Exempt Income in Nepal — Income Tax Act Section 10

Amounts exempted under qualifying bilateral or multilateral agreements between Nepal and a foreign country or international organisation can fall within Section 10.

The precise exemption depends on the agreement and beneficiary.

This can be relevant to:

• diplomatic missions;

• international organisations;

• foreign-government programmes;

• specified personnel.

A qualifying organisation established for social, religious, educational, charitable or similar public/non-profit purposes may obtain tax-exempt status through the statutory registration framework.

However, tax exemption does not necessarily mean every commercial receipt received by the organisation is exempt.

Example

An exempt NGO receives an unconditional grant aligned with its objectives.

Potential exempt treatment.

But if the NGO receives a payment under a consulting contract and is required to provide services in return: the receipt can be service income rather than exempt donation income.

Current guidance expressly distinguishes a grant from a service payment where consideration is expected.

Donations, gifts and qualifying contributions directly connected with the activities of a tax-exempt organisation can fall within the exemption framework.

The organisation should retain:

• exemption certificate;

• donor agreement;

• grant letter;

• project purpose;

• evidence that payment is not consideration for taxable commercial service.

Amounts earned by Nepal Rastra Bank in pursuit of its statutory objectives are included in the Section 10 exemption framework.

Income earned in pursuance of its objective by a mutual fund approved by the Securities Board of Nepal is also included within the exempt-income framework.

This should be distinguished from the tax treatment of distributions subsequently made to investors.

The existing Section 10 framework includes specified non-profit educational institutions operating under arrangements with Government of Nepal.

Finance Act 2083 additionally introduces an exemption for:

amounts earned by a university established and operating in Nepal in accordance with its objectives.

This new exemption should be read according to the exact institutional conditions rather than interpreted as:

“all income of every university is automatically tax-free.”

Finance Act 2083 adds an exemption for amounts earned according to their objectives by qualifying: Drinking Water and Sanitation Consumer Organisations registered under the Water Resources Act, 2049.

The key conditions include:

• appropriate registration;

• qualifying organisational status;

• income earned in accordance with objectives.

Finance Act 2083 exempts income arising where a natural person transfers their own:

• land; or

• private building

without consideration to:

• Government of Nepal;

• Provincial Government; or

• Local Level.

This exemption also interacts with the FY 2083/84 capital-gains collection provisions.

The property must be transferred without consideration; an ordinary government purchase is a different transaction.

Finance Act 2083 adds an exemption for qualifying interest income earned from loan investment in Nepal by a financial institution:

• wholly owned by a foreign government; and

• established/operating on a non-profit basis,

subject to the provision.

This is a specialised international-finance exemption and should not be generalised to foreign banks or lenders.

The Income Tax Act does not treat every disposal of private personal property as taxable capital gain.

Current explanatory material notes that disposal of personal assets such as ordinary household furniture/jewellery outside the defined non-business chargeable asset category can fall outside taxable disposal rules.

By contrast, specified:

• land;

• private buildings; and

• interests in entities

can constitute non-business chargeable assets and require capital-gain analysis.

These concepts are different.

Exempt income

No ordinary tax because the Income Tax Act exempts the amount.

Final withholding income

Tax is imposed through withholding and ordinarily settled at source.

Example: A qualifying dividend with 5% final withholding is not “tax exempt.”

It is taxed through a final withholding mechanism.

Again, different.

Section 10

Exempts specified amount/income.

Section 11

Provides business-specific tax concessions, often expressed as:

• 100% exemption from tax payable;

• 50% reduction;

• 20% reduction;

• concession for specified number of years.

A business concession should therefore not automatically be described as “Section 10 exempt income”.

Where income is exempt, expenditure incurred to derive that exempt income may be restricted from deduction against taxable income under Section 21.

Example

Exempt activity income: NPR 2,000,000

Expenses directly related to that exempt activity: NPR 1,000,000

The taxpayer should not automatically use that NPR 1,000,000 to reduce unrelated taxable business income.

• Identify receipt

• Identify recipient

• Identify Section 10 provision

• Verify entity/exemption status

• Check treaty/agreement where applicable

• Confirm objective-related requirement

• Separate grants from service income

• Separate exempt income from final withholding

• Review expenses linked to exempt income

• Verify Finance Act 2083 overlay

• retain source documentation

Calling final-withholding income “exempt”

Assuming tax-exempt organisation status exempts every commercial activity

Ignoring consideration received in exchange for a grant/payment

Treating Section 11 concessions as Section 10 exemptions

Claiming expenses connected with exempt income against ordinary taxable income

Exemptions are narrowly statutory. Identify the exact Section 10 clause and factual conditions before excluding any amount from taxable income.