Chapter-12 Special Provisions on Retirement Saving

63. Retirement fund

Among various types of investments, investment in a retirement fund is one form of investment. Since the return from such investment is linked to social security, a tax concession in the form of a special incentive is provided to encourage retirement savings. Under the Act, the provisions relating to retirement savings apply not only to persons earning employment income but also to natural persons earning business or investment income. That is, an natural person may, subject to this Act and the Regulations, claim a deduction against retirement contributions when computing taxable income from employment, business or investment.

Examples of retirement funds include the Employees Provident Fund, the Social Security Fund, the Pension Fund, the retirement fund operated by the Citizen Investment Fund, entities that have obtained approval from the Department to operate a retirement fund, and entities operating without such approval. Entities that have obtained approval from the Department, the Employees Provident Fund, the Social Security Fund, the retirement fund operated by the Citizen Investment Fund, and the Pension Fund are called approved retirement funds; retirement funds operating without approval from the Department are called unapproved retirement funds. A beneficiary natural person of an entity means an natural person who has the right to receive income or capital from the entity, as well as an natural person who deposits retirement contributions into such entity.

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(2) An natural person who is the beneficiary of an approved retirement fund may make a claim to have the retirement contribution made to the fund in any income year deducted while computing his taxable income.

(3) Notwithstanding anything contained in sub-section (2), the amount claimed by any person for deduction in any income year pursuant to that sub-section shall not exceed the prescribed limit of retirement contribution.

Rule 21: In any income year, a natural person who is the beneficiary of an approved retirement fund may, in making retirement contribution to the retirement fund, subtract from his or her taxable income a sum of Five Hundred Thousand Rupees or one-third of his or her assessable income, whichever is lower.

A natural person may claim deduction of retirement contributions made to an approved retirement fund in any income year from their income in calculating taxable income. As per Section 63(3) of the Act and Rule 21 of the Regulations, claims can be made for up to Rs. 5,00,000 or one-third of their assessable income, whichever is less. For contributions to the Social Security Fund established under the Contributory Social Security Fund Act, 2074, the deduction limit is Rs. 5,00,000 or one-third of assessable income, whichever is less per Rule 21. Contributions made to retirement funds without approval cannot be claimed as deductible from income.

For the purpose of calculating employment income, assessable income means the total amount (Gross Receipt) of cash, goods, and benefits received by a natural person or employee from the employer in the course of employment. Accordingly, the assessable income from employment is determined before claiming the retirement contribution deduction.

Example 17.5.1: Suppose Ravinath Jha is an employee at Bikash Bank Limited. He received the following salary, allowances, and benefits from the institution:

(a) Salary: Rs. 20,000 per month

(b) Snack allowance: Rs. 3,000 per month

(c) Bonus: Rs. 30,000

(d) The bank deducts 10% of salary and adds an equal amount to deposit in the retirement fund.

(e) He received one month's salary equivalent as Dashain expense.

(f) A car was provided for him and another employee for pick-up and drop.

(g) The office has also provided accommodation for him.

Method of calculating assessable income:

Example 17.5.2: Suppose Ravinath Jha from Example 17.5.1 also donated Rs. 50,000 to a tax-exempt organization approved by the Department for providing free water to the public, and deposited an additional Rs. 60,000 in an approved retirement fund.

Adjusted taxable income = Total employment income Rs. 3,56,000

less retirement contributions (24,000 + 24,000 + 60,000) = Rs. 1,08,000

Adjusted taxable income = Rs. 2,48,000

Charitable contribution claimable: actual donation Rs. 50,000; maximum limit Rs. 1,00,000; 5% of adjusted taxable income Rs. 12,400; of the above, the lower amount of Rs. 12,400 can be deducted from employment income.

For a retirement fund other than the Employees Provident Fund, the Citizen Investment Fund, the Social Security Fund established under the Contribution-Based Social Security Fund Act, 2074, and the Pension Fund established under the Pension Fund Act, 2075 to qualify as an approved retirement fund, it must apply to the Department, and the Department may grant approval subject to Rule 20(2).

