. Employer’s contribution to Retirement Fund
d. Payment for other facilities
e. Discharge or reimbursements of personal cost
f. Payment to agreement to any conditions of the employment
g. Payment for loss or Termination of employment
h. Fringe Benefits u/s 27
i. Pension Income
However, following matters are not to be included in income while calculating the income from
employment: -
1. Amount exempted u/s 10 and amount subjected to final withholding u/s 90.
2. Meals or refreshments to all employees on similar terms.
3. Reimbursement of expenses done on behalf of employer for business purposes.
4. Irregular expenses up to Rs.500 for printing, medical etc.
 Following Table shows calculation of Taxable income as well as tax payable for Income from
employment: -

S.N. Particulars Notes Amount

Components of income:
Amount for wages, salary, leave, amount for overtime work, fee,
1
commission, payment for other facilities,
Dearness Allowance, Remote area allowance, medical allowance, or any
2
kind of allowance
3 Employer’s contribution to Retirement Fund 1
7 Prizes and Gift 2
8 Payment for other facilities
9 Discharge or reimbursements of personal cost
10 Payment to agreement to any conditions of the employment
11 Payment for loss or Termination of employment
14 Fringe Benefits u/s 27 3
15 Pension Income
Assessable Income (A) 0
Components of Reductions
1 Contribution to Approved Retirement Fund 4
2 Gifts or donation provided to any exempt organization 5
Total Reduction (B) 0
Components of deductions
1 Seed fund to start-up business 6
2 Remote Area allowance 7
3 Foreign Diplomat Allowance 8
4 Pension income 9
5 Benefit for incapacitated person 10
6 Investment Insurance Premium 11
7 Health Insurance Premium 12
8 Building Insurance Premium 13
Total Deduction (C) 0
Total Reduction and Deduction (D=B+C) 0

Taxable income(A-D) 0

Tax Payable 14
Female Tax Credit 15
Medical Tax Credit 16
Foreign Tax Credit 17
Net Tax Payable 0

Notes: -
1. Employer’s Contribution to Approved Retirement Fund (ARF)
 If an employee has contributed to an ARF then the employer shall also contribute 10% of basic salary to
the ARF and such contributions shall be added to income of an employee.
Gratuity is to be added to the income if such amount is deposited in any ARF.

2. Prizes and Gifts

Prizes and gifts provided to employees in any sports or games in which participation of such employee
was solely due to the reason being the employee of such organization.

3. Fringe Benefits u/s 27

Any payment from employer can be quantified equal to following amounts:
a. Transfer of Asset: - Market Value of such asset is included in the income of employee.
b. Vehicle Facility: - 0.5% of salary is included in income of employee but for other than employee 1% of
market value of vehicle is included in income.
c. Accommodation Facility: - 2% of the salary is included in the income of the employee but for other than
employee 25% of rent payable is included in income.
d. Facility of cook, chauffer, guard, telephone, internet, and utilities: - Net cost is included in income (i.e.
Actual cost – Amount deducted from salary)
e. Loan at concessional rate: - Loan amount * (Market rate – Concessional rate) is included in income from
employment.

4. Contribution to Approved Retirement Fund

Lower of the following is allowed as reductions while calculating taxable income of income from
employment: -
a. Actual contribution (Employee contribution + Employer’s contribution)
b. 1/3rd of Assessable income
c. Rs. 3,00,000
However, if such person has contributed to Social Security Fund (SSF) then lower of following is allowed
as reductions: -
a. Actual contribution (Employee contribution + Employer’s contribution)
b. 1/3rd of Assessable income
c. Rs. 3,00,000

5. Gifts or Donations provided to any exempt organization

The amount gifted or donated to any exempt organization is allowed as a reduction. Lower of the
following amount can be claimed as reductions: -
a. Rs. 1,00,000
b. 5% of Adjusted Taxable Income (ATI = Assessable income – Contribution to ARF)
c. Actual contribution

6. Seed fund to start-up business

 Maximum 5 startups and maximum Rs. 1,00,000 pr start-up is allowed as deduction while calculating
taxable income of a person.

7. Remote Area Allowance

The following amount is allowed as deductions while calculating taxable income of an employee residing
in such a remote area. The amount mentioned below is for employees residing for a year in such a remote
area and for employees whose stay is less than 1 year the amount shall be calculated proportionately.

Remote Area Category Allowable deduction

A Rs.50,000
B Rs.40,000
C Rs.30,000
D Rs.20,000
E Rs.10,000

8. Foreign Diplomat allowance

The income earned in the capacity of foreign diplomats is included in income and 75% of such income is
allowed as deduction while calculating taxable income of such person.

9. Pension Income
Lower of the following is allowed as the deduction while calculating the taxable income of person having
pension income: -
a. Actual pension income
b. 25% of 1st slab

10. Benefit for incapacitated person

50% of the 1st slab is allowed as deduction while calculating the taxable income of the person.

11. Investment Insurance premium

Lower of the following is allowed as the deduction while calculating the taxable income of person who
has paid Investment Insurance Premium (Life insurance): -
a. Rs.40,000
b. Actual premium paid.

12. Health Insurance premium

Lower of the following is allowed as the deduction while calculating the taxable income of person who
has paid Health Insurance: -
a. Rs.20,000
b. Actual premium paid to resident company.

13. Building Insurance premium

 Lower of the following is allowed as the deduction while calculating the taxable income of person who
has paid Building Insurance: -
c. Rs.5,000
d. Actual premium paid to resident company.

14. Tax Payable

Tax payable for natural person is calculated multiplying the slab rate with slab amount as shown below: -

Slab Amount Rat

Single Couple e
1st Rs.5,00,000 Rs.600,000 1%
2nd Rs.2,00,000 Rs.2,00,000 10
%
3rd Rs.3,00,000 Rs.3,00,000 20
%
4th Rs.10,00,000 Rs.9,00,000 30
However, for the % person who has been
contributing to the 5th Rs.30,00,000 Rs.30,00,000 36 Social Security Fund
(SSF) the slab rate of % first slab becomes 0%.
6th above Rs.50 above Rs.50 39
lakhs lakhs %
15. Female Tax credit
A person is eligible for female tax credit of 10% of tax liability if all of the following conditions are
satisfied: -
a. The person shall be female resident natural person.
b. The person shall be deriving income from employment only.

16. Medical Tax Credit

Approved Medical Expenses (AME) refers to any fees paid to doctor, dispensary cost or other associated
cost. Cosmetic surgery is not an AME.
Lower of the following is allowed as medical tax credit: -
a. Rs. 750
b. 15% of AME
c. Actual tax liability before any credit
Unutilized expenses are carried forward for the next year.
17. Foreign Tax Credit
Foreign tax credit can be claimed by two different methods:
a. Expense method
In this method, tax paid in foreign countries are treated as deductions while calculating tax liability in
Nepal.
b. Credit method
In this method, lower of following is allowed as tax credit: -
a. Tax paid in foreign country
b. Amount calculated by multiplying income of foreign country with Average tax rate.

Average Tax Rate = Tax liability of income earned in foreign country in Nepal after deducting Female & Medical Tax credit
Total taxable income including all foreign income

Any Excess amount which is not allowed as tax credit can be carried forward in following years.

Tax Implications on Retirement Payment

Retirement payment, gratuity, accumulated leave, or similar payments accrued till 2058.12.18 B.S. is
exempted from tax.
Medical expenses not utilized till 2058.12.18 B.S.