1

BY DAMODAR LAMSAL

COMPUTATION OF TOTAL ASSESSABLE AND TAXABLE

INCOME

Concept Assessable Income and Taxable Income

Assessable income is all of the taxable income you earn each year. Taxable income refers to the
income remaining after that year's credits and deductions are applied. If a taxpayer earn income
from more than one source, than calculation of total taxable income is necessary. Resident
companies are subject to tax on their worldwide income. Non-residents are required to pay tax on
their net income acquired or earned in Nepal or income with source in Nepal. Tax is levied on the
net income after making deductions for certain expenses/allowances as specified in the ITA.
 Income of a resident person from the employment, business or investment of the year
irrespective of the location of the source of the income; and
 Income of a non-resident person from the employment, business, or investment of the year
but only to the extent the income has a source in Nepal
Assessable income = Chargeable incomes – Deductible expenses – Loss recovery (applicable to
business or investment)

The taxable income of a person for an income year is equal to the amount as calculated by
subtracting retirement contributions under section 63 and donation under section 12 from the
total assessable income from employment, business and investment for the year. It is noted that
the retirement contributions and donation are subtracted from total assessable income to
determine the taxable income if they are incurred for the year and claimed to deduct. Assessable
income is all of the taxable income you earn each year. Taxable income refers to the income
remaining after that year's credits and deductions are applied.
Income tax is levied on the net income earned or received from each of the following:
 Business income;
 Employment income;
 Investment income; and
 Windfall gains.

Taxable income = Assessable income – Contribution to recognized Retirement funds (Applicable to

Natural person) – Eligible Donation – other exemptions

1
  ERROR! NO TEXT OF SPECIFIED STYLE IN DOCUMENT. 2

According to the current provision for income tax returns, the taxable income can be determined
in the specific format of income returns designed by IRD to calculate the tax liability for natural
person or entity.
Statement of Taxable Income
Particulars Rs. Rs.
Assessable income from employment........................................................................................... xxx
Assessable income from business ................................................................................................ xxx
Assessable income from investment ............................................................................................. xxx
Total assessable income xxx
Less : Allowable reductions:
Contribution to approved retirement fund (ARF) ................................................................ xxx
Donation to tax exempt entity ............................................................................................. xxx xxx
Taxable income before other exemptions xxx
Less: Exemptions:
Life insurance premium ...................................................................................................... xxx
Health insurance premium ................................................................................................. xxx
Disable exemption ............................................................................................................. xxx
Pension exemption ............................................................................................................. xxx
Remote area exemption ..................................................................................................... xxx xxx
Foreign allowance exemption (only for Nepalese diplomat) ...............................................
Total Taxable Income xxx

Allowable Reductions
Following payments are allowed for reduction from total assessable income for the purpose of
computing taxable income of the person.
1. Retirement contribution (section 63): The amount contributed by the person to a approved
retirement fund may claim for reduction from total assessable income:
Maximum Rs. 300,000 for PF or,Rs.500,000 for SSF
or 1/3rd of assessable income
or actual contribution i.e 20% of salary+ CIT (if Contribution to PF) or,31 % of basic salary + CIT
(If contribution to SSF)
whichever is less is allowed for reduction.
2. Donation to exempt organization (Section 12): A person may claim the reduction of donation
from taxable income given to a tax-exempt organization approved by Inland Revenue
Department (IRD). There are following three provisions regarding to the reduction of
donation.
a. Donation given by a person to an tax exempt organization or entity is allowed for reduction
from taxable income:
or 5% of adjusted taxable income ................................................................................ Rs. ×××
Or, Actual donation paid .................................................................................................Rs. ×××
Or, Maximum limit ............................................................................................................Rs. 100,000
(whichever is less is allowed for reduction)
b. Donation given by a company for the protection and promotion of religious, cultural and
ancient heritage and building of public physical infrastructure for promoting sports are
allowed for reduction with a pre-approval of Inland Revenue Department (IRD). The
donation allowed for reduction is;
10% of total assessable income .................................................................................. Rs. ×××
Or, Actual donation paid ............................................................................................... Rs. ×××
Or, Maximum limit .............................................................................................. Rs. 10,00,000
  ERROR! NO TEXT OF SPECIFIED STYLE IN DOCUMENT. 3

