Expenses Not Deductible for Income Tax in Nepal

Personal and Domestic Expenses

A business cannot deduct the owner's personal costs merely because they were paid from the business bank account.

Examples may include:

• family food;

• personal accommodation;

• private travel;

• household utility expenditure;

• personal clothing;

• personal education;

• commuting from home to the normal business location, subject to statutory distinctions;

• interest on borrowing used for private purposes.

The Act contains an expanded definition of expenditure of a domestic or personal nature.

Example

A sole proprietor purchases a television for their private home and records it as: Office Equipment Expense

Changing the ledger name does not change the nature of the expenditure.

The private cost remains non-deductible.

Income Tax

Income tax payable under the Income Tax Act itself is not deductible in calculating taxable income.

Otherwise, allowing tax as an expense would reduce the income on which the same tax is calculated.

Fines and Penalties

Fines or similar charges imposed for violating law are generally not deductible under section 21.

Examples can include specified:

• regulatory fines;

• statutory penalties;

• tax penalties.

This should be distinguished from ordinary commercial damages or compensation, which require separate analysis.

Expenses Relating to Exempt Income

Where income is exempt under section 10, expenditure incurred to derive that exempt amount generally cannot be used to reduce other taxable income.

This follows the matching principle of the Income Tax Act:

Exempt income should not generally create deductions against taxable income.

Expenses Relating to Final-Withholding Income

Similarly, where a receipt is taxed through final withholding, expenses incurred in generating that payment generally cannot also be used to reduce ordinary taxable income where section 21 prohibits the deduction.

This is another reason CMA must distinguish: Final withholding

from advance/non-final withholding.

PAN and Invoice-related Restrictions

Section 21 contains restrictions affecting expenditure where prescribed PAN/invoice requirements are not satisfied.

Historic/current statutory structures include restrictions relating to:

• remuneration to natural persons without PAN, subject to specified exceptions;

• purchases supported by invoices not containing required PAN details beyond applicable limits;

• specific exceptions for qualifying direct purchases from farmers/producers and similar statutory categories.

Because monetary limits and exceptions can be amended, the exact current-year PAN/invoice thresholds should be checked against the current Act/Rules before final tax filing.

Profit Distribution

Distribution of profits by an entity is not an ordinary business deduction.

Examples:

• dividends;

• other distributions of profit.

A company cannot reduce taxable business income merely because profits are later distributed to shareholders.

Cash Payments Above NPR 25,000 — FY 2083/84

Finance Act 2083 materially changes the cash-payment restriction.

For FY 2083/84, the working rule reduces the relevant per-transaction limit: NPR 50,000 → NPR 25,000

and removes the former turnover threshold so the restriction applies more generally.

Example A

Invoice: NPR 22,000
Paid in cash.

The NPR 25,000 threshold is not exceeded, though all other deductibility requirements still apply.

Example B

Invoice: NPR 60,000
Paid fully in cash.

The section 21 cash-payment restriction requires review and can result in disallowance unless a statutory exception applies.

Example C

Invoice: NPR 60,000
Payment deposited into supplier's bank account.

The cash-payment rule should be analysed differently because direct deposit/banking payment is recognised separately under the statutory framework.

Anti-avoidance caution

Artificially splitting one transaction into several cash payments should not be used to defeat the statutory restriction.

Capital Expenditure

Capital expenditure is normally not deducted as an ordinary current-year expense unless another provision specifically permits treatment.

Common examples:

• acquisition of building;

• acquisition of machinery;

• major capital improvement;

• acquisition of long-term assets.

Instead, treatment may arise through:

• tax depreciation;

• asset cost base;

• disposal computation;

• specific statutory deduction.

Share/Debenture Issue Costs — FY 2083/84 Change

Finance Act 2083 changes the treatment of expenditure incurred in issuing shares or debentures.

Finance Act 2083 excludes expenses incurred in issuing shares or debentures from the relevant capital-expenditure definition.

However, this should not be simplified as:

“All share issue costs are automatically deductible.”

The expenditure still needs to satisfy the general statutory deduction framework.

Accounting Provision Does Not Guarantee Tax Deduction

Examples include:

• general provision for expenses;

• provisions for doubtful debts;

• provisions for future liabilities;

• impairment;

• accounting reserves.

A financial statement may properly recognise an amount under accounting standards while the tax law requires a different timing or treatment.

Therefore:

Accounting expense ≠ automatic tax deduction

Expense Connected With Personal Use

Mixed expenditure requires allocation.

Example: Vehicle used:

70% for business

30% privately

Where the statutory rules require allocation, the private element should not simply be claimed as business expenditure.

Maintain evidence supporting the allocation basis.

Missing Documentation

An expense may be commercially genuine but still face tax risk if the business cannot establish:

• supplier;

• transaction;

• business purpose;

• invoice;

• payment;

• PAN/VAT details;

• TDS;

• delivery/service evidence.

The practical tax question is therefore not only:

“Did we spend the money?”

but:

“Can we prove the nature, purpose and statutory compliance of the expense?”

Non-deductible Expense Review Table

Tax Review Checklist

Before finalising the tax return:

• Extract complete general ledger

• Review personal/private accounts

• Review directors'/owners' expenses

• Identify income-tax expense

• Identify fines and penalties

• Review exempt-income-related expenses

• Review final-withholding-income expenses

• Review PAN/invoice compliance

• Review all cash payments over NPR 25,000

• Review capital expenditure

• Add back accounting depreciation

• calculate tax depreciation

• Review provisions and reserves

• Review related-party expenditure

• Verify TDS compliance

• Prepare tax-adjustment schedule

• retain supporting evidence

Common Mistakes

Assuming audited accounts mean every expense is tax deductible

Financial-statement audit and tax deductibility are related but different questions.

Paying a personal cost from a company account

Payment source does not convert private expenditure into business expenditure.

Claiming tax penalties as an ordinary business cost

Section 21 specifically restricts fines and similar charges.

Ignoring the FY 2083/84 cash threshold

The threshold has been tightened to NPR 25,000 under the current-year amendment framework.

Using accounting depreciation

Tax depreciation should be calculated separately.

Treating missing PAN/invoices as a minor documentation issue

The Act contains specific deduction restrictions.

Related CMA Resources

• Allowable Business Expenses

• Cash Payment Restriction

• PAN and Invoice Requirements

• Tax Depreciation

• Accounting-to-Tax Reconciliation

• TDS Compliance

• Business Income

• Audit Readiness Checklist

Further guidance and practical checks

Whether an expenditure is tax deductible depends on its purpose, legal character, supporting documentation, payment method, TDS/PAN compliance and the specific Income Tax Act provision. Recording an expenditure in audited financial statements does not by itself establish income-tax deductibility.