TDS in Nepal (2026): Rates, Filing & Employer Obligations

Tax Deducted at Source (TDS) in Nepal is the withholding-tax mechanism under the Income Tax Act 2058 (2002), Sections 87–93, that requires the payer of certain payments — salary, rent, service fees, interest, dividend, royalty, commission, contract payments — to deduct income tax at the prescribed rate at the time of payment and deposit it with the Inland Revenue Department (IRD). The deductor files a monthly e-TDS return through the taxpayer portal and issues a TDS certificate to the deductee, which the deductee then claims against their final income-tax liability. Rates are set under Schedule 1 and revised annually by the Finance Act — always confirm the current rate before deducting.

This is the 2026 (2083 BS) guide to TDS in Nepal — what it is, who must deduct, the prevailing TDS rates by payment type, the monthly deposit deadline, the e-TDS return process, the TDS certificate obligation, common penalties for late or non-deduction, and how to handle an IRD TDS audit. Written for employers, HR teams, business owners, finance and accounting professionals, and the lawyers and tax advisors supporting them. For closely-related law see Income Tax Act in Nepal, TIN number in Nepal, and income tax rates in Nepal.

Alpine Law Associates — Nepal Bar Council-registered tax and corporate team handling TDS compliance, e-TDS filing, IRD audit defence, penalty mitigation and tax disputes.

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What is TDS and why does it exist?

Tax Deducted at Source is the mechanism by which Nepal collects income tax at the point of payment, rather than waiting for the recipient to file a return and pay. It serves three purposes:

• Cashflow for the State: tax flows monthly through the year, not in a single lump at year-end.
• Compliance discipline: the payer's incentive to record the deduction creates an audit trail of the underlying transaction — useful for VAT, corporate tax and sectoral monitoring.
• Coverage of small recipients: recipients (e.g. small consultants) who might not otherwise file are still brought into the tax net through the deductor.

The deductee is not over-taxed by TDS. The deduction is a prepayment of the deductee's annual income tax. At year-end the deductee files their income-tax return, computes their final liability, and either claims a refund (if TDS exceeds final tax) or pays the balance (if final tax exceeds TDS).

Who must deduct TDS in Nepal?

The Income Tax Act 2058 imposes the deduction obligation on the payer. The principal categories:

• Employers: every employer paying salary above the basic threshold must deduct salary TDS at the employee's slab rate. There are no exemptions for size of employer.
• Businesses making payments for services: companies, partnerships and registered firms paying for consultancy, professional services, technical services, contractor work, advertising, audit and similar must deduct.
• Banks and financial institutions: on interest paid to depositors and lenders.
• Companies declaring dividends: on dividends distributed to resident and non-resident shareholders.
• Tenants: registered persons paying rent above the threshold to a Nepali landlord must deduct rent TDS.
• Government bodies, NGOs, statutory entities: on payments for services, contract works, rent, royalty and the rest.
• Foreign-payment payers: any person paying a non-resident for service rendered in Nepal must deduct at the higher non-resident rate, subject to applicable Double Taxation Avoidance Agreements (DTAAs).

Individuals making personal payments outside any business are generally not deductors — the rule is triggered by registered, business-character payments.

Common TDS rates by payment type

Rates are set under Schedule 1 of the Income Tax Act 2058 and refined annually by the Finance Act. The 2026 (2082/83 BS) prevailing-rate snapshot — always confirm against the current IRD circular at ird.gov.np before deducting:

• Salary: at the employee's annual income-tax slab rate (1% / 10% / 20% / 30% / 36% bands per the Finance Act). The employer projects the employee's annual income and deducts proportionally each month.
• Rent — Nepali resident landlord: 10% (both residential and commercial). The 10% rate applies to corporate / business tenants making the payment.
• Service / consulting / professional fee — Nepali resident: 1.5%. Applies to consultancy, audit, legal, technical and similar services from a Nepali resident provider.
• Service / consulting fee — foreign / non-resident: 15%, subject to applicable Double Taxation Avoidance Agreement (DTAA) reduced rate.
• Interest on deposit: 5% for individual depositors, 15% for entity / non-individual depositors.
• Dividend: 5% — resident and non-resident, subject to applicable DTAA. The dividend tax is the final tax on the recipient.
• Royalty: 15%.
• Commission: 15%.
• Meeting allowance / sitting fee: 15%.
• Contract payment / works: 1.5%.
• Insurance commission: 1.5%.
• Lottery / gain / windfall: 25% (final tax on the recipient).

For non-resident recipients, the relevant DTAA — where Nepal has one with the recipient's country of residence — may reduce the rate. The deductor should obtain a tax-residency certificate and a no-PE declaration from the non-resident before applying a reduced rate.

