Tax & TDS
TDS on salary in Nepal: how the monthly deduction is worked out
Nepali payroll computes tax annually and withholds it monthly. This explains the order of the calculation and the errors that come from getting it backwards.
Updated August 2026
Tax deducted at source on salary is not a monthly tax. It is an annual liability, computed once on projected annual income, then divided across the payroll months and withheld a twelfth at a time.
Getting that order wrong is the single most common payroll error in Nepal. Applying the slab rates to one month of salary and multiplying by twelve produces a different — and wrong — figure, because the bands are annual.
The order of the calculation
- 1Project total annual salary income: monthly gross multiplied by twelve, plus any festival bonus or other one-off taxable payment expected in the year.
- 2Subtract allowable deductions — the employee’s SSF or EPF contribution and any CIT contribution, capped collectively; then life insurance up to NPR 40,000 and health insurance up to NPR 20,000.
- 3Apply the progressive bands to the remaining taxable income to get tax before rebate.
- 4Apply the female taxpayer rebate of 10% if applicable.
- 5Divide the result by twelve. That is the monthly TDS to withhold.
What counts as assessable salary income
Assessable income is broader than base pay. It includes the cash allowances that make up gross salary, and one-off payments made during the year.
- Basic salary and all cash allowances forming gross pay
- Festival bonus, fully taxable in the year it is paid
- Overtime and any performance or incentive payment
- The employer’s retirement fund contribution is treated separately from the employee’s and does not reduce the employee’s taxable income
Mid-year joiners, leavers and salary changes
The annual projection has to be rebuilt whenever the assumption behind it changes. An employee joining in the sixth month of the fiscal year has roughly half a year of income, so their annual projection — and therefore their band position — is lower than a full-year employee on the same monthly salary.
The same applies to a mid-year raise. The correct treatment is to reproject annual income from the new salary, recompute the annual tax, subtract what has already been withheld, and spread the remainder across the months that are left.
Slab-wise tax calculator
| Band | Rate | Tax |
|---|---|---|
| 0 – 10,00,000 | 0% (waived) | 0.00 |
| 10,00,000 – 15,00,000 | 10% | 14,720.00 |
| 15,00,000 – 25,00,000 | 20% | 0.00 |
| 25,00,000 – 40,00,000 | 27% | 0.00 |
| 40,00,000+ | 29.0% | 0.00 |
- Annual taxable income
- 11,47,200.00
- Annual TDS
- 14,720.00
- Monthly TDS
- 1,226.67
What the employer has to do
Withholding is only the first half of the obligation. The amount withheld has to be deposited with the Inland Revenue Department within the statutory window, and reported so that each employee’s credit is recorded against their PAN.
Employees need a statement of what was withheld on their behalf during the year. Keeping the per-employee working — income, deductions applied, band-by-band tax — is what makes both the deposit and any subsequent query straightforward to answer.
Frequently asked questions
What happens if too much TDS was withheld during the year?
Over-withholding is settled through the employee’s annual return, where the tax actually due is compared with the credit already deposited against their PAN. Keeping the monthly working documented is what makes the reconciliation possible.
Does the employer’s SSF contribution increase the employee’s tax?
The employer’s 20% contribution is a cost to the employer that sits on top of gross salary. It is not part of the employee’s gross pay, so it does not appear in the employee’s assessable salary income for the purpose of the bands.