TDS on salary in Nepal is one of those compliance topics that everyone knows must be done, but the rhythm of it — what’s monthly, what’s annual, what triggers a filing event, what gets reconciled when — is rarely explained as a single workflow. This guide covers the full TDS lifecycle for salary, from the monthly deduction to the annual reconciliation, and how PayrollApp’s IRD filing report keeps it audit-ready.
What TDS on salary covers
Under the Income Tax Act 2058, employers are required to deduct tax at source from employee salaries each pay period and remit it to the Inland Revenue Department (IRD). The amount deducted is based on each employee’s projected annual taxable salary, computed against the bracketed tax rates for their filing status (single / couple / family) and category.
TDS on salary differs from TDS on services or rent (which are flat-rate withholdings) — salary TDS uses bracketed rates, includes adjustments for SSF/PF contributions and approved deductions, and reconciles annually against the employee’s actual total income.
The monthly cycle
Each payroll run produces:
- Per-employee TDS calculation based on projected annual salary, less applicable deductions.
- Aggregated TDS remittance to the IRD, due by the 25th of the following month.
- Per-employee TDS record stored against the employee’s annual ledger.
The monthly remittance is a single payment to the IRD covering all employees. The per-employee detail is what surfaces in the annual filing.
What changes the TDS calculation mid-year
The projected annual salary is recomputed whenever:
- An employee’s basic salary changes (salary amendment workflow)
- A bonus or one-time payment is issued
- An allowance category is added or removed
- Investment declaration changes (PF voluntary contribution, life insurance, retirement contribution)
- A leave encashment event occurs
- A termination event occurs (the §27 recomputation)
Each recomputation produces a new annual TDS estimate. The difference between the new estimate and the year-to-date TDS already deducted is collected (or refunded) on the payslip that delivers the change.
This is why employees sometimes see large TDS lines on otherwise routine payslips — a mid-year salary change or bonus event recomputes the year’s full liability.
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The IRD annual filing report
At the end of each fiscal year (mid-July, end of Ashad), every employer must file an annual statement with the IRD detailing:
- Total taxable salary paid per employee
- Total TDS deducted per employee
- SSF/PF contributions per employee
- Other approved deductions
- Net tax liability per employee
This filing is the source-of-truth document for both the employer’s compliance and the employee’s personal income tax return. Errors here propagate to employee returns and create unnecessary disputes.
The IRD-compliant filing report in PayrollApp generates this document in the format the IRD expects, with all required fields populated from the year’s payroll runs. The report includes:
- Employee identification (PAN where applicable)
- Service period within the fiscal year (start, end, or full year)
- Taxable salary breakdown (basic, allowances, festival, gratuity-where-applicable)
- Deductions (SSF, PF, declared investments)
- TDS by month
- TDS reconciliation summary
For employees who joined or left mid-year, the report reflects the partial-year service correctly — including §27 termination payouts where applicable.
The annual reconciliation
A clean annual filing should reconcile to zero — meaning the TDS deducted across the year matches the bracketed rate computed against actual annual taxable salary.
In practice, three things create reconciliation differences:
1. Salary changes that crossed bracket boundaries
If an employee’s salary changed in such a way that they crossed into a higher bracket mid-year, the recomputation will have collected the difference at the change point. The annual filing should show zero residual.
2. Investment declarations that proved different from actual
Many employees declare expected investments (life insurance premiums, voluntary PF contributions) early in the year. If the actual investment was different, the year-end recomputation captures the difference. PayrollApp surfaces this as a separate line in the IRD report.
3. One-time events not captured in monthly projections
Festival bonuses, severance, encashment, or termination payouts shift the annual base. Each event triggers a recomputation in PayrollApp; the cumulative effect should be zero by year-end.
If your monthly TDS was computed correctly each period and all events were recorded as they happened, the annual filing has zero adjustments. If the monthly TDS was computed by hand or estimated, the annual filing usually shows a non-zero adjustment that has to be collected (or refunded) on a single payslip.
The annual employee tax certificate
Alongside the IRD filing, each employee must receive a tax certificate for the fiscal year showing:
- Total earnings
- Total TDS deducted
- SSF/PF contributions
- Net taxable income
PayrollApp generates this per employee from the same data as the IRD filing report. Employees use the certificate when filing their personal income tax return; they should reconcile to the IRD record automatically.
What HR has to get right
The TDS workflow only stays clean if HR keeps three things tight:
1. Salary changes through the structured workflow
Don’t process salary changes via “tell payroll” — use the salary amendment workflow so the change has an effective date, an approved chain, and a webhook to PayrollApp. A salary change that bypasses the workflow won’t trigger the TDS recomputation.
2. Investment declarations on time
Capture employee investment declarations at the start of the fiscal year, and update them when employees notify changes. Late declarations mean late recomputations, which mean a larger year-end reconciliation.
3. Termination events processed promptly
The §27 recomputation depends on the final settlement landing in the right fiscal year. Delaying a termination payslip across the fiscal year boundary creates messy partial-year filings for two years instead of one.
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Common TDS errors
- Computing TDS on basic salary only. Allowances, festival, bonus, gratuity — all part of taxable salary.
- Skipping recomputation on salary changes. The change becomes visible only at year-end when the reconciliation is large.
- Missing the §27 wrap on termination. Final payslip is computed at the regular monthly rate, leaving an underdeposit.
- Not issuing tax certificates promptly. Employees can’t file their personal return without it.
- Filing the IRD report from a manual spreadsheet. Almost always has reconciliation gaps that surface during IRD audit.
The bigger point
TDS compliance in Nepal is not a year-end ritual — it’s a year-round discipline that becomes a clean year-end if the discipline holds. The IRD filing report is the audit document, but the work that produces a clean report happens every month, every salary change, every termination.
Run the workflows through structured tools, let the recomputation engine do its job, and the year-end filing is a one-click event. Skip the discipline and the filing becomes a two-week reconciliation exercise that recovers some — but rarely all — of the gaps.