Three things on Earth are certain; Death, Taxes, and quality services by Bizsewa. In this article, we will focus on the second one; Taxes. Tax is probably a word everyone fears and hates. Taxes are the main sources of income for any government. All the developments, and services to citizens, are possible from the money government collects as taxes.
Nepal’s government charges up to 36 percent income tax based on the income. It is natural for people to try saving a few thousand in taxes. Some people opt for illegal ways, while most want legal ways to pay less tax and buy more happiness with the money earned. We advise you never to go the illegal route. Showing less tax liability can result in fines, penalties, and/or prison time. Let us guide you on how you can save money on taxes by using 100% legal methods.
Here are five tips on tax planning in Nepal.
1. Join government schemes to save tax
The first thing you need to understand about income tax is that tax of the first one percent of the income you make is levied if you are part of the pension fund or the social security fund. Contributing to the Employees Provident Fund and Citizen Investment Trust also helps get rid of heavy income taxes legally. If you deposit a total of Rs 300,000 combined into these two schemes, you are liable for an exemption. So if you are not, make sure you are a part of this because you save both money and tax this way.
2. Buy insurance packages to save income tax
Buying an insurance package is also another way to get away from the heavy income tax. One is liable for an exemption if s/he buys life insurance up to Rs 40,000 a year (previously it was up to Rs.25000). This will reduce the taxable amount and tax liability. Insurance also is a great way to save for the future and mitigate risks. The government also offers an exemption of up to Rs 20,000 if the person buys health insurance. The government also exempts Rs 5,000 from the taxable income if a person also has house insurance in their name.
3. Claim exemptions for medicinal expenses to reduce your tax liability
A person can also claim income tax exemptions for medicinal expenses. The government says a person can claim 15 percent or up to Rs 750 of the amount spent on medical expenses. For this, the person has to submit their medical bill at their workplace.
4. Work in remote areas
The government has divided Nepal’s districts into rural and urban, and the tax brackets for these areas are different, too. If a person is working in rural areas, they are eligible for a remote area allowance of up to Rs 50,000 which is untaxable.
5. Watch for all the tax benefits the government provides and calculate your tax correctly.
Make sure you hire a good accountant to calculate your taxes. Time and again, the government brings various incentives and schemes to reduce tax burden on its people. You can save a lot if you make use of all the schemes you qualify for. One example is: for single women who only have one source of income, the government has a provision to waive 10 percent of the tax they have to pay. For example, if you are a woman who has to pay Rs 10,000 in tax per year, the government will waive Rs 1,000.
Similarly, Nepali officials working in diplomatic missions abroad are eligible for a 75 percent rebate of the extra allowance they receive while working there. Also, Government brings such schemes for businesses as well.
A few extras…
It is also beneficial to learn about different terminologies related to income tax. As I briefly mentioned earlier, people try using illegal means to save on tax. There are ways that are not completely illegal but also do not support the intention of the government. There are three widely used tax-saving strategies:
- Tax Evasion (Illegal)
- Tax Avoidance (Legal but….)
- Tax Mitigation (Completely Legal)
Let us discuss these terminologies in detail:
Tax Evasion (Generally referred to as कर छली): Tax Evasion is the use of illegal methods of concealing income or information from the IRD or other tax authority. Declaring less tax using such schemes can result in fines, penalties, and/or prison time.
Tax Avoidance: Tax avoidance is simply avoiding tax payment by taking the legal opportunities provided to a taxpayer. Since it is not illegal, tax avoidance is some sort of legally allowable way to reduce the tax burden. Businesses have misused government incentives for the only purpose of decreasing tax liabilities. So, tax avoidance schemes are viewed with caution by Tax Authorities. One example is registering a company in the tax heavens (Counties/states with very low-Income tax rates) only for the purpose of paying less tax.
Tax Mitigation: This is also commonly called tax planning. Tax mitigation is a situation where the taxpayer uses a fiscal incentive (tax concession) available to him/her in the tax legislation so that he/she has to pay less of Income-tax or not pay taxes at all. An example of tax mitigation is the setting up of a business by a corporate in a Special Economic Zone (SEZ) to claim a tax exemption provided by the government. Ensuring all the deductions are made while calculating tax base, contributing to approved employee funds like CIT, having Insurance, etc.