TDS in Nepal Explained: Complete 2026/27 Guide to Rates, Rules & Filing for Employees and Businesses

If you've ever looked at your salary slip and wondered why the number in your bank account is smaller than the number in your offer letter, you've already met TDS. If you run a business and have ever paid rent, hired a consultant, or paid a contractor more than a small amount, you've met it from the other side too — as the one legally required to withhold it.

Tax Deducted at Source, or TDS, is one of the few areas of Nepali tax law that touches almost everyone — salaried employees, freelancers, landlords, contractors, and every business big or small. Yet it remains one of the most misunderstood parts of the system, mostly because the rate isn't a single number — it changes depending on what is being paid, to whom, and under what section of law.

This guide breaks it down properly: what TDS actually is, the current rates for FY 2083/84 (2026/27), how it's calculated for salaries versus business payments, who is responsible for withholding it, how to file it correctly, and what happens if you get it wrong.

What Is TDS, in Plain Terms?

TDS (Tax Deducted at Source) is exactly what it sounds like: a portion of tax is deducted before a payment reaches the recipient, and the person or company making the payment deposits that amount directly with the Inland Revenue Department (IRD) on the recipient's behalf.

It's governed by Sections 87 to 95A of the Income Tax Act, 2058 (2002), and the rates are revised most years through the annual Finance Act. So if you searched for "TDS rate in Nepal" and found three different numbers across three different websites, that's usually because they're each describing a different fiscal year.

The logic behind TDS is straightforward from the government's perspective:

• Collect tax as income is earned, rather than waiting for an annual return that may never get filed.
• Reduce tax evasion by putting the withholding obligation on the payer rather than relying solely on the recipient's honesty.
• Spread the tax burden evenly across the year instead of one large payment at year-end.
• Bring informal and unorganized transactions — rent, freelance work, casual contracts — into the formal tax net.

If you're an employee, your employer is the one who withholds TDS from your salary every month. If you're a business owner, you become a withholding agent the moment you pay rent, hire a consultant, pay a contractor above the threshold, or make several other categories of payment — and the legal responsibility to deduct correctly sits with you, not the person you're paying.

TDS Rates in Nepal for FY 2083/84 (2026/27)

The table below reflects the current schedule under the Income Tax Act, 2058, as updated by the Finance Act for FY 2083/84. Rates are applied to the taxable amount only — never to the VAT portion of an invoice.

This table is a practical summary, not a substitute for the official Finance Act text. Rates are revised almost every fiscal year, so always confirm the current figure against the IRD's official notification — especially for any transaction involving a non-resident, a sector-specific exemption, or a DTAA claim.

TDS on Salary: How It Actually Works

Salary TDS works differently from every other category above, because it isn't a flat rate — it's calculated by applying Nepal's progressive income tax slabs to your projected annual income, then dividing by twelve.

Current individual tax slabs for FY 2083/84:

*The 1% rate does not apply to pension income or to contributions made to an approved retirement fund or contribution-based social security fund by sole proprietorship taxpayers — these are exempt from this lowest band.

How your employer calculates this in practice:

1. They estimate your total annual taxable salary — basic pay, allowances, and any other taxable benefits, minus eligible deductions (retirement fund contributions, insurance premiums where applicable).
2. They apply the slab rates above to that projected annual figure to get your estimated annual tax.
3. They divide that annual tax by 12 to get your monthly TDS deduction.
4. If your actual income changes mid-year (a raise, a bonus, a new allowance), the projection is revised and your monthly TDS adjusts accordingly.

A simplified example: an employee earning NPR 60,000 per month (NPR 720,000 annually) would have the first portion of income taxed at the lowest applicable band, with the remaining amount pushed into the next slab. The employer recalculates this each month so that by year-end, the cumulative TDS withheld closely matches the actual annual tax liability — meaning most salaried employees with no other income source end up with little or nothing to settle at year-end.

Who Is Responsible for Deducting TDS?

This is the part many small business owners genuinely don't realize until it's a problem. You don't need to be a big company to be a "withholding agent" — the obligation kicks in automatically the moment you make a qualifying payment.

You are responsible for deducting TDS if you:

• Run a business and pay salaries — you must withhold tax from every employee's pay, every month, regardless of company size.
• Pay rent for office space, a shop, machinery, or equipment — 10% TDS applies unless you're paying a VAT-registered vehicle rental operator (1.5%) or renting from a natural person for house rent specifically (zero, per the current exemption).
• Hire a consultant or service provider — 15% if they only hold a PAN, or 1.5% if they're VAT-registered and issue a VAT invoice. This distinction matters enormously and is one of the most common sources of TDS errors.
• Sign a contract or deed exceeding NPR 50,000 — 1.5% TDS applies on the gross contract value.
• Pay a non-resident for services, contracts, or other qualifying payments — typically 5%, subject to any applicable Double Taxation Avoidance Agreement (DTAA).
• Distribute dividends as a resident company — 5% TDS, treated as final tax for most recipients.
• Operate an e-commerce or ride-sharing platform — 1% TDS on payments made to sellers or drivers using your platform.

You are personally liable if you fail to deduct. This is the single most important fact in this entire guide. Under the Income Tax Act, if you were required to withhold TDS and didn't, the law doesn't simply let you off — you become personally liable for the full tax amount you should have deducted, plus 15% annual interest, plus administrative penalties. The IRD treats failure to deduct as a serious compliance violation, not a minor oversight.