Rule 20 Approval of Retirement Fund:

(1) If an application is received for the approval of a retirement fund under Section 63 of the Act, the Department may grant approval subject to Sub-rule (2).

(2) While granting approval under Sub-rule (1), the Department may do so on the condition that the retirement fund complies with the following requirements:

(a) Amounts deposited in or received by the retirement fund must be invested only in approved investments.

(a1)The paid-up capital must be at least NPR 10 million.

(a2) The number of beneficiary workers or employees under the institution operating the retirement fund must be at least 1,000.

Example 12.3.3: Suppose Compass Nepal Ltd. Retirement Fund has been operating a retirement fund for workers and employees of Compass Nepal Ltd. This retirement fund is an approved retirement fund authorised by the Department. Compass Nepal Ltd. expensed Rs. 1,00,000 as retirement contributions for its workers and employees in Ashadh by recording it in the profit and loss account as a payable liability. Such amount must be deposited into the retirement fund by Shrawan (that is, within 1 month). Similarly, when distributing remuneration for the month of Jestha, the amount expensed must be deposited into the retirement fund by the 15th of Ashadh.

(b) If the retirement fund accepts retirement contributions from an employer on behalf of employees or workers, the management of the fund must be independent from the employer.
However, this clause shall not apply to the employees or workers of the same fund.

Retirement contributions of Government of Nepal employees are deposited into the Employees Provident Fund through the relevant offices (employers). The management of the Employees Provident Fund is independent. Even if such a fund accepts retirement contributions from its own employees, the management is considered independent of the employer. The provision is further clarified in the following example.

Example 12.3.2: Suppose the Rastriya Banijya Bank Retirement Fund has been operating a retirement fund for the sole purpose of accepting retirement contributions from employees of Rastriya Banijya Bank. The fund has been operating with a separate set of regulations and a management committee. If the management committee includes representatives of both bank management and employees, the fund has no liability to the bank, and the fund's financial statements are audited separately by an approved auditor, then the management of that fund shall be considered independent of the employer.

(c) If the retirement contribution is recorded as an expense in the month of Ashadh, it must be deposited into the retirement fund within one month; in other months, within 15 days of recording the expense.

(d) Payments from the retirement fund to beneficiaries shall be allowed only in the following cases:

(1) Upon retirement of the employee or worker,

(2) When the beneficiary reaches the age of 58 years, or

(3) Upon death or permanent disability of the beneficiary.

Example 12.3.4: Suppose Suraksha is a person engaged in a sole proprietorship business. She has been depositing into the Citizen Investment Fund annually the lesser of one-third of her assessable income or Rs. 3,00,000, specifically Rs. 1,20,000 per year. After the Income Tax Act, 2058 came into force, she has continued to deposit Rs. 1,20,000 per year into the Citizen Investment Fund in accordance with the Regulations. By the date of 2066/02/12 (before reaching 58 years), the total amount deposited was Rs. 5,50,000. Having reached 58 years on 2066/02/13, the Citizen Investment Fund must compute the amount payable to her, deduct advance tax, and make the payment as follows:

(e) The retirement fund must be audited annually by an auditor approved by the Office of the Auditor General.

Explanation: For the purpose of this rule, “approved investments” include the following:

(a) Investment in Citizen Investment Trust established under prevailing law,

(b) Investment in government securities issued by the Government of Nepal,

(c) Investment in banks operating under prevailing banking laws,

(d) Investment made on co-financing basis with a bank, and

(e) Investment made to beneficiaries other than its shareholders.

Example 12.3.1: Suppose the Nepal Rastra Bank Employees Retirement Fund has been operating a retirement fund for employees of Nepal Rastra Bank, and employees currently working at Nepal Rastra Bank are making retirement contributions to this fund. The Department may grant approval to such entity on the condition that the retirement contributions received are invested only in the approved areas listed in (a) through (e) above.

(3) If an approved retirement fund fails to comply with the conditions mentioned in Sub-rule (2), the Department may cancel its approval.

