Tax Depreciation in Nepal — Rates, Asset Classes & Calculation

Accounting Depreciation vs Tax Depreciation

They are different computations.

Accounting depreciation

Usually depends on:

• accounting standard;

• estimated useful life;

• residual value;

• depreciation method;

• impairment;

• management estimates.

Tax depreciation

Depends on:

• Income Tax Act;

• Schedule 2 asset class;

• tax depreciation pool;

• statutory rate;

• date/period of addition;

• disposal proceeds;

• special tax provisions.

Therefore:

Accounting depreciation should not automatically be claimed as tax depreciation.

When preparing an income-tax reconciliation, accounting depreciation is generally adjusted and the allowable Schedule 2 depreciation is calculated separately.

When Can Tax Depreciation Be Claimed?

Section 19 applies where a person:

• owns the depreciable property; and

• uses it in deriving income from a business or investment.

IRD's published Act expressly links depreciation to depreciable property owned and used in earning business or investment income.

So the basic test is: Ownership

Use in taxable business/investment

Depreciable property = potential Schedule 2 deduction.

Class A — Buildings & Permanent Structures

Examples may include:

• office building;

• factory building;

• warehouse;

• permanent structural works.

Normal depreciation rate: 5%

Land itself should not simply be put into Class A merely because a building stands on it.

The land and building components should be properly distinguished.

Class B — Computers, Furniture & Office Equipment

Examples:

• desktop computers;

• laptops;

• servers;

• printers;

• data-processing equipment;

• furniture;

• fixtures;

• office equipment.

Normal depreciation rate: 25%

This is usually the most common pool for professional firms and office-based businesses.

Class C — Motor Vehicles

Includes specified:

• automobiles;

• buses;

• minibuses.

Normal depreciation rate: 20%

Vehicle classification should be based on the statutory class rather than an accounting fixed-asset category alone.

Class D — Machinery and Other Assets

Includes:

• construction equipment;

• excavation equipment;

• machinery not otherwise specifically included;

• other depreciable assets not falling into A, B, C or E.

Normal depreciation rate: 15%

This class can contain a broad variety of operational assets.

Class E — Intangible Property

Class E covers depreciable intangible property.

Unlike Classes A–D, Class E assets are generally maintained separately rather than combined into one common pool.

The depreciation rate is derived from the useful life of the intangible, using the Schedule 2 method.

Examples may include qualifying:

• licences;

• rights;

• contractual intangible assets;

• other depreciable intangible property.

Whether purchased software belongs in B, D or E should be determined from the nature of the expenditure rather than applying a blanket rule.

Pool System for Classes A–D

Classes A, B, C and D operate broadly on a pool basis.

Assets falling into the same class are grouped together.

The annual computation is conceptually: Opening tax pool

eligible additions

−

disposal proceeds/incomings = depreciation base

×

applicable rate = tax depreciation

This is different from calculating depreciation asset-by-asset in the accounting fixed-asset register.

First-Year Addition Rule

Schedule 2 section 2(5) uses the later of the time the asset is included in its statutory depreciation pool and the time its acquisition cost is incurred. Ownership, qualifying use and the relevant pool conditions must therefore be established before choosing a timing factor.

For that relevant date, the current-year addition is 3/3 of cost for Shrawan–Poush, 2/3 for Magh–Chaitra, and 1/3 for Baisakh–Ashadh. The remaining cost enters the following income year, subject to the statutory pool conditions. A purchase invoice date alone does not determine the factor where the later statutory event falls in another period.

Example — Computer Purchased in Jestha

Computer cost: NPR 300,000

Class: B

Purchase/use period: Baisakh–Ashad

Initial tax-base addition: NPR 300,000 × 1/3 = NPR 100,000

Normal Class B rate: 25%

Indicative first-year depreciation: NPR 100,000 × 25% = NPR 25,000

The remaining portion of cost is dealt with under Schedule 2 in the following income year.