Final Withholding vs. Creditable Withholding — Why the Difference Matters

Not all TDS works the same way once it's deducted, and this distinction genuinely changes what a taxpayer needs to do next.

Final withholding means the tax deducted fully satisfies the tax liability on that income. The recipient generally doesn't need to include that income in their annual return, can't claim any expenses against it, and can't get a refund even if they were over-withheld. Payments treated as final withholding include:

• Dividends from resident companies
• House rent paid to a natural person not engaged in business
• Gains from investment insurance
• Gains from unapproved retirement funds
• Windfall gains
• Mutual fund distributions to natural persons
• Most payments to non-residents under Sections 87, 88, and 88A
• Meeting allowances up to NPR 20,000 per meeting, casual teaching fees, and exam-related payments

Creditable (non-final) withholding means the TDS deducted is treated as an advance payment against your actual tax liability for the year. You still need to include that income in your annual return, and the TDS already withheld is credited against whatever you owe — meaning you could get a refund if too much was withheld, or owe more if too little was. Most salary TDS, contract payment TDS (1.5%), and consultancy fee TDS fall into this category.

If you're a contractor or consultant receiving payments with TDS already deducted, this distinction tells you whether you still need to file an annual return reporting that income (creditable) or whether you're done once the TDS is withheld (final).

Filing and Depositing TDS: The e-TDS Process

Since electronic TDS filing became mandatory, the process has been fairly standardized:

1. Deduct TDS at the time of payment — never after the fact. The obligation arises at the point the payment is made, not when the contract was signed.
2. Deposit the amount with IRD through the official taxpayer portal at taxpayerportal.ird.gov.np.
3. File the monthly e-TDS return within 25 days of the end of the Nepali month in which the deduction was made.
4. Issue a withholding certificate to the payee, typically within 15 days, so they have proof of the deduction to claim against their own annual return (where the withholding is creditable rather than final).
5. Keep accurate records — PAN of the recipient, payment category, gross amount, and TDS deducted — since the IRD portal requires this data for every submission and discrepancies trigger compliance flags.

Key deadlines to remember:

• Employer TDS returns: monthly, due by the 25th of the following month
• Individual income tax return (salary/freelance): by end of Poush (mid-January)
• Corporate income tax return: within 3 months of fiscal year end, by end of Ashwin (mid-October)
• Advance tax installments for businesses: three payments due in Poush, Chaitra, and Ashadh

Penalties: What Happens When TDS Goes Wrong

The penalty structure is designed to make non-compliance more expensive than simply doing it correctly the first time:

• Failure to deduct TDS at all: personal liability for the full tax that should have been withheld, plus interest.
• Late deposit of deducted TDS: 15% annual interest on the unpaid amount.
• Late filing of the e-TDS return: NPR 100 per day, up to a maximum of NPR 5,000 per return.
• Incorrect TDS category or rate applied: treated as a compliance failure on audit, potentially triggering reassessment, interest, and penalty on the shortfall.

In practice, the two most common ways businesses get into trouble are: (1) not realizing they had a withholding obligation in the first place — often missed for years until an audit — and (2) withholding correctly but failing to file the monthly return on time, which still accrues penalties even though the tax itself was deducted properly.

Common TDS Mistakes Worth Avoiding

1. Deducting TDS on the VAT-inclusive amount instead of the pre-VAT taxable amount. TDS should only ever be calculated on the base service or goods value, never on the VAT component.
2. Confusing the VAT-registered vs. PAN-only service provider rates. A service fee invoice from a VAT-registered supplier attracts 1.5% TDS; the same service from a non-VAT-registered, PAN-only provider attracts 15%. Mixing these up is one of the single most frequent errors in Nepali payroll and accounts departments.
3. Forgetting that house rent paid to an individual landlord (not operating a business) is currently exempt from TDS, while rent paid to a business or for other types of rented assets generally is not.
4. Treating non-resident payments without checking for a DTAA. Nepal has tax treaties with several countries — including India, China, Thailand, South Korea, Austria, Norway, Sri Lanka, Mauritius, and Qatar — and a valid Tax Residency Certificate can reduce the otherwise-applicable rate. Without that certificate, the standard domestic rate applies regardless of the treaty's existence.
5. Not issuing withholding certificates on time, which leaves the recipient unable to properly claim their TDS credit when filing their own return.
6. Assuming a small business is exempt from withholding obligations. There is no general size-based exemption — if you make a qualifying payment, the obligation to withhold applies regardless of whether you're a five-person shop or a large corporation.

Practical Takeaways

If you're an employee: check your monthly pay slip against the current slab rates, confirm your marital status is correctly recorded with HR, and keep your withholding certificate at year-end — you'll need it even if you don't expect to owe additional tax.

If you're a business owner or employer: map out every category of payment you make — salaries, rent, contractor payments, consultancy fees — against the table above, confirm whether each recipient is VAT-registered or PAN-only, and build the monthly e-TDS filing into your routine accounting calendar rather than treating it as an afterthought.

If you're a freelancer or consultant: understand whether the TDS deducted from your payments is final or creditable, since this determines whether you still need to file an annual return reporting that income.

Everyone: remember that TDS rates are revised almost every fiscal year through the Finance Act. A rate that was correct last year may not be correct this year — always verify against the current year's schedule before relying on it for a real transaction.

This article is intended for general informational purposes only and does not constitute legal or tax advice. TDS rates and thresholds are revised through annual Finance Acts and IRD notifications — always confirm the current rate applicable to your specific transaction with a licensed tax advisor or the Inland Revenue Department (ird.gov.np) before filing.