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Taxes in the Nepal Stock Exchange (NEPSE): A Comprehensive Guide

The Nepal Stock Exchange (NEPSE) is the sole stock exchange in Nepal, facilitating the trading of listed securities such as shares, bonds, debentures, and mutual funds. Taxes on NEPSE transactions primarily revolve around capital gains tax (CGT) on the sale of shares, dividend tax, and related withholding taxes. These are governed by the Income Tax Act, 2058 (as amended), under the oversight of the Inland Revenue Department (IRD). This guide covers all aspects in detail, including rates, calculations, exemptions, filing procedures, differences for residents/non-residents and individuals/entities, payment mechanisms, penalties, and recent developments as of fiscal year 2025/26 (2082/83, effective from mid-July 2025). Information is based on current laws and practices, with no major transaction taxes beyond CGT and dividends (e.g., no value-added tax on trades, though brokerage fees apply separately).

Note: Tax rules can vary based on specific circumstances, such as whether shares are classified as business or non-business assets. Always consult a tax professional or the IRD for personalized advice. Rates and rules are for NEPSE-listed shares unless otherwise specified.

1. Overview of Taxes in NEPSE

Taxes in NEPSE primarily apply to:

Profits from selling shares (capital gains).
Income from dividends paid by listed companies.
Other investment returns, such as from mutual funds traded on NEPSE.

There are no direct taxes on buying shares or on transaction volumes (e.g., no securities transaction tax like in some countries). However, brokers deduct withholding tax (TDS) automatically on sales and dividends. NEPSE transactions occur through the Trading Management System (TMS), and tax compliance is integrated with platforms like MeroShare for demat accounts.

Key principles:

Taxes are self-assessed but often withheld at source.
Residents are taxed on worldwide income, including NEPSE gains; non-residents only on Nepal-sourced income.
Fiscal year runs from Shrawan 1 to Ashad end (mid-July to mid-July).
Permanent Account Number (PAN) is mandatory for investors.

2. Capital Gains Tax (CGT) on NEPSE Shares

CGT is levied on the profit (gain) from disposing of shares, calculated as Selling Price minus Cost Basis. It applies only when shares are sold (not held). For NEPSE-listed shares, CGT is collected as advance tax at source under Section 95Ka of the Income Tax Act. Gains are part of taxable income but taxed at special rates.

2.1 Applicability

Triggered on sale of ordinary shares, IPO allotments in secondary market, right shares, bonus shares (upon sale), mutual fund units, or other securities.
Does not apply to unsold holdings or gifts/inheritances (tax deferred until sale by recipient).
For business entities (e.g., if shares are trading stock), gains are treated as business income at standard rates (25-30%), but most investors pay the special CGT rates.
Losses can offset gains: For non-business assets, losses offset same-year gains; for business assets, carry forward indefinitely against future disposal gains.

2.2 Tax Rates

Rates depend on holding period (from purchase to sale date), investor type (individual/entity), and residency. Holding period is per-script (per stock), not portfolio-wide.

Investor Type	Holding Period	CGT Rate on Gain	Notes
Resident Natural Person (Individual)	≤ 365 days (Short-term)	7.5%	Applies to most retail investors.
Resident Natural Person (Individual)	> 365 days (Long-term)	5%	Encourages long-term holding.
Resident Entity (e.g., Company, Cooperative)	Any period	10%	No holding period distinction.
Non-Resident (Individual or Entity)	Any period	25%	On Nepal-sourced gains only.

Unlisted Shares (Not on NEPSE): Higher rates for comparison—Resident Individual: 10%; Resident Entity: 15%; Non-Resident: 25%. Not directly relevant to NEPSE.
Mutual Funds on NEPSE: Same rates as above for individuals (7.5%/5%); entities pay 10%.
No distinction for bonus/right shares in rates, but they adjust cost basis (see calculation below).

2.3 Calculation of CGT

Formula: Capital Gain = Selling Price - Cost Basis Tax Payable = Capital Gain × Applicable Rate

Cost Basis Includes:

Purchase price (IPO price or market price).
Brokerage fees, stamp duty, legal fees, valuation costs.
Adjustments for bonus shares (reduces average cost per share).
Right shares: Their separate purchase price is added.
No inflation adjustment (indexation) currently; nominal gains are taxed fully.

Use First-In-First-Out (FIFO) for partial sales. Calculations are per-script; losses in one stock cannot offset gains in another under current law (though reforms are proposed).

Examples (Assuming Resident Individual Investor):

Short-Term Gain Example: Buy 100 shares of NLIC at NPR 900 each (total NPR 90,000) on Jan 1, 2025. Sell at NPR 1,300 each (total NPR 130,000) on Dec 1, 2025 (<365 days). Gain = NPR 130,000 - 90,000 = NPR 40,000. CGT = 40,000 × 7.5% = NPR 3,000. Explanation: Holding <1 year, so short-term rate applies. Subtract cost from sale, apply rate.
Long-Term Gain with Bonus Shares Example: Buy 100 shares at NPR 100 each (NPR 10,000). Receive 50 bonus shares (no cost). Now 150 shares, average cost = NPR 10,000 / 150 = NPR 66.67 per share. Hold >1 year, sell all at NPR 200 each (NPR 30,000). Gain = NPR 30,000 - 10,000 = NPR 20,000. CGT = 20,000 × 5% = NPR 1,000. Explanation: Bonus dilutes cost basis; long-term rate reduces tax.
Loss Example: Buy at NPR 1,000, sell at NPR 800 (loss NPR 200 per share). No CGT; offset against other same-year gains if applicable.

