Practical guides on tax compliance, financial planning, company registration, and business finance in Nepal.
TDS penalties in Nepal can be severe. This guide covers every TDS rate, filing deadline, and compliance requirement your business needs to know.
Tax Deducted at Source is one of the most frequently mismanaged compliance obligations for Nepal businesses. Unlike annual income tax, TDS requires action every single month. A missed TDS deposit or an incorrect deduction rate triggers compounding penalties that can accumulate into significant amounts before the business even realizes a problem exists. This guide gives you a complete, practical understanding of TDS so that compliance becomes a routine part of your monthly financial operations.
TDS is not a tax on your business; it is tax withheld on behalf of the payment recipient and remitted to IRD. The payer (your business) acts as a tax collection agent for IRD. The recipient then credits the TDS amount against their own tax liability when filing their annual return. Understanding this distinction helps explain why IRD takes TDS failures seriously: a non-deposited TDS amount represents a tax that was owed to the government but not received.
Nepal's Income Tax Act 2058 specifies TDS rates for different types of payments. Salary payments are subject to TDS at the applicable individual income tax slab rates, with no single fixed rate. Contract or service payments to individuals or entities with PAN are subject to 1.5% TDS. The same payments to those without PAN attract 3% TDS, which is why requiring PAN from all your contractors is a compliance best practice.
House rent payments attract 10% TDS on the full rent amount. Dividend payments to shareholders are subject to 5% TDS. Interest payments (bank deposits, debentures, loans to shareholders) attract 15% TDS. Royalty payments also carry 15% TDS. Meeting allowances paid to committee members, board directors, and similar roles attract 15% TDS. Natural resource payments carry 15% TDS. Commission payments attract 10% TDS. Retirement or gratuity payments are subject to 5% TDS.
Salary TDS is calculated based on estimated annual income, not a flat rate. At the beginning of each fiscal year, your HR or payroll department should project the employee's total annual income including basic salary, allowances, and any known bonuses. Subtract all eligible deductions (SSF contribution, life insurance, health insurance). Apply the progressive tax slabs to the taxable income to get the annual tax liability. Divide by 12 to get the monthly TDS deduction.
When an employee's income changes mid-year (raise, bonus, change in deductions), recalculate the projected annual tax and adjust the remaining monthly TDS installments. Most payroll software handles this automatically. Employers who use manual payroll must be especially careful to recalculate when any income or deduction changes occur. Underpayment discovered at year-end often results in the employee having to pay a lump sum balance, which creates dissatisfaction and sometimes disputes.
TDS on contractor payments applies when a business pays for services by individuals or companies. Common examples include payments to freelance consultants, IT contractors, marketing agencies, cleaning services, and security companies. For each such payment, deduct 1.5% (with PAN) or 3% (without PAN) and remit to IRD. The net amount (payment minus TDS) goes to the contractor.
A common question is whether TDS applies to payments to VAT-registered companies. Yes, TDS applies independently of VAT registration status. A payment might have both VAT (which the supplier charges you) and TDS (which you deduct from the payment). For example, if a VAT-registered consultant charges NPR 100,000 plus 13% VAT (total NPR 113,000), your TDS of 1.5% is calculated on the base amount (NPR 100,000), not the VAT-inclusive total. You pay NPR 100,000 x (1-1.5%) = NPR 98,500 to the consultant and remit NPR 1,500 to IRD plus pay NPR 13,000 VAT to the consultant.
TDS collected during a calendar month must be deposited with IRD by the 25th of the following month. For example, TDS withheld in Shrawan (July 16 to August 16) must be deposited by Bhadra 25 (approximately September 9). TDS deposits are made online through the IRD e-payment portal or at designated revenue payment banks. Always maintain a TDS payment voucher with the IRD confirmation reference number.
Failure to deposit by the 25th triggers an interest charge of 15% per annum on the unpaid TDS, calculated from the due date. Additionally, IRD can impose a penalty of 50% to 100% of the undeposited TDS amount for deliberate non-compliance. IRD also disallows the expense for which TDS was not deposited when calculating your company's own income tax, effectively creating a double cost for the non-compliance.
Nepal has an e-filing system for TDS through the IRD portal. Log into ird.gov.np using your PAN and password. Navigate to the e-TDS section and select the relevant month and year. For each type of payment, enter the total payment amounts and TDS deducted. The system calculates the total TDS payable. After payment, upload the payment confirmation to complete the filing. eTDS filing is mandatory for businesses above a certain scale and is increasingly being required for all registered businesses.
An important feature of the eTDS system is that it requires you to enter details of individual recipients for salary TDS. This means you must maintain a payroll register with each employee's PAN, payment details, and TDS deducted. Businesses that do not collect PAN from employees face difficulties in the e-filing process and risk having those employees' TDS rejected by IRD.
After filing eTDS, you must issue TDS certificates to all payment recipients. These certificates are the official proof that tax was deducted and deposited on their behalf. Recipients use TDS certificates to claim credit for the withheld tax when filing their annual income tax returns. Failure to issue TDS certificates attracts penalties and damages your business relationship with contractors and employees.
Salary TDS certificates (often called Form 16 or salary certificate) should be issued to employees annually after the fiscal year ends. Contractor TDS certificates can be issued monthly or quarterly depending on the contractor's preference. Keep copies of all TDS certificates issued, organized by payment type and recipient, for at least 5 years as required by Nepal's income tax record-keeping rules.
The most common mistake is simply not deducting TDS. This happens most often with house rent payments, meeting allowances, and informal contractor payments. Business owners sometimes assume that small payments do not require TDS. This is incorrect: TDS applies regardless of payment amount for the specified payment types. Always check whether a payment type is subject to TDS before making it.
Another frequent error is applying the wrong TDS rate. Confusing the 1.5% contractor rate with other rates, or forgetting to apply the 3% rate for contractors without PAN, are common problems. We recommend maintaining a simple TDS rate card at your finance desk and checking it before processing any significant payment. Growfin's managed payroll and compliance service includes automated TDS calculation, deposit, and reporting for all payment types, eliminating the risk of errors and missed deadlines.
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