(4) …………

(5) …………

(6) Notwithstanding anything written elsewhere in this rule, the following shall apply in relation to the following amounts:

(a) Amounts (including principal and interest) deposited in Provident Fund or Citizen Investment Trust before the commencement of the Act, as well as gratuity and accumulated leave encashment accrued up to that period, shall be tax-exempt.

(b) At the time of commencement of the Act, for employees or workers in service, medical expenses up to NPR 180,000 provided upon retirement in accordance with service conditions shall not be included in their income.

Example 12.6.1: Suppose Aparajita Kashyap is an employee at Bikas Bank Limited. She receives the following salary and benefits from the bank:

Monthly salary: Rs. 20,000 per month

Education allowance: Rs. 2,000 per month

Clothing allowance: Rs. 10,000 per year

Dashain allowance: one month's salary

Vehicle allowance: Rs. 1,000 per month

Telephone expenses: Rs. 1,000 per month

The bank has also provided her with housing accommodation.

The bank deducts 10 percent from her salary and deposits an equal additional amount into an approved retirement fund. Her computation is as follows:

Example 12.6.2: Suppose in Example 12.6.1 above, the assessable income is Rs. 3,46,800 and she additionally contributes Rs. 10,000 per month to the Citizen Investment Fund on her own behalf. Her contribution computation is as follows:

Under Section 4(3)(c) of the Act, to claim a deduction of retirement contributions other than contributions paid directly by the employer, the person must file an income return. If the Citizen Investment Fund or another retirement fund in accordance with an agreement with the employer has been directly deducting the amount from the employer's remuneration and depositing it on the employee's behalf, such employee need not file an income return if they have no other income.

Explanation: For the purposes of this Section, "approved retirement fund" means the Employees' Provident Fund established under the Employees' Provident Fund Act, 2019 (1962); the Citizens Investment Trust established under the Citizens Investment Trust Act, 2047 (1991); the retirement fund operated by the Social Security Fund established under the Contribution-Based Social Security Fund Act, 2074 (2018); and the retirement fund operated by the Pension Fund established under the Pension Fund Act, 2075 (2018).

Retirement contribution deduction (Sec 63, Rule 21): a natural person (employment, business OR investment income) may deduct contributions to an APPROVED fund = the LEAST of (actual contribution, one-third of assessable income, Rs. 5,00,000).

Contributions to UNAPPROVED funds are not deductible.

Approved funds = EPF, Citizen Investment Trust, SSF, Pension Fund + funds approved by the Department (approval needs: paid-up capital ≥ Rs. 1 crore, ≥ 1,000 beneficiaries, management independent of the employer, deposit within 1 month for Ashad / 15 days for other months, payouts only on retirement / age 58 / death or permanent disability, OAG-approved audit). Fund money may be placed only in approved investments: CIT, GoN bonds, banks, bank co-financing, loans to non-shareholder beneficiaries

64. Tax in retirement fund

(1) For the purposes of assessing the income of the retirement fund, the amounts to be included or deducted pursuant to this Act shall be included or deducted in computing the income.

Provided that

(a) Contributions made to the fund shall not be the income of the fund and such contributions shall not be included in computation.

(b) Retirement payments shall not be the expenses of the fund and such payments shall not be deducted in computing the income.

Example 12.7.1: Suppose employee Harihar Vishwakarma of Nepal Airlines Corporation retired from service on Jestha 12, 2065. During the service period, the company had sent Rs. 8,00,000 to the approved retirement fund as provident fund contributions. At the time of retirement, the retirement fund was required to pay Rs. 10,00,000 to that employee. In this case, the retirement contribution of Rs. 8,00,000 received by the fund is not treated as the fund's income, and the Rs. 10,00,000 retirement payment made to that employee is also not treated as the fund's expense.

(c) Interest of any beneficiary in the retirement fund shall not be a liability of the fund.

Since the retirement fund does not treat received contributions as income, and payments made to beneficiaries are also not treated as expenses, the interest of beneficiaries is also not treated as a liability of the fund. The fund is an entity that holds in trust on behalf of beneficiaries. The natural persons who are beneficiaries are the owners of their respective account units in the fund. The management of the fund merely invests in areas specified by Rule 20(2) of the Income Tax Regulations and generates returns for beneficiaries.