For entities/non-residents, replace rate accordingly (e.g., 10% or 25%). Use tools like Excel or MeroShare transaction history for accuracy.

2.4 Exemptions and Deductions

Annual Exemption Limit: NPR 500,000 for individuals (NPR 600,000 for couples) on non-business chargeable assets (including shares). Excess gains taxed at full rate.
Loss Offsets: Deduct losses from same-year gains; carry forward for business assets.
Special Exemptions: Gains on government bonds/securities exempt. Start-ups (innovative/tech-based, turnover <NPR 10 crore) get 100% income tax exemption for 5 years, potentially covering share gains if qualified.
No exemptions for small gains beyond the limit; all taxable gains reported.
Deductions: Only direct costs (e.g., brokerage); no personal expenses.

3. Dividend Tax in NEPSE

Dividends from NEPSE-listed companies (cash or stock) are taxed under Section 88. This is a final withholding tax, not added to taxable income.

3.1 Rates and Applicability

Standard Rate: 5% withholding tax (WHT) on dividends from resident companies/partnerships.
Redistribution: 0% if already taxed.
From Non-Residents: Taxed as normal income (progressive for individuals: 1-36%; 25% for entities).
Uniform for residents/non-residents and individuals/entities.
Bonus shares: Not taxed as dividends upon receipt (taxed as CGT on sale), but cash dividends are.

3.2 Exemptions

Full exemption if company capitalizes profits into shares for capacity expansion (e.g., special/IT/tourism industries).
Special Economic Zones: 0% for first 5 years; 50% concession (2.5% effective) for next 3 years.
IT industries (e.g., software, BPO): Expanded definition for exemptions in 2025/26.

4. Withholding Taxes (TDS) in NEPSE

TDS is automatic for NEPSE trades under Sections 88, 88Ka, 89, 95Ka.

On CGT: Deducted by broker at sale (e.g., 7.5%/5% for individuals).
On Dividends: 5% by company.
On Mutual Fund Returns: 5% for individuals; 15% for entities.
On Commodity Futures (if NEPSE-related): 10%.
Non-residents: TDS is final; residents credit against liability.
If payer fails, deemed collected; penalties apply.

5. Differences: Residents vs. Non-Residents

Residents: Worldwide income taxed; CGT 5-10%; full access to exemptions/loss carryforwards.
Non-Residents: Only Nepal-sourced (e.g., NEPSE gains/dividends); higher CGT (25%); no annual exemption; 5% dividend WHT final. Permanent Establishment (PE) in Nepal (e.g., >90 days service) taxes as resident, with 5% on profit repatriation.

6. Differences: Individuals vs. Entities

Individuals (Natural Persons): Lower rates (5/7.5%); annual exemption; TDS often final for non-business.
Entities (Companies/Coops): 10% CGT; no holding distinction; TDS creditable against 25-30% corporate rate; losses carried forward.

7. Filing and Payment Procedures

TDS-Handled Cases: Broker deducts CGT/dividends; no separate filing if only investing (include in annual return if filing income tax).
Manual Filing: For self-declared or non-TMS sales:
1. Log into IRD portal (taxpayerportal.ird.gov.np) with PAN.
2. Select "Capital Gains Tax Filing" or "Income Return."
3. Enter details (shares, prices, dates); system calculates.
4. Pay via connectIPS/bank.
Deadlines: Annual return within 3 months of fiscal year-end (Asoj end, ~mid-Oct); extensions possible. TDS deposits by 25th of next month.
Refunds: If TDS > liability, claim in return.
Records: Keep purchase/sale docs, CGT certificates from brokers.

8. Penalties for Non-Compliance

Late filing: 0.1% of assessable income or NPR 1,200 per return.
Late payment: 15% p.a. interest.
Underreporting: 50% penalty; fraud: 100% + prosecution.
Non-withholding: 2.5% p.a. on TDS return; audits possible within 4 years.

9. Recent Changes and Proposals (2025/26)

Implemented Changes: Start-up exemption threshold raised to NPR 10 crore; expanded IT industry definitions for dividend exemptions; new 100% exemptions for green hydrogen/EV industries (may indirectly benefit NEPSE firms).
Proposals (Not Yet Implemented): Flat 6% CGT; portfolio-based offsets; inflation indexation; Rs 100,000 tax-free threshold; no tax on bonus receipt; 3-year loss carryforward. A May 2025 budget proposal for 10% flat rate was not adopted. Reforms aim to boost retail participation but face revenue concerns.

10. Other Relevant Aspects

Mutual Funds/ETFs on NEPSE: Treated as shares; same CGT rates. Returns: 5% TDS for individuals.
IPOs/FPOs: CGT on secondary sale only.
Women/Minors/Coops: File under relevant PAN; no special rates.
Tax Planning Tips: Hold >365 days for lower rate; use exemptions; offset losses; consult advisors.
Collection Trends: High CGT collections in 2025 reflect strong market (e.g., Sawan 2025 data), indicating growing investor base.

This covers all key elements of taxes in NEPSE comprehensively. For updates, check IRD or SEBON websites.