Running Payroll in Nepal: Employment Taxes & Setup

Payroll in Nepal centers on salary tax withholding, contributions to the Social Security Fund, retirement and gratuity obligations, and periodic reporting to the Inland Revenue Department and other statutory bodies. You are responsible for calculating income tax on employment income, deducting employee contributions, adding employer contributions, and remitting everything on time in Nepalese rupees. Requirements can vary by income thresholds, employee residency status, and whether you operate as a small or large employer.

Non-compliance can trigger penalties, late-payment interest, audits by the Inland Revenue Department, and serious trust issues with employees if net pay or benefits are incorrect or delayed. This guide walks you through how to calculate payroll taxes, align with filing and payment deadlines, structure your payroll setup, and decide whether to use your own entity or an Employer of Record. With the right processes, you can keep your Nepal payroll compliant while giving employees clear, accurate payslips every month.

In Nepal, payroll taxes revolve around pay-as-you-earn income tax, mandatory social security contributions, and retirement-related funding such as provident fund and gratuity. Each obligation has its own rate structure, cost split between employer and employee, and monthly or annual compliance steps that your team must manage.

Pay-As-You-Earn (PAYE) Salary Tax

PAYE is the monthly withholding of individual income tax from employment income, administered by the Inland Revenue Department under the Income Tax Act. The tax is calculated on taxable salary after allowable deductions, using progressive annual slabs that translate into monthly withholding, with employees bearing the full tax while employers act as withholding agents.

Employers must deduct PAYE each pay cycle, deposit it typically within 25 days after the end of the Nepali month, and file the prescribed withholding statement. If you under-withhold or pay late, the Inland Revenue Department can impose fines, interest, and disallow expense deductions, and repeated non-compliance can trigger audits and restrictions on tax clearance certificates.

Social Security Fund (SSF) Contributions

The Social Security Fund, overseen by the Social Security Fund Office under the Ministry of Labour, Employment and Social Security, provides benefits such as medical, maternity, accident, disability, and old-age protection. The standard contribution rate is 31% of basic salary, with 20% paid by the employer and 11% by the employee, subject to the rules of the Social Security Fund Regulation.

Contributions are calculated on the declared contributory wage and must be deposited monthly through the SSF online portal, along with employee-wise details. Late or missing payments can lead to penalties, interest, suspension of benefit eligibility for employees, and potential legal action against the employer for breaching mandatory social security obligations.

Provident Fund And Gratuity Contributions

In addition to SSF, many employers in Nepal contribute to the Employees Provident Fund and maintain gratuity obligations under the Labour Act, especially for employees not fully migrated into SSF schemes. A common structure is 10% of basic salary contributed by the employer and 10% by the employee to the provident fund, while gratuity accrues at a minimum of 8.33% of basic salary for eligible employees, though exact practices can vary by policy and sector.

These contributions are usually funded monthly and reported either to the Employees Provident Fund office or tracked internally for future payout, with final settlement at separation or retirement. Failure to fund provident and gratuity liabilities can result in labour disputes, orders from the Labour Office, back-pay obligations with interest, and reputational damage that affects hiring and retention.

Most employers in Nepal pay salaries via bank transfer in Nepalese rupees, although cash payments are still used in some smaller or remote operations. Salaries are typically paid monthly, often within a few days of the end of the Nepali month, and you should align your payroll calendar with statutory due dates for tax and social security remittances.

If you do not have a local entity, you can engage an Employer of Record to hire and pay staff compliantly, or set up a local company and register for tax and social security before running your own payroll. Payslips should clearly show gross salary, allowances, overtime, bonuses, all statutory deductions such as PAYE and SSF, employer contributions, and the final net pay, along with the pay period and employee identifiers.

• Payment Method: Use bank transfers in Nepalese rupees as the default method to ensure traceability and easier reconciliation.
• Pay Frequency: Set a consistent monthly pay date that falls before statutory remittance deadlines for taxes and contributions.
• Payslip Content: Include gross pay, itemised allowances, overtime, bonuses, each statutory deduction, employer contributions, and net pay.
• Bank Setup: Open a corporate bank account in Nepal and collect accurate employee bank details before the first payroll run.
• No-Entity Hiring: Use an Employer of Record if you want to hire in Nepal without incorporating and registering for payroll taxes yourself.
• Cut-Off Dates: Define internal cut-off dates for timesheets, variable pay, and approvals so you can process payroll and remit taxes on time.
• Record Keeping: Store payroll records, payslips, and remittance proofs securely for the retention period required by tax and labour authorities.

Getting payroll set up correctly in Nepal determines how smoothly you can hire, pay, and stay compliant with the Inland Revenue Department, Social Security Fund, and labour authorities. The steps differ significantly depending on whether you operate through your own registered entity or rely on an Employer of Record to handle local employment and payroll on your behalf.

