If your business doesn't fall under the presumptive tax scheme, the IRD doesn't wait until year-end to collect its share — it expects you to estimate your annual tax liability and pay it in three instalments spread across the fiscal year. Miss a deadline or underpay by too much, and 15% annual interest starts running on the shortfall. Here's exactly how advance tax works, when it's due, and how to calculate it without over- or under-paying.
What Advance Tax Is and Who Must Pay It
Advance tax — also called estimated or instalment tax — is the mechanism by which income tax due for the current fiscal year is collected progressively rather than in one lump sum after the year closes. It applies to businesses and individuals whose total estimated tax liability for the year exceeds a minimum threshold (advance tax is not required if the total annual tax payable is below NPR 7,500). This covers most companies, partnerships, and self-employed individuals who don't qualify for the presumptive or turnover-based schemes, since D-01 and D-02 taxpayers settle their liability through those flat or turnover-linked mechanisms instead.
The Three Installment Deadlines Across the Fiscal Year
Nepal's fiscal year runs from Shrawan 1 to Ashadh end (mid-July to mid-July). Advance tax is paid cumulatively across three checkpoints within that year, under Section 94(3) of the Income Tax Act 2058:
Each instalment is cumulative, not additional — the second payment covers 70% of the full-year estimate minus whatever was already paid in the first instalment, and the third covers the remaining balance up to 100%.
Calculation Basis — Estimated Annual Taxable Income Method
You start by estimating your total taxable income for the full fiscal year — based on actual results so far plus a reasonable projection for the remaining months, using the prior year's return, current order books, and known seasonal patterns as your baseline. Apply the relevant tax rate (the corporate rate, or the personal income tax slabs for a sole proprietor) to that estimated income to arrive at your estimated annual tax liability. That figure is the base against which the 40%/70%/100% cumulative percentages are calculated at each deadline. An Estimated Tax Return declaring this figure must also be submitted to IRD by the Poush-end deadline, alongside the first payment.
How to Revise Your Estimate Mid-Year if Income Changes Materially
Business conditions rarely track a January projection perfectly through to July. If your actual results diverge significantly from your initial estimate — a large new contract, a slow quarter, an unexpected cost — you are allowed to revise the estimated tax figure before the second or third instalment, and the percentage due at that later deadline is calculated against the revised number. This matters both ways: revising upward avoids an underpayment penalty at year-end, while revising downward (with genuine justification) avoids overpaying and tying up working capital unnecessarily until your final return is processed.
Penalty and Interest for Underpayment of Any Instalment
IRD requires that at least 90% of your actual final tax liability be paid through advance instalments across the year. If the cumulative amount paid falls short of that 90% threshold, interest under Section 118 of the Income Tax Act applies — currently at 15% per annum — calculated on the shortfall for the period it remained unpaid. Separately, a fixed penalty (commonly cited around NPR 5,000) can apply if the Estimated Tax Return itself is not submitted by the Poush-end deadline, independent of whether the payment was made. Practically, this means the safest approach is to estimate slightly conservatively (on the higher side) rather than risk falling short of the 90% mark.
Adjustment of Advance Tax Paid Against the Final Annual Return
When you file your annual income tax return after the fiscal year closes, the advance tax instalments already paid are credited directly against your final computed liability. If your final tax liability turns out lower than what you paid in advance, the excess is either refunded or carried forward and adjusted against the next year's instalments, depending on IRD's processing at the time. If it turns out higher, you settle the balance with the annual return, and — if the shortfall relates to underpaid instalments rather than genuine new information — interest may still apply for the period each instalment was short.
Worked Example — A Business Estimating and Paying Quarterly
A trading business estimates its annual tax liability for FY 2083/84 at NPR 6,00,000 based on the first few months of the year plus historical seasonality.
By Poush end: Pay 40% of NPR 6,00,000 = NPR 2,40,000.
By Chaitra end: Cumulative 70% = NPR 4,20,000, less NPR 2,40,000 already paid = pay NPR 1,80,000.
By Ashadh end: Cumulative 100% = NPR 6,00,000, less NPR 4,20,000 already paid = pay NPR 1,80,000.
If, midway through the year, a large contract pushes the realistic full-year liability to NPR 7,50,000, the business should revise its estimate before the Chaitra payment so the remaining instalments track the higher, more accurate figure rather than compounding a shortfall into year-end.
FAQs — Advance Tax for Individuals With Only Salary Income
Q: Do salaried employees need to pay advance tax separately?
Generally no. Employers deduct TDS (tax deducted at source) from salary each month and deposit it directly with IRD, which already functions as a form of advance payment on the employee's behalf. A salaried individual with no other significant income source typically has no separate advance tax obligation.
Q: What if I have both salary and rental or business income?
The salary portion continues to be covered by employer TDS, but the additional business or rental income (net of any TDS already withheld by tenants or clients) may push your total estimated liability above the NPR 7,500 threshold, triggering the standard three-instalment advance tax obligation on that portion.
Q: How do I actually make the payment?
Generate a payment voucher through the IRD Taxpayer Portal and settle it via ConnectIPS, mobile banking, or an authorised bank branch — the same channels used for other IRD payments.
Note: Deadlines and percentages are set under Section 94(3) of the Income Tax Act 2058 and are consistent across recent fiscal years. Interest and penalty figures should be confirmed against the current Finance Act, as rates are subject to periodic revision.
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