Income tax act, 2058 of Nepal broadly classifies retirement payments into two types: contribution-based retirement payment and non-contribution-based retirement payment. These two retirement payments are subject to different taxation subject to whether the retirement fund is approved or unapproved retirement fund as per act.
Taxation on contribution-based retirement payment:
Where the retirement benefit is from approved retirement fund for the purpose of Income Tax act, tax shall be levied @5% on remaining amount on retirement payment after deducting 500,000 or 50% of retirement fund whichever is higher. For example, I received a Rs. 5,50,000 retirement payment from CIT. Now, my tax liability will be calculated as follows:
Retirement Benefit = 5,50,000 - 5,00,000 [Higher of 5,00,000 or 50% of 5,50,000]
= 50,000
Taxation on retirement benefit u/s 88(1)(1) = 5% of 50,000
= 2,500/-
Where the retirement benefit is from unapproved retirement (resident) fund for the purpose of Income Tax act, tax shall be levied @5% on remaining amount on retirement payment after deducting retirement contribution. For example, I received a Rs 5,50,000 retirement payment from XYZ Pension Fund where I contributed Rs 2,00,000
Retirement Benefit = 5,50,000 - 2,00,000
= 3,50,000
Taxation on retirement benefit u/s 88(1)(1) = 5% of 3,50,000
= 17,500/-
Where the retirement benefit is from unapproved retirement (non-resident) fund for the purpose of Income Tax act, such retirement benefit shall be included in income of the beneficiary for the calculation of income tax liability. For example, I received a Rs 5,50,000 retirement payment from Boston Pension Fund where I contributed Rs 2,00,000
Retirement Benefit = 5,50,000 - 2,00,000
= 3,50,000
This retirement benefit shall be included in income for tax liability calculation.
Taxation on non-contribution-based retirement payment:
Where non-contribution-based retirement payment is received by beneficiary, retirement payment is subject to withholding tax of 15% which is final as per income tax act, irrespective of retirement fund being approved or unapproved.
Taxation on retirement payment by Government of Nepal:
Where the retirement benefit is from Government of Nepal, tax shall be levied @5% on remaining amount on retirement payment after deducting 500,000 or 50% of retirement fund whichever is higher irrespective of whether this payment is contribution based or non-contribution based. For example, I received a Rs. 5,50,000 retirement payment from Government of Nepal. Now, my tax liability will be calculated as follows:
Retirement Benefit = 5,50,000 - 5,00,000 [Higher of 5,00,000 or 50% of 5,50,000]
= 50,000
Taxation on retirement benefit u/s 88(1)(1) = 5% of 50,000
= 2,500/-
