Taxation

Calculation of income from business and employment under the Income Tax Act, 2058

Under the Act, a person's taxable income is worked out separately for each source (business, employment and investment) and then added together. Net income from a source is the gross income of that source less the deductions the Act allows.

1. Income from business (Section 7)

Formula

$\text{Business income} = \text{Gross receipts and business gains} - \text{Allowable business deductions}$

Included in income: sales and service receipts, gains from the disposal of trading stock, interest or commission earned in the course of business, and amounts received for the business (such as a debt previously written off and now recovered).

Main allowable deductions:

• Expenses incurred wholly and exclusively for earning business income, such as rent, wages, raw materials, interest on business loans, repairs and insurance;
• Depreciation on business assets under the pooled-block method (Block A 5%, B 25%, C 20%, D 15%);
• Cost of trading stock and bad debts actually written off;
• Pollution control, research and development, and similar costs, within the limits set by the Act.

Not allowed: private or domestic expenses, income tax itself, fines and penalties, and capital expenditure (except through depreciation).

Example. Himal Traders in Kathmandu earns the following in a year.

$\text{Business income} = 50,00,000 - (30,00,000 + 8,00,000 + 2,00,000 + 1,00,000) = \text{Rs } 9,00,000$

The personal expense of Rs 50,000 is ignored. Tax is then charged on Rs 9,00,000 at the rates in force.

2. Income from employment (Section 8)

Formula

$\text{Employment income} = \text{Remuneration and benefits} - \text{Allowable deductions}$

Included in income: salary, wages, allowances, bonus, overtime, leave pay, commission, and benefits in kind such as housing, vehicle for private use or a loan at low interest, valued at their taxable amount. Payments received on termination of service are also included.

Deductions:

• Contribution to an approved retirement fund (Provident Fund, Citizen Investment Trust, Social Security Fund), up to the lowest of the actual contribution, one third of assessable income or the limit fixed by law;
• Life insurance premium and medical insurance premium within the prescribed limits;
• Remote area allowance, depending on the area where the person works.

Example. Sita works in a Kathmandu bank.

$\text{Assessable income} = 6,00,000 + 1,20,000 = \text{Rs } 7,20,000$

Retirement contributions total Rs 1,20,000, which is below one third of assessable income (Rs 2,40,000) and the statutory ceiling, so Rs 1,20,000 is deducted. The insurance premium is deducted up to its limit, so Rs 25,000 is allowed.

$\text{Taxable employment income} = 7,20,000 - 1,20,000 - 25,000 = \text{Rs } 5,75,000$

Tax is charged on this amount by the slab rates for a resident individual under the current Finance Act (starting with a 1% social security tax slab). The employer deducts tax at source every month and deposits it with the Inland Revenue Department.

Key difference