Tax Exemption Codes & Categories Explained (IRD Reference Guide)

If you've ever looked at an IRD form, a TDS certificate, or a tax return and seen a reference to an "exempt amount" or an "exemption category," you've probably wondered exactly where that comes from and whether there's a master list somewhere. There is — but it isn't a simple numbered chart. Nepal's tax exemptions are set out in Section 10 of the Income Tax Act 2058 (2002), organized as clauses (a, b, c, and so on) rather than the kind of standalone numeric "code" system you might find in some other countries' tax systems.

This guide walks through what these exemption categories actually cover, how to correctly reference one when filing, what documentation you need to back it up, and what happens if you claim the wrong one. A quick note before we start: this is general reference information, not personalized tax advice — for anything filing-specific to your situation, it's worth confirming directly with the Inland Revenue Department or a registered tax consultant.

What "Exemption Codes" Actually Refer To

It's worth clearing up a common point of confusion first. The IRD doesn't maintain a single published list of numbered "exemption codes" (like E-01, E-02) that individual taxpayers select from a dropdown. What the term usually refers to in practice is one of two things: the specific clause of Section 10 of the Income Tax Act under which an amount is exempt, or the "revenue code" or "revenue head" used in the IRD's TDS and e-filing systems to classify a type of transaction (salary, rent, interest, service fee, dividend, and so on). When someone talks about "citing the correct exemption code," they usually mean correctly identifying which Section 10 clause applies to the income in question, or selecting the right transaction category in the e-TDS system so an exempt payment isn't wrongly taxed at source.

Common Exemption Categories Referenced on Forms

Section 10 of the Income Tax Act sets out the amounts exempted from tax. The categories most commonly referenced on returns, TDS forms, and IRD correspondence include:

• Treaty-based exemptions: Amounts exempt under a bilateral or multilateral treaty or agreement between the Government of Nepal and a foreign country or international organisation.
• Foreign government service income: Amounts received by Nepali citizens employed in a foreign government's service, where the payment comes from that government's own funds.
• Non-Nepali citizens in Nepal government service: Income received by a non-Nepali citizen appointed to Government of Nepal service under specific tax-exemption terms.
• Government social security allowances: Allowances provided by the federal, provincial, or local government as social security — commonly covering widows, senior citizens, and persons with disabilities.
• Gifts, inheritance, and scholarships: Amounts received as a gift, inheritance, or scholarship, except for any portion that must still be included in income computation under other sections of the Act.
• Donations to exempt organizations: Contributions made to organizations that have been granted exempt status by the IRD, including contributions to Nepal Rastra Bank.
• Foreign military or police pensions: Pensions received by Nepali citizens who retired from foreign military or police service.
• Special industries, cooperatives, and tax-holiday sectors: Partial or full exemptions available to approved special industries (including hydropower projects meeting specific criteria), agricultural income, and registered cooperatives, generally requiring separate approval or registration.

How to Correctly Cite an Exemption When Filing

For individual taxpayers filing a self-assessment return (commonly the D-01 or D-02 forms depending on your taxpayer category), the correct approach is to reference the specific Section 10 clause the exempt amount falls under directly in the relevant schedule of your return, rather than searching for a standalone numeric code. If you're a withholding agent processing a payment that should not have TDS deducted because it falls under an exemption, you need to select the correct transaction category in the e-TDS system so the payment is recorded under the right revenue head rather than defaulting to a taxable category.

For special industries, tax holidays, or organizational exemption status (such as NGOs seeking exempt status), the exemption typically needs to be pre-approved — this means registering with the IRD or the relevant government body (such as the Department of Industry for industrial tax holidays) before you can claim the exemption on a return, rather than simply declaring it after the fact. Where a specific approval number or exemption certificate has been issued to you or your organization, that reference number should be cited alongside the relevant Section 10 clause when filing.

Documentation to Support Each Category

• Treaty exemptions: A copy of the relevant treaty provision or a certificate/letter confirming your eligibility under that treaty, often obtained through the relevant embassy, international organization, or the Ministry of Finance.
• Foreign government service: Appointment letter or employment contract confirming the foreign government as the source of funds, along with payment records.
• Government allowances: The official allowance disbursement letter or record from the relevant government office (senior citizen ID, disability certificate, or widow allowance documentation, as applicable).
• Gifts, inheritance, and scholarships: A gift deed, inheritance documentation (such as a relationship certificate or probate record), or an official scholarship award letter clearly stating the amount and purpose.
• Donations to exempt organizations: A receipt from the receiving organization confirming its IRD-approved exempt status, along with your own donation record.
• Foreign military/police pensions: Pension disbursement documentation from the relevant foreign government or institution, along with proof of prior service.
• Special industries and tax holidays: The industry registration certificate, the specific tax-holiday approval letter from the Department of Industry or relevant authority, and annual compliance filings confirming continued eligibility.

In every case, the underlying principle is the same: keep the original documentation, not just a note referencing the exemption, since the IRD can request supporting evidence at any point, including during an audit conducted well after the original filing.

Frequently Asked Questions

What happens if the wrong exemption code is claimed?

If an exemption is claimed incorrectly, the IRD can disallow it upon review or audit, which typically results in the previously exempted amount being reassessed as taxable income, with the corresponding tax due plus interest for the period it went unpaid. Depending on the circumstances, the Income Tax Act also provides for fees and penalties where returns are incomplete, inaccurate, or supporting documentation isn't maintained as required, so an incorrectly claimed exemption is best corrected proactively — through a revised return or by contacting the concerned tax office — rather than left unaddressed until an audit uncovers it.

Is there an official numbered list of exemption codes from IRD?

No single public numeric code chart exists for taxpayers to select from. Exemptions are instead defined by specific clauses under Section 10 of the Income Tax Act, and TDS transactions are classified using revenue codes/heads within the e-TDS and e-filing systems.

Do I need pre-approval to claim a tax exemption in Nepal?

For some categories — particularly organizational exempt status, industrial tax holidays, and treaty-based relief — yes, pre-approval or registration with the IRD or another relevant authority is generally required before the exemption can be claimed on a return. Other categories, like gifts or scholarships within the permitted scope, are typically self-declared with supporting documentation kept on file.

Where can I find the exact legal text of Nepal's tax exemptions?

The authoritative source is Section 10 of the Income Tax Act, 2058 (2002), available through the Inland Revenue Department's official website, along with any amendments introduced through subsequent Finance Acts.