Chapter 4 · Part 4 — Deductions, Exemptions and Reliefs
Deductions, Exemptions and Reliefs
What comes off before the slabs apply, and what never enters the tax net at all.
4 of 14 · 10 min
What comes off before the slabs apply, and what never enters the tax net at all. This Part covers the reliefs available to individuals, the new exemptions added by the Finance Act 2083, and the caps that limit them.
Deduction versus exemption — the distinction that matters
┌──────────────────────────────────────────────────────────────────────┐
│ EXEMPT INCOME │
│ Never enters the tax computation at all. It is outside the base. │
│ → Section 10 of the Income Tax Act 2058 │
├──────────────────────────────────────────────────────────────────────┤
│ DEDUCTION / RELIEF │
│ Income enters the base, then an amount is subtracted before the │
│ slabs are applied. │
│ → its VALUE to you = deduction × your MARGINAL rate │
└──────────────────────────────────────────────────────────────────────┘
WHY THE DIFFERENCE MATTERS
Rs 25,000 of EXEMPT income
→ you keep Rs 25,000
Rs 25,000 DEDUCTION at a 27% marginal rate
→ you save 25,000 × 27% = Rs 6,750
⇒ A deduction is worth its face value multiplied by your marginal
rate. At the 1% band, a Rs 25,000 deduction saves Rs 250.Reliefs for individuals — the FY 2083/84 position
Insurance premium on a private building
╔═══════════════════════════════════════════════════════════════════╗ ║ Maximum deduction: Rs 10,000 ║ ║ (raised from Rs 5,000) ║ ║ ║ ║ LIMITED TO THE ACTUAL PREMIUM PAID, IF LOWER. ║ ╚═══════════════════════════════════════════════════════════════════╝ Premium paid Rs 7,000 → deduction Rs 7,000 (actual is lower) Premium paid Rs 12,000 → deduction Rs 10,000 (cap bites)
Tuition fee for children's education — new
╔═══════════════════════════════════════════════════════════════════╗ ║ Deduction = LOWER OF ║ ║ (a) 25% of the annual tuition fee paid, OR ║ ║ (b) Rs 25,000 ║ ╚═══════════════════════════════════════════════════════════════════╝ Annual fee 25% of fee Rs 25,000 DEDUCTION (lower) ────────────────────────────────────────────────────────── 40,000 10,000 25,000 10,000 80,000 20,000 25,000 20,000 100,000 25,000 25,000 25,000 ← the crossover 300,000 75,000 25,000 25,000 ← capped ⇒ The relief maxes out at an annual fee of Rs 100,000. Above that, extra fees give no extra relief.
Donations — Section 12
╔═══════════════════════════════════════════════════════════════════╗
║ Deductible donation = LOWER OF ║
║ (a) Rs 300,000, OR ║
║ (b) 5% of ADJUSTED TAXABLE INCOME ║
╚═══════════════════════════════════════════════════════════════════╝
Adjusted taxable income 5% of it Rs 300,000 DEDUCTION
────────────────────────────────────────────────────────────────
2,000,000 100,000 300,000 100,000
6,000,000 300,000 300,000 300,000 ← crossover
12,000,000 600,000 300,000 300,000 ← capped
⇒ The Rs 300,000 ceiling binds once adjusted taxable income
exceeds Rs 6,000,000.Retirement contributions
Contributions to an approved retirement fund are deductible within the limits prescribed by the Act [R]. Where a taxpayer contributes to the Social Security Fund (SSF), the 1% social security tax in the first band does not apply (Part 2.3).
New exemptions under Section 10
The Finance Act 2083 adds four categories of exempt income.
