How to Calculate TDS on Salary in Nepal (Step-by-Step)
What Is TDS and Why Does It Matter in Nepal?
TDS stands for Tax Deducted at Source. It is that part of income tax which is deducted from the salary of an employee before the salary is issued to him. The employer then pays that amount to the Inland Revenue Department (IRD) on the employee’s behalf, each month.
Tax is deducted at source meaning that workers don’t have to pay a big tax bill at the end of the year. Rather, they pay their taxes equally for a year.
TDS in Nepal is governed by Income Tax Act 2058. No exception is there for every registered employer to calculate, deduct, and deposit the TDS on time.
Quick Fact: TDS is deducted on annual taxable income and not on monthly income. The employer will have to deposit it with IRD on the 25th of every Nepali month.
Why TDS Compliance Matters for Employers in Nepal
In Nepal, there are still numerous SMEs who are doing TDS manually in spreadsheets. This is only feasible for a small company, but is very risky as the company expands.
Here’s why TDS compliance makes a difference to your business:
- The IRD regularly audits and if the TDS records are incorrect, interest and penalties are levied.
- When employees see incorrect deductions on their payslips, it creates a sense of mistrust among them.
- If the employer under-deducts TDS, he is personally required to pay the difference.
- If TDS is overdeducted it causes hardship to employees and refund problems as well.
- If you make a late payment to IRD, they will charge the interest due on that late payment.
To summarize, in short, TDS errors are costly – both in monetary and operational terms. For this reason, it is crucial for every HR team in Nepal to have a consistent and repeatable process to ensure TDS is captured correctly each and every month.
Who Needs to Deduct TDS on Salary in Nepal?
Nepal’s Income Tax Act mandates the deduction of TDS by all employers on remuneration paid to an employee. This applies to:
- Private companies or corporations
- A non-governmental organisation, an international nongovernmental organisation and a non-profit organisation.
- Financial institutions, banks and insurance companies
- Manufacturing and trading businesses
- Startups andsmall businesseswith salaried staff
No minimum size of company or number of employees is a requirement. If you have only one salaried employee, then you have to deduct and deposit TDS each month.
How to Calculate TDS on Salary in Nepal: Step-by-Step
There are five steps in calculating TDS on salary in Nepal. Once you know how to do each step, the calculations are easy.
Step 1 — Determine Gross Annual Salary
Begin by taking the employee’s total annual income. This includes basic salary, allowances, overtime pay, bonuses, and all other cash benefits. Calculate the total annual income by adding up all components.
Step 2 — Apply Allowable Deductions
Employees in Nepal can avail tax exemption on their income by making contributions to certain schemes. Here are the common deductions that are to be applied:
- SSF (Social Security Fund): The complete contribution by the employee, which is 11% of basic salary, is deductible.
- EPF/PF (Employees Provident Fund): Employee’s contribution is 10% of basic salary up to a minimum of 1/3rd of assessable income or NPR 3,00,000 (whichever is lower).
- Voluntary contributions – CIT (Citizen Investment Trust) – up to NPR 3,00,000 or 1/3 of assessable income, whichever is less.
- Life insurance premiums: Deductible up to a maximum of NPR 40,000 per year.
- Insurance for medicines: up to NPR 20,000 per year.
Step 3 — Calculate Taxable Income
Take the total deductions away from gross annual salary. The outcome is taxable income on which you will apply Nepal’s progressive tax rates.
Formula: Taxable Income = Gross Annual Salary − Total Allowable Deductions
Step 4 — Apply Nepal's Income Tax Slabs
The tax system in Nepal for FY 2082/83 is progressive. Add the slabs below to the taxable income:
For Individuals (Unmarried):
Income Slab (Annual) | Tax Rate |
Up to NPR 5,00,000 | 1% |
NPR 5,00,001 – 7,00,000 | 10% |
NPR 7,00,001 – 10,00,000 | 20% |
NPR 10,00,001 – 20,00,000 | 30% |
Above NPR 20,00,000 | 36% |
For Married Couples:
Income Slab (Annual) | Tax Rate |
Up to NPR 6,00,000 | 1% |
NPR 6,00,001 – 8,00,000 | 10% |
NPR 8,00,001 – 11,00,000 | 20% |
NPR 11,00,001 – 21,00,000 | 30% |
Above NPR 21,00,000 | 36% |
Step 5 — Convert Annual Tax to Monthly TDS
After computing the annual tax, then divide by 12 to determine the monthly amount of TDS to be deducted from every pay slip.
Formula: Monthly TDS = Annual Tax ÷ 12
Worked Example: How to Calculate TDS on Salary in Nepal
Let us take a practical example so the process is completely clear.