(whichever is lower is allowed for deduction)

c. The government of Nepal may allow full or partial reduction of donation incurred for
special purpose for a specific year by publishing a notice in the Nepal Gazette.
Or, Donation given to Prime Ministry Relief Fund, Earthquake Victim Relief Fund and Earthquake
Reconstruction Authority is fully allowed as per Income Tax Act.
c. Other reductions: Following reductions may also claim by a resident person from his total
assessable income.
i. Life insurance premium: Life insurance premium paid for his/her life is allowed for
reduction from total assessable income:
Allowable limit:
Actual LIP paid ........................................................................................ Rs. ×××
Or, Maximum limit ............................................................................... Rs 40,000
(Whichever is lower)
ii. Health insurance premium: Likewise, life insurance premium, the health insurance
premium is also allowable for deduction up to maximum Rs 20,000 per annum from
assessable income.
Allowable limit:
Actual health insurance premium paid .................................................... Rs. ×××
Or, Maximum limit .................................................................................Rs 20,000
(Whichever is lower)
iii. Remote area exemption: An individual (employee) working in a remote area specified by
Government of Nepal is entitled to a reduction of remote area allowance Rs 10,000 to Rs
50,000 from taxable income depending up on the location of remote area worked by
individual (employee). The maximum limits for various remote area are;
Allowable limit:
Remote Area-A ....................................................................................Rs 50,000
Remote Area-B ..................................................................................Rs 40,000
Remote Area-C .................................................................................Rs 30,000
Remote Area-D .................................................................................Rs 20,000
Remote Area-E .................................................................................Rs 10,000
iv. Pension income exemption: A person who received pension income can get additional
facility for deduction from his/her assessable income.
Allowable limit:
Actual pension income ............................................................................ Rs. ×××
Or 25% of basic exemption ..................................................................... Rs. ×××
(i.e. Rs 500,000 for single and Rs. 600,000 for couple)
(Whichever is lower)
v. Disable exemption: Disabled person who earn assessable income also allowed for
deduction as exemption.
Allowable limit:
50% of basic exemption (i.e. Rs 500,000 for single and Rs 600,000 for couple)
vi. Foreign allowance exemption: Nepalese diplomat who earn assessable income is also
allowed for deduction such facilities.
Allowable limit:
75% of foreign allowance xxx
  ERROR! NO TEXT OF SPECIFIED STYLE IN DOCUMENT. 4

Illustrative problems
Illustration 1: Mr. Ganesh a government staff furnished the following particulars of his income for the previous
year.
Net assessable) income from employment Rs. 400,000
Net (assessable) income from investment Rs. 200,000
Net (assessable) income from business Rs. 300,000
He has claimed the following expenses for deduction:
Contribution to provident fund as per government rule
Donation to political party (approved) of Rs. 10,000
Life insurance premium Rs. 30,000
Required: Tax liability of Mr. Ganesh
SOLUTION:
Calculation of total Taxable income of Mr. Ganesh for the previous year
Particulars Details Rs. Amount Rs.
Assessable income from Employment 400,000
Assessable income from Investment 200,000
Assessable income from Business 300,000
Total Assessable income 900,000
Less: Allowable Reductions:
(i) Retirement contribution
1/3rd of Rs.900,000 or Actual 20% of annual salary Rs.338,028 or Maximum Rs.300,000
(Whichever is less) 67,608
(ii) Donation to Political Party (Approved)
5% of (Rs.900,000-67,608) or Actual Rs.10,000 or Maximum Rs.100,000 (Whichever is less) 10,000 1,02,608
(iii) Life insurance premium (max. Rs. 25,000 or Actual Rs. 30,000 whichever is less) 25,000
Total taxable income 7,97,392
Calculation of Tax Liability
Particulars Rs.
First 400,000 @ 1% (Assume individual) ....................................................................................................... 4,000
Next 100,000@ 10% ..................................................................................................................................... 10,000
Next Rs. 2,00,000 @ 20%.............................................................................................................................. 40,000
Balance Rs.97,392 @30% ............................................................................................................................. 29,217.6
Total tax liability 83,217.6
Working Note:
Assumed that income from employment included only salary, Dashain Kharcha, and provident fund contribution by the
government only.
Let, Monthly salary = Rs.x
Assessable income from employment = Salary +Dashain Kharcha + Government contribution to provident fund
OR, 400,000 (Given) = 12x+x + (10% of 12x)
OR, 400,000 = 13x+1.2x
OR, 400,000= 14.2x
Or, X =400,000/14.2
∴x=28,169.02
∴Annual salary = 28,169.02 ×12 =Rs.3,38,028