(2) No tax shall be levied on the income of the approved retirement fund.

(3) If any approved retirement fund ceases to remain in the form of such fund, such fund shall pay tax at the rate mentioned in sub-section (1) of Section 2 of Schedule-1 on the amount computed by subtracting the amount referred to in clause (b) from the amount referred to in clause (a):-

(a) All retirement contributions paid to the fund between the period from the date when the fund obtained approval as a retirement fund and the date when the recognition ceased to exist, and all income amounts that would be treated as taxable incomes if sub-section (2) were not applicable,

(b) All retirement payments made by the fund between the period from the date when the fund obtained approval as a retirement fund and the date when the recognition ceased to exist.

If any approved retirement fund ceases to be such a fund (that is, has become an unapproved retirement fund), the income of such fund shall be subject to tax at 25 percent under Schedule-1, Section 2(1) of the Act. The following example illustrates this provision:

Example 12.7.2: Suppose Nepal Srijan Company Ltd. has been operating a retirement fund for its workers and employees since obtaining approval from the Department on the last day of Ashadh 2060. The fund's accounts are as follows:

FY 60/61 retirement contributions: Rs. 25,00,000

FY 60/61 interest from investments: Rs. 1,50,000

FY 61/62 retirement contributions: Rs. 30,00,000

FY 61/62 interest from investments: Rs. 4,00,000

FY 60/61 retirement payments: Rs. 15,00,000

FY 61/62 retirement payments: Rs. 14,00,000

FY 60/61 retirement fund operating expenses: Rs. 1,00,000

FY 61/62 retirement fund operating expenses: Rs. 1,10,000

Suppose the Department notified the fund that its approval was revoked from the last day of Jestha 2062. In this case, since the approved retirement fund became an unapproved retirement fund from the last day of Jestha 2062, the tax computation for that retirement fund must be done as follows:

Tax in retirement fund (Sec 64): a fund's received contributions are NOT its income, retirement payments are NOT its expense, and beneficiaries' interests are NOT its liability (the fund holds in trust).

64(2): the income of an APPROVED retirement fund (EPF, CIT, SSF, Pension Fund, Department-approved) is fully EXEMPT from tax.

64(3): if an approved fund loses approval, it pays 25% tax (Schedule 1, Sec 2(1)) on [total contributions + accumulated taxable income from approval to revocation] − [retirement payments made in that period]

65. Retirement payments

Refer Section 8(2)

A retirement payment means a payment made after an natural person has in principle reached a stage where they are unable to engage in employment, a profession, or a business and has retired from employment, a profession, or a business. Similarly, if an natural person dies, a payment of the amount that the person was entitled to receive, made to their dependants, is also called a retirement payment. Examples of retirement payments include retirement payments made from an approved or unapproved retirement fund, pension, gratuity, provident fund, leave encashment, medical treatment expenses, long service gratuity, welfare fund payments, and other payments of a similar nature received upon retirement. Such retirement payments may be from the Government of Nepal, from an approved retirement fund, from an unapproved retirement fund, or other retirement payments from an employer. However, payments from life insurance or investment insurance do not fall under this provision.

Payments received during service (before meeting the conditions of Rule 20(2)(d), that is, before retirement), such as long service gratuity, leave encashment, and medical expenses, do not fall within retirement payments and must be included in employment income at the time they are received. Similarly, if a beneficiary natural person other than a contributing employee receives payment before reaching 58 years of age or other than in the case of death or permanent disability, such payments shall not be treated as retirement payments and must be included in income at the time of receipt. However, amounts borrowed by such beneficiaries from the fund in accordance with the approved regulations of the retirement fund, since they constitute an investment by the fund, shall not be treated as a payment. Such amounts borrowed from the fund must be repaid to the fund with or without interest. The amount contributed by the beneficiary and the returns thereon constitute the retirement payment amount and tax must be withheld therefrom.