Employee: Ramesh (Individual / Unmarried)Monthly Gross Salary: NPR 80,000 → Annual Gross: NPR 9,60,000
Deductions:
- SSF 11% of basic NPR 50,000 = NPR 5,500/month = NPR 66,000/year
- CIT contribution = NPR 2,000/month = NPR 24,000/year
- Total Annual Deductions = NPR 90,000
Taxable Income: NPR 9,60,000 − NPR 90,000 = NPR 8,70,000
Tax Calculation:
- First NPR 5,00,000 × 1% = NPR 5,000
- Next NPR 2,00,000 × 10% = NPR 20,000
- Next NPR 1,70,000 × 20% = NPR 34,000
Annual Tax = NPR 59,000 Monthly TDS = NPR 59,000 ÷ 12 = NPR 4,917
How SSF Enrollment Affects Your TDS Calculation
The first tax slab is reduced from 1% to 0% when your company registers with the Social Security Fund (SSF). This implies that the first NPR 500,000 (single) or NPR 600,000 (married) NPR of taxable income is exempted from tax for SSF enrolled employees.
This is huge money you save up monthly which directly impacts the monthly deduction of your TDS. If a company adopts SSF, the company must adjust their payroll calculations accordingly so that they do not over-deduct from the employees.
TDS on Bonuses, Overtime, and Other Allowances in Nepal
Many HR teams don’t know what to do about the TDS on payments other than basic salary. A breakdown, which is quite clear:
Dashain Bonus:Up to one month’s basic salary is exempt from income tax. Excessive amounts are a part of annual taxable income.
Performance Bonuses: Allperformance bonusesare taxable. Take the employee’s annual income as new income and calculate TDS on the income for the month.
Overtime: Overtime pay is deemed to be part of the compensation and is taxable. Learn more about how overtime management affects your payroll calculations.
Allowances: Majority of the allowances such as HRA, transportation allowance, dearness allowance are taxable unless specifically exempted under the Income Tax Act of Nepal.
Common TDS Mistakes Employers Make in Nepal
Manual calculations are a challenge for many businesses when it comes to TDS compliance. Below are the most frequent errors that trigger IRD notices:
- Applying old tax slabs of the previous fiscal year.
- Failure to claim the deductions for SSF, CIT or PF before taxable income calculation
- Not taking into account salary revisions that occur during the year, which would alter the amount of taxes to be paid
- Failure to pay the IRD on time (on the 25th of every Nepali month)
- Entering the wrong marital status – married persons get higher basic exemptions.
These errors are a core part of the broader HR challenges that companies face when managing payroll manually. The good news is that a payroll management software purpose-built for Nepal can eliminate all of these risks automatically.
How Automated Payroll Software Simplifies TDS in Nepal
Hajir HRM has been designed to meet the compliance needs of Nepal. Here’s what it does for you automatically, with each payroll run:
- Properly uses the latest income tax slabs for FY 2082/83 without making any manual changes.
- Deducts SSF (11% employee + 20% employer), PF, and CIT from each employee’s pay
- Calculates taxable income after all allowable deductions
- Generates monthly TDS amounts on employee and produces payslips
- Prepares IRD-ready reports for monthly TDS deposit
Your Next Step to Stress-Free TDS Compliance in Nepal
Now it becomes a simple procedure to calculate TDS on salary in Nepal with the help of the above five steps. Now you have to start with a gross income, deduct certain items, calculate the taxable income and use the correct progressive slabs to calculate the monthly income.
But this isn’t a burden on people to do it for each employee, each month, while keeping up with the changes to IRD rules. Hence, the modern Nepal businesses are converting to automated payroll software.
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FAQ:
An employer deducts the income tax from the income of the employee before paying it to the employee. This tax is called TDS or Tax Deducted at Source. This amount is paid to the Inland Revenue Department (IRD) on a monthly basis on behalf of the employee by their employer.
For individuals: 1% on the first NPR 5,00,000; 10% on NPR 5,00,001–7,00,000; 20% on NPR 7,00,001–10,00,000; 30% on NPR 10,00,001–20,00,000; and 36% above NPR 20,00,000. The basic exemption amount for married couples is NPR 6,00,000.
Yes. The first tax slab rate is changed from 1 to 0 percent in the case of an employee's contribution to the Social Security Fund (SSF). This will affect the overall annual tax liability and so will decrease TDS deduction on a monthly basis for SSF employees.
The major deductions that can reduce taxable income before tax deduction is calculated are: SSF contribution (full employee contribution), PF/EPF contribution (up to NPR 3,00,000) or contribution towards CIT (same limit), Life insurance premium contribution (up to NPR 40,000) and medical insurance contribution (up to NPR 20,000).
The TDS has to be deposited to the Inland Revenue Department (IRD) on or before 25th of every Nepali calendar month.
Yes. The Payroll software, Hajir HRM automatically calculates Nepal's current IRD tax slabs, deductions for SSF, PF, and CIT and calculates the exact amount of TDS for every employee in the month with the accuracy.