Illustration 2: Mr. Shakya furnished the following particulars of his income for the previous year:
Assessable income from business ...............................................................................Rs. 2,000,000
Assessable income from employment ..........................................................................Rs. 1,000,000
Assessable income from investment ..............................................................................Rs. 500,000
He claimed the following expenses for deduction
Interest on investment Rs. 1,00,000 is not included in above investment income
Contribution to retirement fund ........................................................................................Rs. 400,000
Life insurance premium......................................................................................................Rs. 32,000
  ERROR! NO TEXT OF SPECIFIED STYLE IN DOCUMENT. 5

Tax paid in advance .........................................................................................................Rs. 140,000

Required: Total taxable income and tax liability
SOLUTION:
Statement of total taxable income
Particulars Amount Rs. Amount Rs.
Assessable income from business ................................................................................................... 2,000,000
Assessable income from employment .............................................................................................. 1,000,000
Assessable income from investment (500,000 + 100,000)................................................................ 600,000
Total assessable income 3,600,000
Less: Contribution to retirement fund (1/3 of 36,00,000) .................................................................. 12,00,000
OR, Actual ............................................................................................................................. 400,000
OR, Maximum limit (Whichever is lower ) ............................................................................... 300,000 300,000
Less: Life insurance premium .........................................................................................................
(Actual LIP .............................................................................................................................. 32,000
Or, Maximum limit = Rs. 25,000) Whichever is Lower ........................................................... 25,000 25,000
Total taxable income 3,275,000
Calculation of tax liabilities
Particulars Amount Rs.
First Rs. 400,000 – Assume Single status @ 1% ................................................................................................ 4,000
Next Rs. 100,000 @ 10% ...................................................................................................................................... 10,000
Next Rs. 200,000 @ 20% ...................................................................................................................................... 40,000
Next Rs. 1,300,000 @ 30% ................................................................................................................................... 390,000
Rest Rs. 1,275,000 @ 36%.................................................................................................................................... 4,59,000
Total tax liabilities 903,000
Less: Advance Tax Paid ......................................................................................................................................... 140,000
Net Tax liability 763,000

Illustration 3: Mr. Krishna furnished the following particulars in his income for the previous year:
Assessable income from business ..............................................................................Rs. 2,000,000
Assessable income from employment ............................................................................Rs. 900,000
Assessable income from investment ...........................................................................Rs. 1,100,000
He claimed the following expenses for deduction
Contribution to retirement fund .......................................................................................Rs. 500,000
Donation to Pashupati Area Development Trust ............................................................Rs. 700,000
Life insurance premium......................................................................................................Rs. 25,000
Medical expenses of his own ............................................................................................Rs. 10,000
Tax paid in advance ........................................................................................................Rs. 200,000
Required: a. Statement of taxable income b. Tax liability
SOLUTION:
a. calculation of taxable income
Particulars Amount Rs.
Assessable income from business .......................................................................................................................... 200,000
Assessable income from employment...................................................................................................................... 900,000
Assessable income from investment ........................................................................................................................ 1,100,000
Total assessable income 30,00,000
Less: Contribution to retirement fund (1/3 of 30,00,000 = 1000,000 or, actual Rs. 500,000 or maximum limit =
Rs. 300,000) whichever is less 300,000
Less: Donation [5% of (3000,000 – 300,000) = Rs. 135,000 or actual = Rs. 700,000 or maximum limit = Rs.
100,000)] whichever is less 100,000
Less: Life Insurance premium (actual = Rs. 25,000 or, maximum limit = Rs. 25,000) whichever is less 25,000
Total taxable income 25,75,000
b. Calculation of tax liability
  ERROR! NO TEXT OF SPECIFIED STYLE IN DOCUMENT. 6

