Very Short Questions and Answers
1. Briefly mention the provision for deduction of retirement contribution to the approved fund by an individual.
A resident individual may claim a deduction for retirement contributions made to an approved fund in an income year not exceeding Rs. 3,00,000 or one-third of the assessable income.
2. How is retirement payment from an approved retirement fund taxed? Explain.
The retirement payments made by an approved fund or the retirement payments made by the Government of Nepal are subject to a final withholding tax of 15%. In case, the retirement payment is in the form of a lump sum amount, Rs. 5,00,000 or 50% of such payment whichever is higher is exempted from tax and the balance is taxed @ 5% final withholding taxes.
3. State the condition for a resident individual or couple to be treated as a couple.
A resident natural person and a resident spouse of the person may elect to be treated as a single individual. For this, they have to notify the tax office in writing. In this case, both are jointly or separately liable for any tax payable. Similarly, the resident widow or widower with dependents are treated as a couple for income tax purposes.
Numerical Problems
4. Mrs. Geeta Pathak submitted the following information:
Gross salary Rs 25,000 pm, contribution to PF 10% from both sides, contribution to CIT by Mr. Pathak 10% of his salary, and assessable income from employment Rs 450,000.
Required: Allowable amount of retirement contribution for the year.
SOLUTION
Allowable retirement contribution
| Particulars
|
Rs.
|
| 1/3 of 450,000
or Actual (30% of 300,000) or Maximum limit (whichever is the lowest)
Allowable contribution |
Rs.150,000
90,000 300,000
|
| Rs.90,000 |
Short Questions and Answers
1. Briefly describe the provision of ‘medical tax credit’ as laid down under the Income Tax Act, 2058.
A resident individual may claim a tax credit for the medical expenses incurred for his or her treatment. The maximum tax credit that can be adjusted in a year will be lower than Rs. 750 or 15% of the approved medical expenses. The medical expenses are not covered because of such a tax credit limit and due to a lower amount of tax payable the medical tax credit can be carried forward to the next income year.
2. How couples are defined in the act? What are the privileges enjoyed by couples over single?
A resident natural person and a resident spouse of the person may elect to be treated as a single individual. For this, they have to notify IRD in writing. In this case, both are jointly or separately liable for any tax payable by the couple for the year. Similarly, the resident widow or widower with dependents are treated as a couple for income tax purposes.
The privileges that couples enjoyed over single differ in basic exemption limits. The single individual enjoys a basic exemption of Rs. 250,000 while the couple enjoys Rs. 300,000 as a basic exemption.
3. Show your acquaintance with the provisions related to retirement contributions.
Retirement contributions constitute contributions to provident fund, gratuity fund, citizen investment fund, or any periodic amounts payable on retirement or on the left of the service. In addition to the employee’s own contributions, the employer also generally contributes some amount to the fund. Such retirement contributions may be deposited either with the approved fund or an unapproved fund.
- Retirement contribution to an approved fund: A resident person intending to establish an approved retirement fund is required to obtain approval from Inland Revenue Department. However, Citizens Investment Trust was established as per Citizen Investment Trust Act, 2047 intending to manage a retirement fund, and a retirement fund managed by Employee Provident Fund Act, 2019 do not require approval from the Department. An individual may claim a deduction for retirement contributions made to an approved fund in an income year not exceeding Rs. 3,00,000 or one-third of the assessable income (Rule 21, Income Tax Rule, 2059).
- Retirement contributions to an unapproved fund: Contributions to an unapproved fund are not eligible for reduction for income tax purposes.
4. How retirement payments are taxed in Nepal? Explain.
Retirement payments by an approved fund: The retirement payments made by an approved fund or the retirement payments made by the Government of Nepal are considered as an income of an individual. Such payments are subject to final withholding tax @ 15%. In case, the retirement payment is in the form of a lump sum amount, Rs. 5,00,000 or 50% of such payment whichever is higher is exempted from tax. Any amount remaining after such deduction is treated as income from disposal of non-business chargeable assets and taxed @ 5% final withholding taxes.
| Total retirement payment in a lump sum
Less: 50% of total payment or Rs. 5,00,000 (which is higher) |
XXX
XXX
|
| The taxable amount of retirement payment | XXX
|
Retirement payments by an unapproved fund: With respect to retirement payments made by an unapproved fund, only gain is taxed @ 5% in the form of final withholding tax. The gain is defined as the excess of retirement payments over retirement contributions.
Gain from unapproved retirement fund = Retirement payments – Retirement contributions.
4. Mr. Bhandari retired on Ashadh’s end (the previous year) after completing more than a three-decade-long Government service.
During his retirement, the Employees Provident Fund (an Approved Retirement Fund) was liable to make a retirement payment in a lump sum to Mr. Pandey amounting to Rs. 18,00,000. Out of the total retirement payment required to be made by the fund, the amount of the retirement payment accrued up to 18th Chaitra, 2058 was equal w to Rs. 7,00,000 and the balance of Rs. 11,00,000 was accrued from 19th Chaitra, 2058 to the date of retirement.
Required: Tax payable on retirement payment and the net amount of retirement payment received by Mr. Bhandari
Solution
Statement of tax liability
| Particulars
|
Rs.
|
| Retirement payment up to 18th Chaitra 2058 = Rs.700,000 (tax exempt)
Retirement contribution after 18th Chaitra 50% of 11,00,000 or 500,000 (whichever is higher is tax exempted) i.e. 550,000 Balance Rs.550,000 @ 5% Tax payable (as final TDS) |
Nil
Nil
27,500 |
| 27,500 |