The deposit and filing process

Step 1 — Deduct at the time of payment

The TDS is deducted at the moment of payment (or credit, whichever is earlier). The deductor records the gross amount, the TDS deducted, the net paid, the deductee's TIN / PAN, and the section under which the deduction is made.

Step 2 — Deposit within 25 days of the next Nepali month

The TDS deducted in any Nepali month must be deposited with IRD within 25 days of the end of that month. Deposit is by bank or e-payment through the taxpayer portal at taxpayerportal.ird.gov.np. Late deposit attracts interest and additional fee under the Income Tax Act.

Step 3 — File the e-TDS return

The deductor files a monthly e-TDS return on the taxpayer portal within the same 25-day window. The return shows, for each deductee, the gross payment, the TDS rate applied, the TDS amount and the section / nature-of-payment code. The portal validates against deposit records.

Step 4 — Issue TDS certificate to the deductee

The deductor issues a TDS certificate to the deductee — typically annually for salary employees and on transaction or annual basis for service / contract recipients. The certificate is the deductee's evidence to claim the TDS credit on their own income-tax return. Failure to issue the certificate exposes the deductor to penalties and prevents the deductee from claiming credit, creating client friction.

Step 5 — Reconcile at year-end

At year-end the deductor reconciles all TDS deducted, all deposits made, all returns filed, and all certificates issued. The IRD's deductor account on the portal must show consistent totals across all four. Discrepancies trigger automated audit selection.

What happens if you fail to deduct or deposit?

Non-compliance with TDS is among the most consequential exposures in Nepali tax law because the failures multiply across the deductor's records:

• Interest on the unpaid TDS from the due date to actual deposit, computed monthly.
• Additional fee under the Income Tax Act on late filing of the e-TDS return.
• Disallowance of the underlying expense for income-tax computation — a payment on which TDS was required but not deducted is not deductible from the deductor's income, increasing the deductor's own corporate tax exposure.
• TDS payable joint and severally: the deductor remains primarily liable; recovery from the deductee is permitted but rare in practice.
• Audit cascade: a TDS finding in one year often triggers a multi-year IRD scrutiny, which compounds penalties.
• Director / authorised-signatory exposure: in serious or wilful cases, the IRD can pursue the authorised signatory personally.

Most TDS exposure in Nepali audits comes from under-rate deduction (e.g. applying 1.5% to a foreign-service payment that should be 15%) and missed-payee deduction (e.g. failing to deduct rent TDS where the rent runs through a personal account). Both are caught by reconciliation, both are expensive to remediate.

How to handle an IRD TDS audit

• Immediate response: on receipt of an IRD notice, the deductor has the prescribed window to file the records — typically 7–15 days. Counsel-drafted responses materially affect outcomes.
• Records to produce: the GL extracts of all payments in scope, the e-TDS returns filed, the deposit challans, the TDS certificates issued, the deductee TINs, the contract / engagement letters establishing the nature of payment, and the deductee's tax-residency / PE declarations for non-resident payments.
• Voluntary disclosure window: where past errors are discovered before the IRD finds them, voluntary disclosure with deposit of the missing TDS plus interest typically halves the additional-fee exposure.
• Settlement and appeal: orders can be settled at the IRD scrutiny level, appealed administratively, taken to the Revenue Tribunal, and onward to the Supreme Court on questions of law. Statutory deposit of disputed tax is required to maintain the appeal.

How Alpine Law Associates can help

Alpine Law Associates is a Nepal Bar Council-registered law firm based in Anamnagar, Kathmandu, with a dedicated tax and corporate practice. We act for employers, businesses, NGOs and foreign-invested companies on TDS compliance, e-TDS filing support, audit defence and disputes.

• Compliance set-up: mapping the deductor's payment universe to the correct sections, rates and codes; building the monthly TDS calendar; selecting the deductee data fields the e-TDS return needs.
• Monthly e-TDS filing support: review and filing of monthly returns through the taxpayer portal; coordination with banks for deposit challans.
• Foreign-payment advisory: applying the correct DTAA-reduced rates, drafting tax-residency and no-PE declarations, and managing the documentary trail IRD will scrutinise.
• Audit defence: drafting responses to IRD notices, producing reconciled records, negotiating settlements, and representing the deductor through scrutiny, Revenue Tribunal and Supreme Court appeal if needed.
• Voluntary disclosure: structuring voluntary catch-up filings to limit additional-fee exposure on past errors.
• Director liability protection: advisory on authorised-signatory exposure and corporate governance around TDS sign-off.
• Training: in-house TDS workshops for HR and finance teams, particularly around new-employee onboarding and foreign-vendor payments — see also Income Tax Act in Nepal.

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Last reviewed: April 2026.