Particulars Rs.
First Rs. 400,000 @ 1% Single status ..................................................................................................................... 4,000
Net Rs. 100,000 @ 10% .......................................................................................................................................... 10,000
Net Rs. 200,000 @ 20% .......................................................................................................................................... 40,000
Net Rs. 1300,000 @ 30% ....................................................................................................................................... 390,000
Balance Rs. 575,000 @ 36% ................................................................................................................................... 207,000
Tax payable 651,000
Less: Advance tax paid ........................................................................................................................................... 200,000
Medical tax credit (15% of 10,000 = Rs. 1500 or, maximum limit = Rs. 750) whichever is less..................... 750
Total payable 450,250

NUMERICAL EXERCISE

STATEMENT OF TAXABLE INCOME AND TAX LIABILITY

Problem 1. __ Mrs. Sanyukta a widow woman working as civil servant of government office furnish
the following details of her income of previous year:
Assessable income from the employment Rs. 8,10,000.
Assessable income from business Rs. 5,00,000
Assessable income from investment Rs. 4,00,000
She claimed following expenses for reduction
Retirement fund as per government rules.
Donation to Maiti Nepal Rs. 40,000
Domestic expenses Rs. 20,000
Life insurance premium of own life policy Rs 30,000 and her children RS.25,000
Health insurance premium Rs 30,000
Approved medical expenses Rs.10,000.
Tuition fees of her sister was paid by her of Rs. 30,000
Her working place lies at zone 'B'
Advance tax paid Rs 10,000
She elect couple status for tax purpose.
Required: a.Statement of taxable income b. Tax liabilities.

Problem 2. __ Mr. Lama a disable person furnished the following particulars of his incomes for the
previous year.
Net (assessable) income from employment Rs.800,000
Net assessable income from investment Rs.400,000
Net assessable income from business Rs.800,000
He has claimed following expenses for deduction.
Approved retirement contribution to SSF Rs.180,000 as per government rule.
Donation to public school Rs.50,000.
Donation to Prime Minister Relief Fund Rs. 40,000
Life insurance premium Rs.50,000
Health insurance premium paid Rs.15,000
Income from employment includes pension income from previous employer Rs.150,000
Required: Statement of taxable income and Tax liability of Mr. Lama.

Problem 3. __ Mr. Karma submitted the following details of his income and expenses for previous
  ERROR! NO TEXT OF SPECIFIED STYLE IN DOCUMENT. 7

income:
Net assessable income from the employment including retirement Rs. 3,00,000
Net assessable income from the business ................................... Rs. 500,000
Net assessable income from the profession ................................. Rs. 200,000
Net assessable income from the investment ............................ Rs. 1, 80,000
Additional information:
• Income from the investment includes dividend received from the resident company and foreign
company Rs. 8,000 and Rs. 6,000 respectively.
• Income from the employment includes approved retirement fund contribution by the employer
Rs. 30,000 and he also contributes equal amount.
• Bad debts recovered Rs. 20,000 is included in business income but it was allowed only 40%
for deduction previously as bad debts written off.
He claimed following expenses for deduction:
• Donation given to prime Minister Relief Fund Rs. 40,000.
• Life insurance premium Rs. 30,000 of his own life policy.
• Health insurance premium Rs.22,000
• He was drawing the identity card as disable person from the government.
• Purchase of books for his study Rs. 10,000.
• Tuition fees of his son Rs. 5,000.
• Contribution to Citizen Investment Trust Rs. 60,000.
Required: a.Statement of taxable income b. Tax liabilities.

Problem 4. __ Mrs. Nistha is a disable resident individual working as a tax officer. She furnished the
following facts of her income of previous year.
i. Assessable income from profession Rs.280, 000.
ii. Assessable income from investment Rs.300,000
iii. Assessable income from employment Rs.500,000
She claimed following expenses for deduction.
a. Life insurance premium on her own policy Rs.24000
b. Her contribution to CIT Rs.20, 000. She is a member of provident fund and contribute
Rs.30,000 and her employer also contribute same amount.
c. Donation given to tax exempt organization Rs.65, 000.
d. She is working in remote area C.
e. She claimed medical expenses of her treatment Rs.10, 000.
f. She has paid advance tax Rs.6,500
Required: Total taxable Income and tax liability

 ERROR! NO TEXT OF SPECIFIED STYLE IN DOCUMENT. 8