┌──────────────────────────────────────────────────────────────────────┐ │ (a) Section 10(Jha1) — DONATED LAND AND BUILDINGS │ │ Gains from disposing of private land or buildings donated to │ │ the federal, provincial or local government are exempt from │ │ tax for a natural person. │ │ → worked in Part 3.6 │ ├──────────────────────────────────────────────────────────────────────┤ │ (b) FOREIGN-GOVERNMENT-OWNED NOT-FOR-PROFIT LENDERS │ │ Tax on interest from debt investments in Nepal by a │ │ not-for-profit financial institution WHOLLY OWNED by a │ │ foreign government is exempt. │ │ → aimed at development finance flowing into Nepal │ ├──────────────────────────────────────────────────────────────────────┤ │ (c) DRINKING WATER AND SANITATION CONSUMER ORGANISATIONS │ │ Income earned for its stated objectives by an organisation │ │ registered under the Water Resource Act, 2049 is exempt. │ ├──────────────────────────────────────────────────────────────────────┤ │ (d) UNIVERSITIES │ │ No tax on the income of universities registered and operating │ │ in Nepal, for their stated objectives. │ └──────────────────────────────────────────────────────────────────────┘
Other exemptions and thresholds
| Item | Position |
|---|---|
| **Interest on deposits** with microfinance institutions, rural development banks, the postal bank and cooperatives | Taxable **above Rs 25,000** — Section 10(2) |
| **Cinema halls** established outside metropolitan and sub-metropolitan areas | **10 years' tax exemption** from the date of commercial operation |
| **IT sector sweat equity** received by employees | Need not be included in taxable income — Section 8 |
| **Agricultural business** | Definition now covers crops, horticulture, livestock, **aquaculture and apiculture** |
Corporate social responsibility — Section 12Gha
This provision has an unusual two-part effect that is easy to get wrong.
╔═══════════════════════════════════════════════════════════════════╗ ║ Businesses may deduct CSR expenses up to 1% of TAXABLE INCOME. ║ ║ ║ ║ BUT: CSR spending under Section 12Gha is deductible in ║ ║ computing TAXABLE INCOME — and NOT in computing ║ ║ ADJUSTED TAXABLE INCOME. ║ ╚═══════════════════════════════════════════════════════════════════╝
Why that second sentence matters.
ADJUSTED TAXABLE INCOME is the base for the DONATION limit
under Section 12 (5% of adjusted taxable income — see 4.2).
If CSR were deducted in computing adjusted taxable income, it
would shrink the base and therefore shrink the allowable
donation too — a compounding effect.
By excluding CSR from the adjusted-taxable-income computation,
the Act keeps the two reliefs INDEPENDENT of each other.
Taxable income ── CSR deducted here (1% cap)
Adjusted taxable
income ── CSR NOT deducted here
└─► donation limit (5% / Rs 300,000)Business deductions changed this year
Covered fully in Part 5, but the two headline changes belong here because they change what is deductible:
Cash transaction disallowance — Section 21(2)
╔═══════════════════════════════════════════════════════════════════╗
║ THRESHOLD LOWERED: Rs 50,000 → Rs 25,000 per transaction ║
╚═══════════════════════════════════════════════════════════════════╝
A single transaction paid in cash ABOVE the threshold is
DISALLOWED as a deduction.
⇒ A business paying Rs 30,000 in cash for a genuine expense
gets NO deduction for it this year, where last year it would
have been allowed.
⇒ Effective cost at a 25% corporate rate [R]:
Rs 30,000 expense × 25% = Rs 7,500 of lost tax relief,
on top of the Rs 30,000 already spent.Share and debenture issue costs — Section 21(3)
BEFORE: treated as CAPITAL EXPENDITURE
→ not deductible against income
NOW: Section 21(3) no longer treats them as capital expenditure
→ share and debenture issue costs are DEDUCTIBLESector-specific relief: hire-purchase companies
NRB-licensed HIRE-PURCHASE COMPANIES may now deduct loan-loss
provisions up to 5% of:
• outstanding loans
• written-off loans
• non-banking assets
— the same basis already available to banks and financial
institutions (BFIs).How the reliefs stack — a worked example
Illustrative. A salaried resident individual, FY 2083/84.
