What is TDS in Nepal?
Tax Deducted at Source (TDS) is a mechanism under the Income Tax Act, 2058 where the person responsible for making specific payments — called the "withholder" — must deduct tax at the very moment of payment and deposit it with the Inland Revenue Department (IRD). Rather than waiting for year-end filing, the government collects tax incrementally, in real-time, as income is generated.
The TDS process in Nepal follows a structured legal workflow governed by the Income Tax Act, 2058 as amended by the Economic Act, 2082. There are eight key steps from transaction to final electronic reporting.
Step 1: Identifying the Transaction
The first step is determining whether a payment is subject to withholding tax at all. Not every payment triggers TDS — you must match the payment against the relevant section of the Act.
Identify Transaction Type & Applicable Section
Four primary sections govern withholding in Nepal:
| Section | Payment Type | Examples |
|---|---|---|
| Section 87 | Employment Income | Salaries, wages, bonuses, allowances paid to employees |
| Section 88 | Investment Returns & Service Fees | Dividends, interest, rent, professional fees, consultancy |
| Section 88A | Windfall Gains | Lottery winnings, prizes, unexpected gifts, competitions |
| Section 89 | Contract Payments | Payments >NPR 50,000 under a single contract; non-resident payments |
Step 2: Determining the Applicable Rate
Once the transaction type is confirmed, the withholder must determine the correct rate. Three key factors affect which rate applies:
A. Residency of the Payee
Rates differ significantly between resident and non-resident payees. Non-resident employment income is taxed at a flat 25%, while non-resident contract payments are taxed at 5% under Section 89.
B. VAT Registration Status
For service and vendor payments, VAT registration status is the most critical factor. Always request a VAT certificate from your vendor before processing payment.
C. Nature of Payment / Asset
Even within the same category, rates vary by asset type. Rent for business properties is taxed at 10%; vehicle rentals at 2.5%.
TDS Rate Reference Table — FY 2082/83
| Payment Type | Rate | Section | Notes |
|---|---|---|---|
| Service Fee — VAT Registered | 1.5% | Sec 88 | Vendor provides valid VAT invoice |
| Service Fee — Non-VAT | 15% | Sec 88 | No VAT registration certificate |
| Technical/Consultancy (Individual) | 5% | Sec 88 | Final withholding for individuals |
| Contract >NPR 50,000 | 1.5% | Sec 88A | Single contract value threshold |
| Contract — Non-Resident | 5% | Sec 89 | All non-resident contractors |
| Rent — Business Property | 10% | Sec 88 | Paid to resident (non-natural persons) |
| Vehicle / Transport Rental | 2.5% | Sec 88 | All transport service payments |
| Dividends | 5% | Sec 88 | Final withholding; resident companies |
| Interest — Bank / Cooperative | 6% | Sec 88 | Final withholding; natural persons |
| Windfall Gains / Lottery / Prizes | 25% | Sec 88A | Final withholding on all windfall |
| Non-Resident Employment Income | 25% | Sec 87 | Flat rate regardless of slab |
Employment Income — FY 2082/83 Tax Slabs
Salary TDS is calculated under Section 87 using a progressive slab system. Employers estimate the employee's total annual income and deduct a proportional monthly TDS amount from each payslip.
| Annual Income (Single) | Annual Income (Couple) | Tax Rate |
|---|---|---|
| Up to Rs. 5,00,000 | Up to Rs. 6,00,000 | 1%Social Security Tax |
| Rs. 5,00,001 – 7,00,000 | Rs. 6,00,001 – 8,00,000 | 10% |
| Rs. 7,00,001 – 10,00,000 | Rs. 8,00,001 – 11,00,000 | 20% |
| Rs. 10,00,001 – 20,00,000 | Rs. 11,00,001 – 20,00,000 | 30% |
| Rs. 20,00,001 – 50,00,000 | Rs. 20,00,001 – 50,00,000 | 36%30% + 20% surcharge |
| Above Rs. 50,00,000 | Above Rs. 50,00,000 | 39%30% + 30% surcharge |
Step 3: Calculation and Deduction
Calculate TDS on Gross Payment
Sec 90(3)The withholder calculates TDS on the gross payment amount before any deductions:
Net Payable = Gross Payment − TDS Amount
Under Section 90(3), even if tax is not physically deducted at the time of payment, it is legally considered "deducted" the moment the payment is made. The withholder remains liable regardless.
Example B — Non-VAT vendor: NPR 1,00,000 × 15% = TDS NPR 15,000 | Net NPR 85,000
Step 4: Depositing the Tax with IRD
Deposit TDS into Government Treasury
Sec 90- Deadline: Within 25 days of the end of the month in which the deduction was made.
- Payment channels: IRD-approved banking channels or the IRD electronic payment system.
- Reference: Always quote your PAN and the relevant tax period.
Step 5: Maintaining Records
Maintain All Documentation
Sec 88Every withholder must maintain records for a minimum of five years. Required records include:
- Original invoices and payment vouchers
- TDS calculation worksheets
- VAT registration certificates of payees
- Copies of TDS certificates issued to payees
- Bank receipts confirming IRD deposits
- Monthly eTDS submission acknowledgements
Step 6: Issuing TDS Certificates
Provide TDS Certificate to Payee
| Certificate Type | Deadline |
|---|---|
| General payments (vendor, rent, dividend, interest) | 25 days after month-end |
| Employment income — annual certificate | 30 days after fiscal year-end, or within 30 days of termination |
Step 7: Filing the Monthly eTDS Statement
Submit Electronic TDS Statement to IRD
eTDS Portal- Deadline: Within 25 days of the end of the month.
- Content: Each payee's PAN, payment amount, TDS rate, and TDS amount — for every transaction in the month.
- Consequences: Failure attracts a 2.5% per annum fee on outstanding amounts.
Deadline Summary
| Obligation | Deadline | Consequence if Missed |
|---|---|---|
| Deposit TDS with IRD | 25th of following month | 15% p.a. interest on unpaid amount |
| Issue TDS certificate (general) | 25th of following month | Penalty exposure; payee cannot claim credit |
| Issue annual employment certificate | 30 days after year-end | Penalty; employee tax filing delayed |
| Submit monthly eTDS statement | 25th of following month | 2.5% p.a. fee on outstanding amounts |
| Retain records | Minimum 5 years | IRD reassessment; penalties on audit |
Step 8: Penalties for Non-Compliance
| Violation | Penalty / Interest | Basis |
|---|---|---|
| Late deposit of deducted TDS | 15% per annum interest | On unpaid tax from due date |
| Failure to submit monthly eTDS | 2.5% per annum fee | On amounts not reported |
| False or misleading statement to IRD | 50%–100% of tax deficit | Plus potential prosecution |
| Failure to deduct TDS at source | Full TDS + 15% p.a. interest | Withholder personally liable |
| Minimum late filing penalty | NPR 5,000+ | Per violation instance |
| Joint liability (payee) | Proportional to unpaid TDS | Where withholder defaults |