Is your Dashain bonus taxable in Nepal? Yes — and here is exactly how much

Is the Dashain bonus taxable in Nepal?

The festival allowance — Dashain kharcha, on most Nepali payslips — is not exempt. Under section 8 of the Income Tax Act 2058, income from employment includes every payment, allowance, bonus and benefit arising from the employment. Festival allowance is not carved out anywhere in the Act. The Labour Act 2074 makes the payment compulsory — one month's basic pay for most employees — but a compulsory payment is still income.

This catches people because the two laws get quoted together. “One month's basic salary” is the Labour Act fixing how much the employer must pay. Nothing in that sentence touches the Income Tax Act, which decides whether it is taxed. The answer there is yes, at your ordinary bands.

How much tax does the bonus actually cost?

The bonus is taxed at your marginal band, so the cost depends on where your salary already sits. At NPR 1,00,000 a month, a one-month bonus of NPR 1,00,000 adds NPR 10,000 of tax for the year — you keep NPR 90,000. At NPR 1,50,000 a month the same one-month bonus costs NPR 30,000.

Notice the rate is not the same in both columns. The lower salary is still partly inside the 10% band; the higher one has already climbed into 20%. This is also why two colleagues with the same bonus can lose visibly different amounts of it — and neither payroll team is wrong.

Why does the Dashain payslip look wrong?

Nepal assesses tax on the year, but withholds it monthly. When the bonus is paid, payroll recomputes the year's liability and collects the difference — either all in that month, or spread over the months that remain. Both methods are legitimate, and both make one payslip look unusual.

1. 1

   The bonus enters the year's income

   Payroll adds the festival payment to the salary already paid and the salary still to come, giving a new annual figure.

2. 2

   The year's tax is recomputed

   The new income runs through the bands. Because the bonus sits on top, the extra tax is charged at your highest rate, not your average one.

3. 3

   The shortfall is collected

   Tax already withheld this year is subtracted, and what is left is divided over the remaining months — or taken in the bonus month if the system is set that way.

4. 4

   Later months settle back down

   Once the catch-up is absorbed, the monthly TDS returns to a level that fits the new annual total. Judge the year, not the month.

Is one month's bonus tax-free in Nepal?

There is no provision in the Income Tax Act 2058 exempting a festival allowance up to one month's salary, or of any other size. Sites that repeat it are confusing the Labour Act's entitlement with a tax exemption. If your employer applies such an exemption, the shortfall is still your liability at assessment.

The reliefs that genuinely exist are the ones the Act names: retirement contributions to PF, SSF and CIT up to NPR 5,00,000 combined, life insurance premiums up to NPR 40,000, health insurance up to NPR 20,000, and the 10% rebate for a resident woman with only employment income. A festival allowance is not on that list — the ways to pay less are.

How are gratuity, leave encashment and arrears taxed?

Every one-off cash payment from the employment is treated the same way as the festival bonus: added to the year's income and taxed at your top band. Arrears from a backdated raise, encashed leave and a gratuity paid on retirement all arrive with the same problem — a large amount landing in a single year.

The last row is the useful one. Money routed through an approved retirement fund — SSF gratuity, a provident fund, CIT — is relieved up to the shared ceiling, while the same money paid as cash is taxed. That is a payroll design question worth raising before the payment is made, not after.

What should you do before Dashain?

Claim the reliefs you already qualify for before the bonus is processed. Life and health insurance premiums only reduce your tax if payroll has recorded them, and the deduction they produce is worth most in the months a bonus pushes you into a higher band.

1. Give payroll your life and health insurance receipts — up to NPR 40,000 and NPR 20,000 of premium are deductible, and unrecorded premiums save nothing.
2. Check your CIT room. Retirement relief is capped at NPR 5,00,000 including your PF or SSF, and any unused room reduces tax at your marginal rate.
3. Run the bonus through the calculator before it is paid — enter it in the festival bonus field and compare the monthly TDS with and without it, so the payslip holds no surprise.
4. If you joined mid-year, tell payroll the months you were actually paid for. A full-year assumption on a part-year salary overstates the tax on the bonus.