Example — Existing Class B Pool

Opening Class B tax pool after prior-year treatment: NPR 800,000

Eligible current-year addition: NPR 300,000

Disposal proceeds: NPR 100,000

Simplified base: NPR 800,000

• NPR 300,000
  − NPR 100,000
  = NPR 1,000,000

Depreciation: NPR 1,000,000 × 25%

= NPR 250,000

The actual computation must apply the Schedule 2 addition timing rules where the NPR 300,000 represents a current-year purchase.

Disposal of Depreciable Assets

Tax treatment does not end when an asset is sold.

Schedule 2 adjusts the depreciation pool for amounts derived from disposal.

Depending upon the pool and disposal amount, the result can include:

• reduction of the tax pool;

• balancing income;

• terminal deduction.

The statutory Schedule specifically deals with income or deduction where disposal proceeds differ from the remaining depreciation base.

Therefore the sale of a fully or partly depreciated asset should never simply be posted to:

“Profit on Sale of Fixed Asset”

and copied directly into the tax return.

A separate tax calculation is required.

Small Remaining Pool

Where the remaining Class A–D depreciation base after depreciation falls below the statutory threshold of NPR 2,000, Schedule 2 permits the remaining amount to be written off as additional depreciation.

Additional / Accelerated Depreciation

Schedule 2 provides an additional one-third of the applicable depreciation rate for certain qualifying projects/entities.

The exact qualifying category must be checked against the current Section 11 and Section 19 wording for the relevant income year.

Current FY 2083/84 reference material continues to recognise additional depreciation for specified qualifying infrastructure/special-industry categories.

Example

Normal Class D rate: 15%

Additional one-third of rate: 15% × 1/3 = 5%

Possible qualifying rate: 20%

This concession should not be applied merely because a business calls itself an industry.

Eligibility must first be established.

Renewable Energy Asset Provision

Schedule 2 provides special treatment permitting 50% of qualifying capitalised property used to generate renewable energy required for the person's own business to be claimed under the relevant provision.

This should be evaluated separately from the ordinary A–D pool calculation.

Fiscal Printer / Cash Machine

Schedule 2 also contains special immediate deduction treatment for qualifying fiscal printer/cash-machine expenditure where the statutory conditions are satisfied.

Accounting-to-Tax Example

Financial statements show: Accounting depreciation: NPR 700,000

Tax depreciation under Schedule 2: NPR 950,000

Tax reconciliation: Accounting profit

• Accounting depreciation: NPR 700,000
  − Tax depreciation: NPR 950,000

Net tax adjustment: NPR 250,000 reduction from accounting profit, before other tax adjustments.

Tax Depreciation Register

CMA recommends maintaining a separate tax fixed-asset schedule containing:

• asset description;

• acquisition date;

• tax class;

• accounting class;

• cost;

• qualifying-use date;

• opening tax pool;

• addition timing factor;

• disposal date;

• disposal proceeds;

• tax depreciation;

• closing tax pool;

• accounting carrying amount;

• temporary difference;

• supporting invoice;

• payment evidence.

Audit / Tax Review Checklist

• Obtain fixed-asset register

• Reconcile opening tax pools

• Verify ownership

• Verify business/investment use

• Separate land from buildings

• Classify A–E correctly

• Check acquisition date

• Apply 3/3, 2/3 or 1/3 addition rule

• Reconcile disposals

• Check disposal proceeds

• Check accelerated-depreciation eligibility

• Review renewable-energy assets

• Review fiscal printer/cash-machine treatment

• Add back accounting depreciation

• Claim Schedule 2 depreciation

• Reconcile closing tax pool to next year

Common Mistakes

Using Companies Act/accounting depreciation rates for tax

Claiming the full cost of every new asset in the tax pool immediately

Ignoring the acquisition-period rule

Failing to reduce pools for asset disposals

Including land in the building depreciation pool

Applying additional one-third depreciation without verifying eligibility

Using accounting carrying amount as the tax written-down value

Official Source Note

IRD currently publishes the Income Tax Act consolidated through Finance Act 2082 and the separate gazetted Finance Act 2083 for the current FY. IRD also currently lists the Income Tax Rules, 2059 including the Sixteenth Amendment.

Further guidance and practical checks

Tax depreciation can materially differ from accounting depreciation. Businesses should maintain a separate tax depreciation schedule and reconcile it annually with the financial-statement fixed-asset register.