With your own entity, you must register for tax, social security, and labour obligations, configure payroll software, and maintain ongoing filings and audits. With no entity, an Employer of Record becomes the legal employer in Nepal, managing contracts, payroll calculations, and statutory payments while you direct day-to-day work.

• Incorporation: Register a local company with the Office of the Company Registrar if you plan to run payroll directly.
• Tax Registration: Obtain a Permanent Account Number from the Inland Revenue Department and register as a withholding employer.
• Social Security Registration: Enrol with the Social Security Fund and, where applicable, the Employees Provident Fund before hiring staff.
• Bank Account: Open a corporate bank account in Nepalese rupees to pay salaries and remit statutory contributions.
• Payroll Policies: Define salary structures, allowances, overtime rules, leave policies, and reimbursement processes in line with the Labour Act.
• Payroll System: Implement payroll software or a provider that can handle Nepali tax slabs, SSF, provident fund, and gratuity calculations.
• Data Collection: Collect employee KYC details, tax information, SSF numbers, and bank details before the first payroll run.
• No-Entity Option: If you do not want to incorporate, appoint an Employer of Record to employ workers and manage all payroll compliance.
• Internal Controls: Set up approval workflows and segregation of duties for payroll input, review, and payment release.

Example Of Salary Tax Calculation

Assume an employee in Kathmandu earns a monthly gross salary of NPR 100,000 with standard participation in the Social Security Fund. You would first determine the contributory wage, calculate the employee SSF contribution at 11%, then apply the progressive income tax slabs to the remaining taxable income to arrive at the PAYE withholding.

On the employer side, you would add a 20% SSF contribution on the same wage and any other agreed benefits, then confirm that the total cost and deductions reconcile with your payroll records. Finally, you would generate a payslip showing gross salary, SSF contributions, income tax withheld, and net pay, and schedule remittances to the Inland Revenue Department and Social Security Fund within their due dates.

• Step 1 – Determine Gross Pay: Confirm the monthly gross salary and any taxable allowances or bonuses for the period.
• Step 2 – Calculate SSF: Apply 11% employee and 20% employer SSF rates to the contributory wage and record both amounts.
• Step 3 – Compute Taxable Income: Subtract allowable deductions, including employee SSF, to arrive at taxable income for the month.
• Step 4 – Apply Tax Slabs: Use the current progressive income tax slabs to calculate PAYE withholding on the taxable income.
• Step 5 – Finalise Payslip: Confirm net pay after all deductions, generate the payslip, and prepare remittance schedules for tax and SSF.

Submitting Employee Tax In Nepal

Employee tax and contribution submissions in Nepal are largely handled through official online portals and bank channels linked to your registered tax and social security accounts. You will need your Permanent Account Number, Social Security Fund employer code, payroll period details, employee-wise breakdowns, and access to your corporate bank account to complete filings and payments.

• IRD e-Filing Portal: Submit monthly withholding tax returns and PAYE payments through the Inland Revenue Department online system using your employer credentials.
• SSF Online Portal: Upload contribution schedules and pay Social Security Fund contributions via the SSF portal linked to your bank account.
• Bank Vouchers: Where required, generate bank vouchers or payment references from the portals and complete payment at designated banks.
• Payroll Software Integration: Use payroll software that can export IRD and SSF-compliant files to reduce manual data entry and errors.
• Third-Party Providers: Engage a local payroll provider or Employer of Record to manage filings if you lack in-house expertise or systems.

Payroll Tax Due Dates In Nepal

Understanding the tax obligations for both employers and employees is crucial when operating in Nepal's business landscape. This section explains how taxes and statutory fees affect payroll and individual earnings in Nepal.

Employer Tax Contributions

Employer payroll contributions are generally estimated at an additional 20%–30% on top of the employee salary in Nepal. The largest component is the 20% Social Security Fund contribution on contributory wages, with additional costs arising from provident fund, gratuity, and other benefits depending on your policies and whether employees are fully covered by SSF.

Employee Payroll Tax Contributions

In Nepal, the typical estimation for employee payroll contributions cost is around 15%.

Individual Income Tax Contributions

Individual income tax in Nepal is levied on a progressive slab basis, with different thresholds for resident individuals and additional surcharges for higher earners. Employers apply these slabs through monthly PAYE withholding, and employees reconcile their position through annual returns if required.

Pension in Nepal

Pension in Nepal is primarily delivered through the Social Security Fund and, for many employees, the Employees Provident Fund, which together build retirement savings over the course of employment. Employers should clearly define whether staff are covered under SSF, provident fund, or both, and ensure contributions are deposited on time so employees can access retirement and old-age benefits when eligible.