If retirement contribution amounts are deposited with more than one retirement fund manager, since it may be possible to claim a larger exemption than the limit allowed under Section 65(1)(b) of the Act, in the case of workers and employees, the employer must require the employee to declare the other retirement fund(s) in which they have contributions, and upon retirement, the other relevant retirement fund manager(s) must be informed accordingly. In the case of natural persons other than employers, the fund manager shall be responsible for obtaining a declaration from such person and notifying the relevant office accordingly.

(1) For the purposes of computing retirement payment income earned by any natural person from the interest based on contribution held in any approved retirement fund, or retirement payment from the Government of Nepal, the following provisions shall apply:-

(a) Retirement payments made by the fund for the interest in the fund shall be included in the income, and

(b) Notwithstanding anything contained in clause (a), if such payment is made in lump sum, the payment to be set by subtracting fifty percent of the paid amount or five hundred thousand rupees, whichever is higher, from the amount so paid shall be deemed as the profit made by the person from the disposal of his non-business taxable assets.

When an approved retirement fund or the Government of Nepal makes a lump sum retirement payment to an natural person, the gain shall be computed under Section 65(1)(b) of the Act and advance tax must be withheld at 5 percent under the proviso clause (1) of Section 88(1) of the Act before making payment. Such advance tax withheld constitutes a payment from which tax is withheld finally under Section 92(1)(chha) of the Act.

Rule 20(6) provides tax provisions relating to retirement payments in respect of periods before the Act came into force. Under clause (a), principal, interest, and other amounts accumulated in the provident fund or the Citizen Investment Fund of an employee or worker in income years prior to the commencement of the Act, and gratuity and accumulated leave amounts accrued up to that period, shall be exempt from tax. Under clause (b), medical treatment expenses payable up to one lakh eighty thousand rupees, as per the service regulations, to an employee or worker who was in service at the time the Act came into force and who retires from service, shall not be included in the income of that employee or worker.

Example 12.4.1: Suppose employee Mahanta Prasad is working at Nepal Airlines Corporation. The retirement contributions deducted during his service period have been deposited into the Employees' Provident Fund. He retired from service at the end of Ashadh 2076. He was found entitled to receive retirement payments of Rs. 6 lakh up to Chaitra 18, 2058 and Rs. 25 lakh thereafter, totalling Rs. 31 lakh. In this case, his income computation must be done as follows:

(2) For the purposes of computing the profit made by any natural person from the interest in any unapproved retirement fund, the following provisions shall apply:-

(a) Where a resident person has made payment, tax shall be imposed on the beneficiary in that amount as withholding of tax finally, and

Example 12.4.2: Suppose in Example 12.4.1 above, the contributions deducted by Nepal Airlines Corporation had been deposited into an unapproved retirement fund. Mahanta's contributions were Rs. 4,00,000 up to Chaitra 18, 2058 and Rs. 25,00,000 thereafter. The interest accrued up to Chaitra 18, 2058 was Rs. 1 lakh. He was entitled to receive a lump sum of Rs. 37 lakh from the retirement fund upon retirement. For tax purposes, his gain must be computed as follows:

(b) Where a non-resident person has made payment, that amount shall be included in computing the income of the beneficiary.

Example 12.4.3: In Example 12.4.2 above, if the retirement fund is a non-resident person, Mahanta Prasad must include the gain of Rs. 7,00,000 in income and file an income return.

Explanation: For the purposes of this Section, "profit made from the interest in any unapproved retirement fund" means, if retirement payments made from a retirement fund which has not obtained approval to a beneficiary natural person for his interest in the fund exceed the amounts of retirement contributions paid by that person to that fund for his interest in the fund, the amount to the extent of such excess.

Provided that payment made from any non-contributory fund shall not be considered as benefit from interest held in a unapproved retirement fund.

Example 12.4.4: Suppose Samanta Rai is a gazetted officer working at a commercial bank. In accordance with the bank's terms and conditions of service, the bank has established a Staff Security Fund and has been depositing amounts into it every year. Upon the employee's retirement from the bank, he received Rs. 3,00,000 from that fund as retirement payment. Since the retirement payment received from that fund is not a gain on account of interest in an unapproved retirement fund but is a payment from a non-contributory fund, advance tax at 15 percent must be withheld from such payment under Section 88(1) of the Act. Such payment shall be treated as a payment from which tax is withheld finally under Section 92(1)(chha) of the Act.

