Income Year vs. Assessment Year & Taxable Income Computation

Key Concepts: Income Year vs. Assessment Year

1. Definitions

classDiagram
    class IncomeYear {
        + Starts on 1st Baisakh
        + Ends on 30th Chaitra
        + Follows financial accounting year
        + Example: 2079/80
    }
    class AssessmentYear {
        + Starts on 1st Baisakh of the year following the income year
        + Ends on 30th Chaitra of the same year
        + Example: Income Year 2079/80 → Assessment Year 2080/81
        + Tax is computed and filed in this year
    }
    IncomeYear --> AssessmentYear : "Income Year → Assessment Year"

• Income Year (Fiscal Year): The 12-month period for which income is earned and expenses are incurred. In Nepal, it runs from 1st Baisakh to 30th Chaitra (e.g., 2079/80).
• Assessment Year: The year in which tax is computed and filed for the preceding income year. It starts 1st Baisakh of the year following the income year (e.g., Income Year 2079/80 → Assessment Year 2080/81).

Why the delay? Tax authorities need time to verify returns, audit businesses, and process filings before levying tax.

2. How Taxable Income is Computed

Taxable income is calculated using the formula:

**Taxable Income = Gross Income – Allowable Deductions**

Allowable deductions include:

• Business expenses (salaries, rent, depreciation, repairs).
• Losses carried forward (if applicable).
• Donations to approved institutions (up to 10% of gross income).
• Interest on loans for business purposes.

In the Real World

1. eSewa & Khalti (Digital Payments)

   • When you pay taxes online via eSewa or Khalti, the system automatically calculates your taxable income based on your declared earnings (e.g., salary, business profits) and deducts tax for the assessment year (not the income year).
   • Example: If you earn Rs. 500,000 in 2079/80 (Income Year), eSewa will compute tax for Assessment Year 2080/81.

2. Nepal Rastra Bank (NRB) & Bank Loans

   • Banks like NMB or Global IME compute interest on loans as tax-deductible expenses for businesses. If a Kathmandu retail shop takes a loan for expansion, the interest paid reduces its taxable income in the income year.

3. Daraz & Pathao (E-commerce & Logistics)

   • Daraz sellers must report their gross sales (Income Year) and deduct allowable expenses (warehouse rent, shipping costs) to compute taxable income. Pathao drivers declare their earnings minus fuel/vehicle expenses to avoid overpaying tax.

Worked Example: Taxable Income Calculation for a Kathmandu Retail Shop

Business Name: Kathmandu Mart (Retail Shop) Income Year: 2079/80 Assessment Year: 2080/81

Given Data:

Step-by-Step Calculation:

1. Compute Gross Profit:

   Gross Profit = Gross Sales – COGS
   = 12,00,000 – 7,50,000 = **4,50,000**
   

2. Deduct Allowable Expenses:

   Total Deductions = Rent + Salaries + Depreciation + Donation
   = 3,00,000 + 2,00,000 + 50,000 + 1,00,000 = **6,50,000**
   

   But: Donations are limited to 10% of gross sales (Rs. 1,20,000). Since Rs. 1,00,000 ≤ Rs. 1,20,000, it is fully deductible.

3. Adjust for Previous Year’s Loss:

   • Losses from the previous income year (2078/79) can be carried forward and deducted in 2079/80.
   • Net Profit Before Loss Adjustment:

     4,50,000 (Gross Profit) – 6,50,000 (Expenses) = **-2,00,000 (Loss)**
     

   • After Adjusting Previous Loss (Rs. 2,00,000):

     Net Profit = -2,00,000 – 2,00,000 = **-4,00,000 (Total Loss)**
     

     But: If the business had a profit in 2078/79, the loss from 2079/80 could be set off against it.

4. Final Taxable Income:

   • Since the business incurred a loss, its taxable income = Rs. 0.
   • No tax is payable for Assessment Year 2080/81.

Note: If the business had a profit, tax would be computed as:

Taxable Income = Net Profit – Standard Deduction (if applicable)

For individuals, a standard deduction of Rs. 50,000 is allowed (Section 8 of Income Tax Act, 2058).

Comparison: Income Year vs. Assessment Year

Special Cases in Taxable Income Computation

1. Business Losses

• Short-term losses (current year): Can be set off against other income (salary, rent, etc.).
• Long-term losses (carried forward): Can be set off against future business profits for up to 8 years (Section 10 of Income Tax Act, 2058).

Example: If Kathmandu Mart had a loss of Rs. 3,00,000 in 2079/80, it can:

• Deduct Rs. 1,00,000 from other income (e.g., rental income).
• Carry forward Rs. 2,00,000 to future profitable years.

2. Depreciation Allowance

Depreciation is allowed on fixed assets (machinery, vehicles, buildings) at 10% per annum (Section 19 of Income Tax Act, 2058).

Example: If Kathmandu Mart buys a delivery van for Rs. 5,00,000, depreciation for the year is:

Depreciation = 10% of WDV (Written Down Value)
= 10% of 5,00,000 = **Rs. 50,000**

This Rs. 50,000 is deductible from taxable income.

The Accounting Cycle & Tax Filing Process

flowchart TD
    A["Income Year Ends<br/>(30th Chaitra)"] --> B["Prepare Financial Statements<br/>(Balance Sheet, P&L)"]
    B --> C["Compute Gross Income<br/>(Deduct COGS, Expenses)"]
    C --> D["Adjust for Losses/Deductions<br/>(Carry forward, Donations)"]
    D --> E["Determine Taxable Income"]
    E --> F["File Tax Return by<br/>30th Chaitra (Assessment Year)"]
    F --> G["Tax Audit<br/>(If turnover > Rs. 50 lacs)"]
    G --> H["Tax Payment<br/>(If applicable)"]

Exam Tip

1. Memorize the dates:

   • Income Year: 1st Baisakh – 30th Chaitra.
   • Assessment Year: Next year’s same period.

2. Loss carry-forward rules:

   • Short-term losses can be set off against other income.
   • Long-term losses can be carried forward for up to 8 years.

3. Depreciation is always 10% (unless specified otherwise in the question).

4. Donations are limited to 10% of gross income—never exceed this in calculations.

5. For numerical problems:

   • Always start with gross income → deduct expenses → adjust losses → compute taxable income.
   • Show step-by-step working (examiners reward clarity).

6. Real-world tie-ins:

   • Relate to eSewa tax payments, bank loan interest deductions, or Daraz seller tax filings in exam answers.

Final Note: This unit is heavily tested in both TU and NEB exams. Focus on: ✅ Income Year vs. Assessment Year (dates, purpose). ✅ Taxable Income Calculation (gross income – deductions). ✅ Loss adjustments (carry forward rules). ✅ Depreciation (10% WDV method).

Practice past exam questions on loss carry-forward and depreciation—they appear every year.