Nepal Payroll & Tax Compliance Insights

Update

The Honourable Finance Minister presented the Budget for Fiscal Year 2083/84 before the Federal Parliament on May 29, 2026. The Budget introduces significant reforms to the taxation of employment income, aimed at reducing the tax burden on salaried individuals and simplifying payroll tax administration.

The key proposals impacting payroll and employer compliance are as follows:

1. Revision of Personal Income Tax Slabs for Employment Income

The Government has amended Section 1 of Schedule 1 of the Income Tax Act, 2058 through the Finance Act, 2083 to revise the personal income tax structure applicable to resident natural persons and couples with effect from the beginning of Fiscal Year 2083/84 (FY 2026/27).

The revised structure substantially increases the lower tax threshold, removes the 30% tax bracket and reduces the maximum effective tax rate applicable to employment income. The changes are expected to reduce the overall tax burden for employees and result in lower Tax Deducted at Source (TDS) obligations.

Below is the comparative table of the applicable tax slabs for the Fiscal Year 2082/83 and Revised Tax Slabs applicable for Fiscal Year 2083/84

Notes:

1. The 1% rate represents Social Security Tax (SST). The Budget does not propose any change to the existing SST provisions, and SST applicability shall continue in accordance with the prevailing provisions of the Income Tax Act, 2058 and related regulations. Employees contributing to the Social Security Fund (SSF) remain exempt from SST.

2. *36% represents the 30% base income tax rate together with a 20% surcharge applicable under the previous tax structure.

3. **39% represents the 30% base income tax rate together with a 30% surcharge applicable under the previous tax structure.

4. Under the amended provisions of Section 1 of Schedule 1 of the Income Tax Act, 2058, the previous surcharge-based tax rates of 36% and 39% have been removed. Taxable income exceeding NPR 2,500,000 is subject to tax at 27%, and where taxable income exceeds NPR 4,000,000, an additional 2% Surcharge applies, resulting in a maximum effective tax rate of 29%.

2. Couple-specific slab thresholds have been discontinued

The amended provisions continue to recognize both resident natural persons and couples as taxpayer categories, the revised tax slab structure no longer provides separate slab thresholds for couple taxpayers. Employers should therefore discontinue the application of the previous couple-specific slab thresholds when annualizing employee tax liability and computing TDS.

There is no change to the existing employer withholding obligation under Section 87 of the Income Tax Act, 2058. The change relates only to the income tax slab rates applicable for determining employee tax liability and monthly TDS.

Employers should therefore re-estimate annual taxable income and recompute monthly TDS deductions using the revised tax bands. The revised tax slabs must be applied for salary payments relating to Fiscal Year 2083/84 from the first payroll run on or after July 17, 2026 (Shrawan 1, 2083).