Example 12.4.5: Suppose Hari Prasad Kafle was appointed at Nepal Bank Ltd. as an assistant on Baishakh 1, 2044. He retired from service on Jestha 1, 2065. At the time of retirement, he received the following amounts:

Example 12.4.6: Suppose the retirement fund to which Hari Kafle contributed had become an unapproved retirement fund by the time of his retirement. His contributions to the fund and the payments received are as follows:

(1) Provident fund - principal from Chaitra 19, 2058 to end of Baishakh 2060: Rs. 4,50,000

(2) Interest on provident fund during that period: Rs. 50,000

(3) Total payment amount: Rs. 5,00,000

Of the above principal amount, Hari Kafle's own contribution is Rs. 4,50,000. Tax must be deducted as follows:

(1) Payment amount: Rs. 5,00,000

(2) Own contribution to the fund: Rs. 4,50,000

Gain for tax purposes: Rs. 50,000

Advance tax at 5% per Section 88(1) (Rs. 50,000 x 5% = Rs. 2,500) must be deducted and the remaining amount paid.

However, if such payment were from the Government of Nepal, the higher of Rs. 5 lakh or fifty percent of the payment amount per Section 65(1)(b) must be deducted and tax at 5 percent deducted from the remaining amount.

Example 12.4.7: Suppose the bank's employee service regulations in Example 12.4.5 above provide for gratuity as follows:

• For completion of 5 years of service: half a month's salary for each year of service completed;

• For more than 5 years up to 10 years: one month's salary for each year of service completed;

• For more than 10 years up to 15 years: one and a half months' salary for each year of service completed;

• For more than 15 years: two months' salary for each year of service completed.

His salary at the time of retirement was Rs. 40,000 per month. He had 60 days of accumulated leave up to Chaitra 18, 2058 and 120 days at the time of retirement, for which he received Rs. 1,60,000. His tax computation is as follows:

The retirement payment computed for tax purposes of Rs. 5,70,160 shall have 15% advance tax deducted per Section 88(1) of the Income Tax Act, 2058, and the payment shall be made. Such payment received after advance tax deduction is a final withholding payment per Section 92 of the Act and thus need not be included when computing employment income per Section 8(3) of the Act. In this regard, Rule 20(6)(a) provides that gratuity and leave amounts accrued before the Act came into force are settled and paid only upon retirement, so the exemption must be computed based on the salary at the time of retirement.

However, if such payment were from the approved retirement fund or Government of Nepal, the higher of Rs. 5 lakh or fifty percent of the payment amount per Section 65(1)(b) must be deducted and tax at 5 percent deducted from the remaining amount.

Example 12.4.8: Suppose Sweccha Kapali has been an employee at Bikas Bank Limited since Ashadh 1, 2052. The bank's employee service regulations provide for one month's salary as medical treatment expenses for each year of service upon retirement. Other details are as follows:

(a) Date of retirement: Shrawan 31, 2064

(b) Salary at the time of retirement: Rs. 20,000 per month

(c) Service period: 12 years

Based on the above information, her medical treatment expenses for tax purposes are computed as follows:

Retirement payments (Sec 65): payment on retirement / inability to work, or to dependants on death - pension, gratuity, provident fund, leave encashment, medical, long-service award (NOT life/investment insurance).

Pre-retirement leave/gratuity/medical paid during service = EMPLOYMENT income.

Tax on the gain:

(1) payment from an APPROVED retirement fund or the Government of Nepal → taxable = payment − (higher of 50% of payment or Rs. 5,00,000); 5% final WHT (Sec 88(1) proviso, final u/s 92(1)(chha)).

(2) payment from an UNAPPROVED fund → gain = payment − own contributions; resident payer = final WHT, non-resident payer = included in income.

(3) gratuity, leave encashment, medical and non-contributory-fund payments → 15% final WHT u/s 88(1).

Amounts accrued up to Chaitra 18, 2058 are exempt; pre-Act medical up to Rs. 1,80,000 exempt (Rule 20(6))

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