Resignation and Notice Period Under Nepal's Labour Act 2074: Complete Guide for HR

Resignations and terminations in Nepal generate more compliance questions than any other HR event. The Labour Act 2074 (2017) lays out clear notice-period rules, but the order of payouts at the end — accrued leave, gratuity, severance, encashment — and how each interacts with TDS is where most companies trip.

This guide covers what the Labour Act actually requires, how the §27 termination payout sequence works, and how to run the workflow without leaving compliance gaps.

Notice period basics

The Labour Act sets minimum notice periods that depend on the employee’s tenure. These are floors — your employment contract or collective agreement may set longer periods, and those override the statutory minimum.

Statutory minimum notice (Labour Act §145):

Service length	Minimum notice
Up to 4 weeks	1 day
Up to 1 year	7 days
1 to 5 years	15 days
Over 5 years	30 days

Either party — employer or employee — can give the notice. If notice is not given, payment in lieu equal to the corresponding wages is owed by the party that failed to give notice.

The notice period must be in writing, must specify the last working day, and must be acknowledged by the receiving party.

What’s owed at the end of employment

When employment ends — whether by resignation, dismissal, redundancy, or retirement — the employer must pay out, in this order:

1. Wages up to the last working day

Including any pro-rated allowances and any unpaid amounts from prior periods.

2. Encashment of unused annual leave

Under §41 of the Labour Act, accrued but unused annual home leave (वार्षिक बिदा) and sick leave above statutory carry-over caps are encashable on termination. The encashment is calculated at the employee’s most recent basic pay rate.

3. Gratuity

Under the Social Security Act / Labour Act gratuity provisions, employees with at least one year of continuous service are entitled to gratuity. The standard formula is 8.33% of basic salary accrued each month, paid as a lump sum at termination. For employees enrolled in SSF (Social Security Fund), gratuity contributions are made monthly to the fund and the lump-sum on termination is replaced by SSF disbursement.

4. Severance pay (if applicable)

Severance applies in cases of redundancy or employer-initiated termination without cause. The standard formula is half a month’s salary per year of service, capped per §28.

5. Notice payment in lieu (if applicable)

If the employer terminated without giving the required notice, the equivalent wage amount is owed.

6. Other entitlements

Pending expense reimbursements, festival allowance pro-rated to the last working day, and any contractual bonus owed.

§27: the termination payout sequence

Section 27 of the Labour Act covers the broader “settlement on termination” obligation — the requirement that all amounts owed be calculated and paid promptly, and that TDS be deducted correctly on the entire termination package as part of the employee’s annual taxable salary.

This is where most companies make mistakes. The full termination package is taxable income in the fiscal year of termination. That includes:

• Wages up to last day
• Leave encashment value
• Gratuity (taxable except where SSF rules exempt portions)
• Severance pay (taxability depends on circumstances)
• Notice payment in lieu (taxable as wages)

When you compute the final payslip, all these amounts are added to the year-to-date taxable salary for the employee, and the TDS is recomputed on the new total. The TDS deducted across earlier months of the fiscal year becomes a partial credit; the difference is deducted from the termination payslip.

If you skip the recomputation step, the TDS on the termination package is wrong — and the employee will discover this when they file their personal return.

A practical workflow

What an HR team should run on receipt of a resignation:

1. Acknowledge in writing the notice and confirm the last working day.
2. Verify notice period matches the contract / Labour Act minimum. If short, calculate notice payment in lieu either way.
3. Compute pro-rated balances for leave, festival allowance, and any contractual bonuses up to the last working day.
4. Run a termination preview — total package, line by line.
5. Apply §27 tax recomputation on the full annual taxable salary including the termination package.
6. Disburse via the normal payroll cycle if timing allows; otherwise issue a final payslip and bank transfer outside the cycle.
7. Issue exit documentation — experience letter, relieving letter, final payslip, tax certificate (Form-16-equivalent for the partial year).
8. Settle SSF/PF — for SSF members, disbursement happens through SSF channels; for PF-only employees, the PF balance is transferred or paid out per the employee’s instruction.

How Leave Balance handles this

The resignation flow in Leave Balance covers the workflow side; PayrollApp covers the calculation side.

In Leave Balance:

• Employee submits resignation with last working day.
• Notice period auto-validates against the contract and Labour Act minimum.
• Admin sees a termination preview showing leave encashment, gratuity, severance (where applicable), and notice payment.
• Approval triggers the final settlement workflow.

In PayrollApp:

• The §27 tax recomputation runs automatically when the termination payslip is generated.
• Leave encashment value is added to taxable annual salary and the TDS hook fires.
• Gratuity is computed using stored basic-pay history.
• Bank file generation packages the final disbursement for the company’s payment bank.
• The exit tax certificate is generated against the partial fiscal year.

The split — workflow up top, calculation engine in the payroll service — means HR doesn’t have to think about TDS sequencing, and payroll doesn’t have to chase HR for the data.

What goes wrong without this

The three most common compliance failures we see at companies onboarding to Leave Balance from spreadsheets or older tools:

• Missing the §27 tax recomputation. The termination package is paid at the employee’s marginal rate from the last regular payslip, which is wrong because the package shifts the employee into a higher bracket for the year.
• Treating leave encashment as non-taxable. It is taxable. Always.
• Forgetting the SSF/PF distinction on gratuity. SSF-enrolled employees do not get an additional gratuity lump sum at termination from the employer — the SSF disbursement covers it. Paying gratuity twice is a real and common error.

The bigger point

Nepal’s Labour Act is generous to employees, exact about process, and strict on tax. The combination means a clean termination workflow has to integrate HR records, leave balances, and payroll tax engine in one motion. Splitting it across spreadsheets and manual recomputations is how compliance gets lost.

If you are still running terminations on a spreadsheet, the migration to a structured workflow is one engagement away. The audit cost of getting one termination wrong is several engagements long.