Gross remuneration Rs 2,400,000
LESS reliefs and deductions
Approved retirement fund contribution [R] (200,000)
Insurance premium, private building
(actual premium Rs 12,000 → capped) (10,000)
Tuition fee relief
(annual fee Rs 90,000 → 25% = 22,500,
lower of that and Rs 25,000) (22,500)
Donation
(donated Rs 150,000; adjusted taxable income
gives a 5% limit above this, and it is under
Rs 300,000, so fully allowed) [R] (150,000)
───────────
TAXABLE INCOME Rs 2,017,500
APPLY THE SLABS (Part 2.1)
First 1,000,000 × 1% = 10,000
Next 500,000 × 10% = 50,000
Next 517,500 × 20% = 103,500
────────
TAX LIABILITY Rs 163,500
Effective rate on taxable income = 163,500 ÷ 2,017,500 = 8.10%
Effective rate on GROSS = 163,500 ÷ 2,400,000 = 6.81%
╔═══════════════════════════════════════════════════════════════╗
║ VALUE OF THE RELIEFS ║
║ Total deductions Rs 382,500 ║
║ Marginal rate at the top of the stack: 20% ║
║ Tax saved ≈ 382,500 × 20% ≈ Rs 76,500 ║
║ ║
║ ! "≈" because the deductions strip income off the TOP of ║
║ the stack. Without them, taxable income would be ║
║ Rs 2,400,000 and tax would be Rs 240,000 — so the actual ║
║ saving is 240,000 − 163,500 = Rs 76,500. The approximation ║
║ holds here because all the removed income sat in the 20% ║
║ band. ║
╚═══════════════════════════════════════════════════════════════╝Common mistakes
MYTH "A Rs 25,000 deduction saves me Rs 25,000."
FACT It saves deduction × MARGINAL RATE. At 1%, that is Rs 250.
MYTH "Tuition relief is 25% of what I pay."
FACT LOWER of 25% or Rs 25,000. It stops growing at a Rs 100,000 fee.
MYTH "Taxable income and adjusted taxable income are the same."
FACT They are different computations. CSR is deducted in one, not
the other (4.4).
MYTH "I can donate freely and deduct it all."
FACT Lower of Rs 300,000 or 5% of adjusted taxable income.
MYTH "Cash payments are fine if the expense is genuine."
FACT Above Rs 25,000 per transaction, the deduction is DISALLOWED
regardless of genuineness.
MYTH "Exempt bodies pay no tax on anything."
FACT The exemption attaches to income earned FOR THEIR STATED
OBJECTIVES.Part 4 — Revision table
| Relief / exemption | FY 2083/84 position |
|---|---|
| Insurance premium, private building | Rs **10,000** (was Rs 5,000), capped at actual premium |
| Tuition fee, children | **Lower of** 25% of annual fee **or** Rs 25,000 |
| Donation (Section 12) | **Lower of** Rs 300,000 **or** 5% of adjusted taxable income |
| CSR (Section 12Gha) | Up to 1% of taxable income; deductible in taxable income, **not** in adjusted taxable income |
| Cash transaction (Section 21(2)) | Disallowed above **Rs 25,000** per transaction (was Rs 50,000) |
| Share/debenture issue costs (Section 21(3)) | **Now deductible** — no longer capital expenditure |
| Donated land/buildings to government | **Exempt** — Section 10(Jha1) |
| Foreign-government-owned NFP lender interest | **Exempt** |
| Water/sanitation consumer organisations | **Exempt** for stated objectives |
| Universities in Nepal | **Exempt** for stated objectives |
| MFI/cooperative deposit interest | Taxable **above Rs 25,000** — Section 10(2) |
| Cinema halls outside metro/sub-metro | **10-year** exemption from commercial operation |
| IT sweat equity | Excluded from taxable income — Section 8 |
| Agricultural business | Now includes **aquaculture and apiculture** |
| Hire-purchase companies | Loan-loss provision deductible up to **5%**, as for BFIs |
| Verify | ird.gov.np + Finance Act 2083 |
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