Residential Status & Taxable Income: Rules, Tests & Computation

TAKEAWAYS:

• Residential status in Nepal is determined by the 182-day rule, employment test, or family ties—only residents pay tax on global income.
• Assessable income includes all income sources (salary, business, capital gains), while taxable income excludes allowable deductions (e.g., donations, medical expenses).
• Income year (April 16–April 15) ≠ assessment year (following fiscal year); tax is computed on the former but paid in the latter.
• Government employees use the scale of pay (basic + DA + HRA) minus allowable deductions to compute taxable employment income.
• Business income is taxed after deducting depreciation (WDV method) and allowable expenses—never personal withdrawals.
• Specific incomes (dividends, royalties, lottery winnings) have unique tax treatments (e.g., 10% flat tax on dividends, 50% on lottery).

1. Residential Status: Who Pays Tax in Nepal?

The Income Tax Act 2058 defines resident taxpayers (liable for global income) vs. non-residents (taxed only on Nepal-sourced income). Three tests determine residency:

A. The 182-Day Rule (Primary Test)

A person is a resident if they stay in Nepal for 182 days or more in a financial year (Shrawan 1–Chaitra 30). Visual:

flowchart TD
    A["Stay in Nepal ≥182 days?"] -->|"Yes"| B["Resident\nTaxed on global income"]
    A -->|"No"| C["Check other tests"]
    C --> D["Employed in Nepal?"] -->|"Yes"| E["Resident\nTaxed on global income"]
    C --> D -->|"No"| F["Family ties?"] -->|"Yes"| G["Resident\nTaxed on global income"]
    F -->|"No"| H["Non-resident\nTaxed only on Nepal-sourced income"]

B. Employment Test

If a person is employed in Nepal (even for <182 days), they are a resident and taxed on global income. Example:

• Mr. Basnet (past exam question) is a government officer promoted in 2073 Shrawan. Even if he works only 150 days, he is a resident because his employment is in Nepal.

C. Family Ties Test

If a person’s spouse/children are ordinarily resident in Nepal, they may also be considered a resident (used if the first two tests fail).

2. Assessable Income vs. Taxable Income: What’s the Difference?

Visual: Deductions Table

| **Deduction Type**       | **Max Limit (Rs.)** | **Example**                          |
|--------------------------|---------------------|--------------------------------------|
| Donations                | 10% of assessable income | Rs. 250,000 (10% of Rs. 2,500,000)   |
| Medical expenses         | Actual (up to Rs. 100,000) | Hospital bills for self/dependents |
| Life insurance premiums  | Actual (up to Rs. 100,000) | Rs. 50,000 paid for policy          |
| Interest on housing loan | Actual (up to Rs. 200,000) | Rs. 150,000 EMI interest            |

3. Income Year vs. Assessment Year: When Is Tax Paid?

Example:

• Income Year 2078 (April 16, 2078 – April 15, 2079) → Assessment Year 2079/80 (tax due by Ashwin 15, 2079).

4. Employment Income: How Government Salaries Are Taxed

Government employees (e.g., NTC, Ncell, NABIL) have taxable salary computed as: Basic Salary + DA + HRA – Allowable Deductions

Worked Example: Miss Hira (Past Exam Question)

Given:

• Taxable employment income = Rs. 11,20,000
• Tax Slab (2079/80):

  | **Income Slab (Rs.)** | **Tax Rate** | **Tax (Rs.)**       |
  |-----------------------|--------------|---------------------|
  | Up to 5,00,000        | 0%           | 0                   |
  | 5,00,001 – 10,00,000   | 10%          | 50,000              |
  | 10,00,001 – 15,00,000  | 20%          | 1,04,000 (100k × 20%) |
  | **Total Tax**         |              | **1,54,000**        |
  

Tax Liability:

• Rs. 1,54,000 (paid in assessment year 2079/80).

5. Business Income: Depreciation and WDV Method

Businesses (e.g., Kathmandu retail shops, Daraz sellers) deduct depreciation (using Written Down Value (WDV) method) before computing taxable profit.

WDV Formula:

Depreciation = Opening WDV × Rate (10% for Block C, 20% for Block D)

Worked Example: SS Trades (Past Exam Question) Given:

• Block B: Opening WDV = Rs. 400,000; New addition = Rs. 150,000 (on Ashwin 1)
• Block C: Opening WDV = Rs. 900,000; New addition = Rs. 200,000 (on Kartik 15)

Step-by-Step Calculation:

1. Block B (10% rate):

   • Opening WDV: Rs. 400,000
   • Depreciation (10%): Rs. 40,000
   • Closing WDV: Rs. 360,000
   • New addition (Rs. 150,000) added after Ashwin 1 → No depreciation in same year.

2. Block C (20% rate):

   • Opening WDV: Rs. 900,000
   • Depreciation (20%): Rs. 180,000
   • Closing WDV: Rs. 720,000
   • New addition (Rs. 200,000) added after Kartik 15 → No depreciation in same year.

Final Taxable Business Income:

Gross Profit (from P&L) – Depreciation (Rs. 40,000 + Rs. 180,000) = Taxable Income

6. Taxation of Specific Incomes

In the Real World

1. eSewa & Khalti (Digital Payments)

   • Taxable Income Rule: Freelancers earning via eSewa/Khalti must declare all income (even if paid digitally). If they stay ≥182 days in Nepal, they are residents and taxed on global income (e.g., foreign freelance work).

2. Daraz Sellers (E-Commerce)

   • Business Income & WDV: Daraz sellers must compute taxable profit by deducting depreciation on assets (e.g., laptops, delivery vehicles) using the WDV method. Example: A seller with Rs. 500,000 in inventory must account for 10% depreciation (Rs. 50,000) if assets are in Block C.

3. Nepal Rastra Bank (NRB) Employees

   • Employment Income: NRB officers are government employees, so their taxable salary is computed as: Basic + DA + HRA – Deductions (e.g., PF, life insurance). Example: An officer with Rs. 12,00,000 salary pays tax as per the slab rates (see earlier table).

Exam Tip

1. Memorize the 182-day rule—it’s the most common test for residency.
2. Differentiate assessable vs. taxable income—examiners love asking for deductions.
3. Government employees: Always compute tax using scale of pay (basic + DA + HRA).
4. Business income: Never forget WDV depreciation—it’s a common deduction.
5. Specific incomes (dividends, lottery): Flat rates (10%, 50%) are easy marks—learn them by heart.
6. Past exam pattern: Questions often mix residency tests + income computation—practice both together.

Final Visual: The Accounting Cycle for Tax Computation

flowchart LR
    A["Income Year\n(April 16–15)"] --> B["Compute Assessable Income\n(Salary + Business + Other)"]
    B --> C["Subtract Deductions\n(Donations, Medical, etc.)"]
    C --> D["Taxable Income"]
    D --> E["Apply Tax Slabs\n(0%, 10%, 20%, etc.)"]
    E --> F["Tax Payable in\nAssessment Year"]
    F --> G["File ITR by\nAshwin 15"]