Side income and freelance tax in Nepal: what to declare and what to set aside

Last month a friend who does design on the side asked me a simple question: "I made रू 3 lakh from clients this year on top of my salary. How much do I owe?"

A few days later, a second friend: "I'm on Upwork, earning in USD. The bank deducted 5% — am I done with tax or do I still need to file?"

Same word, two different tax regimes. This post pulls them apart and gives you a setup that works whether you moonlight in NPR for local clients, export digital services to foreign clients, or run both at once.

Two regimes, one PAN

Step one is the same no matter what you earn: get a PAN. It's free, it takes a morning at the IRD office or the taxpayer portal, and without it your bank can't tag the 5% withholding to you, and your domestic clients can't issue you a TDS certificate.

Once you have PAN, freelance income splits into two clean lanes:

1. The foreign-currency lane. Digital services delivered abroad: Upwork, Fiverr, Toptal, direct clients in the US/EU, YouTube AdSense, software contracts paid via SWIFT/wire. Money lands in a Nepali bank as USD/EUR converted to NPR. The 5% scheme applies.
2. The domestic NPR lane. A Kathmandu agency hires you for a logo. A local startup pays you for a content piece. A friend's company contracts you for a side project. You're paid in NPR, often after TDS. The regular slab system applies.

Most freelancers I know sit in one lane. A few are in both, and the common mistake is treating both streams the same. They aren't the same.

The foreign-currency lane: 5% and (mostly) done

When a foreign client pays your Nepali bank account in USD, the bank converts it and withholds 5% as final tax before crediting NPR to your account. This sits under the digital service export framework introduced by the Finance Act and renewed routinely since.

What qualifies? The IRD's framing is broad: software development, data processing, business process outsourcing, cyber security, YouTube monetisation, and similar information technology services rendered outside Nepal. Design, writing, video editing, and consulting work for foreign clients usually falls under this umbrella, but the precise scope is decided by your tax officer at filing time, not by freelancer Twitter consensus.

Three conditions you must meet:

1. The money comes through a licensed Nepali bank as a proper inward remittance. Not Hundi. Not crypto/USDT. Not "my friend in Dubai will pay me cash next time he visits." Those routes are tax evasion and they kill your eligibility for the 5% treatment retroactively.
2. Your PAN is linked to your bank account. This is what tells the IRD that the 5% withheld actually belongs to you. Without the link, the bank still withholds, but the credit may not flow into your tax file cleanly.
3. You're a natural person (an individual, not a company). For companies, the 5% is treated as advance tax rather than final.

For natural persons meeting all three, the 5% is the final tax on that stream. You still file a return so the income is on record, but you don't pay slab tax on top.

Forms. Small earners use D-01 (turnover under रू 30 lakh and net income under रू 3 lakh). Higher earners file the standard return. The exact form shifts when your turnover crosses thresholds; your accountant or the IRD portal walks you through it at filing time.

One trap. Once your annual foreign-currency turnover crosses रू 30 lakh, you also cross the VAT threshold for services (more on this below). You're now both a 5%-final-tax person and a VAT-registered person. The two regimes don't cancel each other out. Both apply.

The domestic NPR lane: slabs and TDS

Domestic side income gets added to your other taxable income for the year. Sum up your salary's taxable amount, your domestic freelance net, any rental or interest income, and apply the regular slabs.

Individual income tax slabs for FY 2082/83 (single filer):

Annual taxable income	Rate
Up to रू 5,00,000	1% (Social Security Tax — does not apply if you're on SSF or you're a sole proprietor)
रू 5,00,001 – 7,00,000	10%
रू 7,00,001 – 10,00,000	20%
रू 10,00,001 – 20,00,000	30%
रू 20,00,001 – 50,00,000	36%
Above रू 50,00,000	39%

Married filers get a slightly larger first slab (up to रू 6,00,000 at 1%, then 10% to रू 8,00,000, 20% to रू 11,00,000, 30% thereafter).

TDS on domestic service payments. Under Section 88, when a Nepali business pays you for services, they deduct TDS at:

• 1.5% of the taxable amount if you're VAT-registered and issue a VAT invoice
• 15% if you only issue a PAN bill (no VAT)

TDS is computed on the service amount only, never on the VAT portion. It's an advance: you adjust it against your final tax liability when you file. Too much withheld, you get a refund (slowly). Too little, you owe the difference.

People often misread the 15% TDS on a PAN-only bill as "final tax." It isn't. It's an advance withholding. At your final marginal slab the actual tax might be 20% or 30%, in which case the 15% covered most of it. At the 1% or 10% slab, the 15% over-withheld and you should claim the refund at filing.

Section 89 (contracts). A separate rule covers contract payments above रू 50,000 in any 10-day window: 1.5% TDS. The Act explicitly excludes "contracts made for providing specific services" from Section 89, so service freelancers usually live under Section 88, not 89. Section 89 matters mostly for vendors supplying goods under a contract.

VAT registration: thresholds you have to know

Cross a turnover threshold and VAT registration is triggered whether you wanted it or not.

Business type	Registration threshold
Goods only	रू 50 lakh annual turnover
Services	रू 30 lakh annual turnover
Mixed (goods + services)	रू 30 lakh annual turnover

Turnover is measured on a rolling 12-month basis. The day you cross the threshold, you have 30 days to register. Operating without VAT registration past that point is a real penalty risk.

Once VAT-registered:

• You charge 13% VAT on top of your invoices.
• You can claim input VAT on business expenses.
• Domestic clients now deduct TDS at 1.5%, not 15%.
• Foreign-currency export services typically qualify for 0% VAT (zero-rated), so you can still claim input VAT against expenses without charging output VAT to overseas clients. Confirm with your accountant.

