In Nepal, the income tax exemption limit is set at NPR 500,000 for individuals and NPR 600,000 for couples, which appears generous compared to other countries. However, the first and second tax slabs following the exemption limit are very narrow, making Nepal’s tax system comparatively stringent. A long-term solution to this issue requires that tax slabs and limits be automatically adjusted annually according to the inflation rate.
For many years, before the presentation of each fiscal year’s budget, the government conducts budget pre-consultation programs across the country. Rooms fill with people, microphones circulate — and in almost every place, year after year, about 90 percent of participants repeat two consistent demands: “Don’t reduce tax rates, expand the taxable income range” and “Increase the income tax exemption limit — what use is NPR 500,000 nowadays?”
But how valid is this widely repeated demand by the general public to “increase the income tax exemption limit”? Currently, for the fiscal year 2082/83 (2025/26), the government, through the Income Tax Act, 2058 (2002), has arranged that a social security tax of only 1 percent is applied on annual income up to NPR 500,000 for individuals and NPR 600,000 for couples.
The determination of tax exemption limits depends on various factors such as the country’s economic condition, citizens’ income and wealth, and state policies. In Nepal, the exemption limit is by no means “low”. However, those subject to the highest marginal tax rate of 39 percent benefit from a 39 percent tax exemption on the increased exemption amount, while those subject to a 10 percent marginal tax rate receive only a 10 percent exemption.
