Payroll
Allowable salary tax deductions in Nepal and their ceilings
Four things reduce a salaried employee’s tax in Nepal. Each has a ceiling, and one ceiling is shared between two of them.
Updated August 2026
Taxable income is annual salary income less allowable deductions. Getting the deductions right matters as much as getting the bands right, and every one of them is capped.
The deductions and their ceilings
The first three reduce taxable income before the bands are applied. The fourth is different: it reduces the tax that the bands produce.
| Deduction | Ceiling | Notes |
|---|---|---|
| Retirement contributions | Lower of NPR 5,00,000 or one-third of annual salary income | Combined across SSF or EPF employee share and CIT |
| Life insurance premium | NPR 40,000 per year | Actual premium paid, up to the ceiling |
| Health insurance premium | NPR 20,000 per year | Actual premium paid, up to the ceiling |
| Female taxpayer rebate | 10% of computed tax | Applied to the tax figure, not to income |
The retirement ceiling in detail
The retirement ceiling is the one that causes trouble, because it is shared and because it is proportional at lower incomes and absolute at higher ones.
The ceiling is whichever is lower: NPR 5,00,000, or one-third of annual salary income. For an employee on NPR 12,60,000 of annual salary income, one-third is NPR 4,20,000 — below the absolute ceiling, so NPR 4,20,000 applies. For an employee on NPR 21,00,000, one-third is NPR 7,00,000, so the NPR 5,00,000 absolute ceiling binds instead.
Insurance premiums
Life insurance premium is deductible up to NPR 40,000 a year and health insurance premium up to NPR 20,000 a year. Both are the actual premium paid, capped — paying NPR 60,000 of life premium still deducts only NPR 40,000.
These ceilings are separate from each other and separate from the retirement ceiling, so an employee can claim against all three.
The female taxpayer rebate and the disability band
Two adjustments apply to the taxpayer rather than to a specific payment.
A female taxpayer receives a 10% rebate on the tax computed across the bands. On a computed tax of NPR 20,720, the rebate is NPR 2,072 and the tax payable becomes NPR 18,648.
An employee with a disability has the first exemption band widened by 50%, so the opening band covers the first NPR 15,00,000 of taxable income rather than the first NPR 10,00,000.
What payroll needs to hold
- Retirement contributions are computed by payroll, so no employee declaration is needed for the SSF or EPF share.
- CIT contributions need to be recorded per employee, since the amount is voluntary and varies.
- Insurance premiums are employee-declared and should be supported by the policy document and evidence of payment.
- The taxpayer circumstances that drive the rebate and the wider band belong on the employee record, not on the payroll run.
Frequently asked questions
Can I claim both life and health insurance deductions?
Yes. The NPR 40,000 life insurance ceiling and the NPR 20,000 health insurance ceiling are separate, and both are separate from the retirement contribution ceiling.
What is the maximum retirement contribution I can deduct?
The lower of NPR 5,00,000 or one-third of your annual salary income, counting your SSF or EPF employee contribution and your CIT contribution together against that single ceiling.