Benefits of Filing Income Tax Return in Nepal: Why it Matters for Individuals

Benefits of Filing Income Tax Return in Nepal Why iIt Matters for Individuals

Hey! It's taxation season. Have you ever thought about filing your personal Income Tax Return? If not, this article might give an insight into the reasons why you need to file your Income Tax Returns this year.

First of all, what does Income Tax Return filing mean?

Income tax return filing is a process whereby you report your income, deductions, and tax liabilities to the government irrespective of whether you are an individual, a business, or any other entity.

What is the frequency of filing of Income Tax Return?

Income tax return is filed once for every income year. An income year is defined as the time frame starting on the first of Shrawan and ending on the last of Ashad of any next year.

What is the Due Date of Income Tax Return filing for individuals?

The income tax return should be filed within three months of the expiration of the income year and the due date can be extended for the next three months in case of submission of application to the tax office within the end of the filing period. However, you need to ensure that the reason for such an extension is a genuine reason, and the tax officer needs to approve the extension.

Is filing of Income Tax Return Compulsory?

It is actually a legal requirement to file income tax return under section 96 of Nepalese Income Tax Act 2058 for Businesses registered in Nepal. However, individuals with income up to NPR 40 Lakhs are given the option not to file the return under Section 97 of the Act. This article will convince you to file your tax returns even if you are not obliged to file your income tax return under the Income Tax Act of the country.

What are the sources of Income for Individuals in Nepal?

Individuals can earn from varied sources. However, for ease of understanding, we have divided the sources of income of individuals as below:

  • Employment
  • Income from Proprietorship Business
  • Dividend Income from Partnership Businesses and Companies
  • Interest Income
  • Gain from Disposal of Investment and Immovable Properties
  • Rental Income
  • Windfall Gains such as lottery, gifts, prizes, tips, or any other gain acquired incidentally
  • Pension Income
  • Any kind of allowance received for participation in any kind of activities
  • Operation of public bus facilities

What are the exemptions for filing of Income Tax Return for Individuals

Income Tax Act 2058 does not require the following individuals with total income up to NPR 40 lakhs to submit income tax return:

  • Individuals with final withholding income only.
  • Individuals employed under only one employer registered in Nepal over the income year and not claiming any deductions except for contribution to retirement funds and medical expenses provided that the individual does not have any other source of income except final withholding income.
  • Any individuals who have taxable income but are not required to pay tax.
  • An individual whose only source of income is the disposal of non-business taxable property such as immovable properties, shares, etc., and is not willing to submit an income tax return.

What is Final Withholding Income?

Final Withholding Income includes those incomes in which tax withheld by the payer of such income is final and the payee is not liable to pay any additional tax for such incomes. These incomes include:

  • Dividend paid by a resident company or partnership firm.
  • Income in the form of Rent received for the land or building and fixtures and equipment having source in Nepal.
  • Amount of profit paid by a resident person for investment insurance.
  • Amount of profit paid by a resident person for the interest of an unapproved retirement fund.
  • Interest paid to an individual not having a source in Nepal and not related to the operation of business by a bank, financial institution, or other entity issuing bonds (debentures) or company registered under the prevailing law of the country.
  • All kinds of retirement payments, including that paid by the Government of Nepal or approved retirement fund or unapproved retirement fund (except regularly paid pension).
  • Meeting allowance of up to twenty thousand rupees per meeting, payment for teaching every time, making question papers or examining answer sheets.
  • Payment for a windfall gain.
  • Amount of consideration to be distributed to individuals from a mutual fund.
  • Payment for rent of a motor vehicle or carrier vehicle or carriage service of an individual except for a private firm.

Benefits of filing of Income Tax Return

Although all individuals are not bound by law to file their Income Tax Return there are many benefits to filing of income tax return. The following benefits might tempt you to file your return:

  1. Proof of source of fund
    • While making an investment or purchasing an immovable property or establishing any business, the legal authorities require you to submit the documentation proving that the amount invested is from legal sources which ultimately are tax clearance certificates of the amount invested for the authorities. Tax Clearance Certificates can be obtained only if you file your income tax return. There have been many cases where individuals were unable to invest or buy immovable properties despite having more than enough amount in their possession. The only hurdle was that the individuals were unable to present proof of their source of funds to the authorities. Hence, if you see yourself investing in a property or any business in the future, you might want to consider the filing of income tax return and obtaining tax clearance certificates for your income.
  2. Ease for Loan Processing
    • We have been hearing that the Banks and Financial Institutions are asking for tax clearance certificates as proof of income from their potential borrowers on receipt of requests for loans whether personal or business. Tax Clearance Certificates are provided only in case of filing of Income Tax Returns. If you are thinking of applying for a credit facility from any Banks and Financial Institutions in Nepal in the near future, you might want to consider the filing of Income Tax Return this year.
  3. Reductions
    • While filing individual income tax returns, you can check if your employer has correctly considered the reductions for contributions towards a retirement fund, payment of health, and medical expenses, and life and household insurance policies within the limit set by the Income Tax Act 2058 while calculating tax to be withheld from your income. If not, you can claim avail of the reduction facilities as mentioned above. You can also claim donations within the limit set by the act and provided to tax-exempt organizations as reductions. This can decrease your taxable income which in turn decreases your income tax liability.
  4. Carry Forward of Advance Tax
    • Any taxes paid on your behalf by your employer, or your debtors accumulate in your PAN Account if the employer and debtors have filed E-TDS return mentioning your PAN Account and the amount of TDS deducted. In case your income tax liability is lower than the total taxes paid on your behalf, such advance taxes can be carried forward for settlement in the next year.
  5. Assistance in VISA Processing
    • Most embassies require you to provide proof of income while applying for VISAs from foreign countries. Tax Clearance Certificates are obtained by filing income tax return servers as proof of income. Therefore, if you or any of your family members are considering going abroad, you might want to consider the filing of Income Tax Return.
  6. Planning for the future
    • The information you provide on your income tax return can help you assess your financial situation and plan for the future. You can make informed decisions about investments, retirement planning, and other financial goals by analyzing your income, expenses, and deductions.
  7. Avoiding Penalties and Interest
    • Filing income tax return on time helps you avoid penalties and interest charges that can accrue for late filing or non-payment of taxes owed.
  8. Avoiding Audits
    • Filing your tax return accurately and honestly reduces the likelihood of being audited by tax authorities. Providing complete and transparent information can help you avoid unnecessary scrutiny.

In conclusion, there are many benefits to filing income tax returns; However, these advantages may vary depending on your individual circumstances and the tax laws. It is recommended to consult with a tax professional or a financial advisor to understand how filing your tax return can personally benefit you.