For most full-time freelancers earning a comfortable living, the year you cross रू 30 lakh of services turnover is also the year you hire an accountant. The VAT compliance cycle (monthly returns, input/output reconciliation) carries enough overhead that the time cost beats the accountant's fee.

Presumptive (D-01) vs standard return

Below certain thresholds, Nepal allows a simplified small-taxpayer regime. D-01 / presumptive tax is open to:

• A resident individual whose income is only from Nepal-based business sources
• Annual business turnover up to रू 30,00,000
• Annual net business income below रू 3,00,000

The simplification: a flat presumptive amount based on location/turnover band, no detailed P&L required.

Important exclusion. The Income Tax Act explicitly excludes professionals (lawyers, doctors, auditors, chartered accountants, consultants, engineers, professional athletes) from presumptive tax. They must file the standard return regardless of turnover.

Most software and design freelancers sit in a grey area. The IRD reads "consultant" broadly. If your income is mostly client services, expect to file the standard return rather than D-01, even if your numbers are small.

What to actually set aside, by lane

Practical setaside percentages I'd use, given the math above.

Foreign-currency lane (5% final tax): the bank already withholds 5%. Set aside an extra 1–2% for compliance buffer: accountant fees, bank charges on remittances, occasional reconciliation. Don't set aside slab-rate tax; it doesn't apply to this stream for natural persons.

Domestic NPR lane (slabs): depends on your combined taxable income (salary + freelance). Rough guide:

Combined annual taxable income	Setaside on freelance gross
Under रू 5 lakh	~5% (TDS likely covers it; refund possible)
रू 5 – 7 lakh	~10%
रू 7 – 10 lakh	~20%
रू 10 – 20 lakh	~30%
रू 20 – 50 lakh	~36%
Above रू 50 lakh	~39%

Subtract any TDS the client already deducted. Park the result in a separate account the moment each invoice clears, not when the tax bill is due. The painful version of this story is the freelancer in March who realises they spent the gross.

Filing deadlines

The Nepali fiscal year runs Shrawan to Asar (mid-July to mid-July); see the Bikram Sambat fiscal year post for context. Deadlines that matter:

• Ashoj end (mid-October) — standard individual income tax return deadline. If your only income is salary plus a small amount of freelance, this is your date.
• Poush end (mid-January) — extended deadline for self-employed individuals and businesses. Primarily freelance? You typically file by this date.

Advance tax (only relevant if you have business income, not pure salary):

• 40% by Poush end (mid-January)
• 70% by Chaitra end (mid-April)
• 100% by Asar end (mid-July)

Skip the advance tax instalments and you owe 15% annual interest on the shortfall, plus administrative penalties. The interest is the bigger cost. At 15%, even a six-month delay is meaningful on a sizeable freelance year.

What to keep in your records

The IRD doesn't need to see most of this; you need to see most of it when you reconcile at year-end:

• Every invoice you issue: date, client, amount in original currency, NPR equivalent, TDS deducted.
• Every TDS certificate (Form-TDS-S issued by the client). Without it, you can't claim the credit.
• Every bank credit advice for foreign remittances. The slip should show gross USD, FX rate, 5% withholding, and net NPR.
• Receipts and invoices for genuine business expenses: laptop, internet, software subscriptions, co-working desk, professional courses. These reduce taxable income on the slab return; on the 5% lane, they don't (the 5% is on gross, no deductions).
• Annual SSF or CIT statements if you're still salaried alongside freelancing.

Three years is the minimum I'd keep. The IRD's assessment window is longer than people remember, and freelance income is an audit-friendly category.

Tracking it in Kharchapatra

A clean setup that's held up for me:

1. Two separate accounts. "Freelance — Foreign" and "Freelance — Domestic". Don't let them blur.
2. Tag every income transaction with the client name. Year-end reporting is much easier when you can group by client without an accountant's help.
3. Log TDS as a reduction on the income transaction, not as a separate expense. The gross is your turnover; the net is what hit the bank. Both numbers matter at filing.
4. A "Tax Reserve" account as a separate account, fed by an automated transfer rule (or a manual habit) on every freelance credit.
5. A custom category "Business Expenses (deductible)" for things you'll claim: internet, software, courses. Keeps personal vs business spending visible at a glance.

When to hire an accountant

You can run the foreign-currency lane yourself for years if your annual turnover is well under रू 30 lakh and your only filing obligation is a small return. You probably cannot run the following without help:

• VAT registration (the moment you cross रू 30 lakh of services turnover)
• A return year where your income mixes salary, foreign-currency freelance, and domestic NPR freelance. The slab math gets fiddly fast.
• Any year where you're audited or queried. You want representation, not Google.

Reasonable accountant fees for a single freelancer's annual return run from a few thousand to a few tens of thousands of रू depending on complexity. At the higher end of freelance income, the fee is small relative to the cost of a single mistake.

What this all comes down to

Pick the right lane, register correctly, withhold the right amount up front, and the rest is mostly bookkeeping. The freelancers who get into trouble in Nepal are almost always the ones who:

• Run foreign-currency income through Hundi or crypto to avoid the 5%, then can't prove the income when applying for a visa, loan, or property purchase later
• Treat 15% PAN-bill TDS as final tax and don't file, missing refunds in low-slab years and accruing penalties in high-slab years
• Cross the रू 30 lakh services threshold without registering for VAT, operating "informally" for a couple of years before getting caught

None of those are interesting strategies. The boring path (PAN, correct invoicing, monthly setaside, annual filing) costs maybe 1% of revenue in time and a small accountant fee, and it's the only one that scales as freelance income grows.

Specific edge case I haven't covered? Email parjanya57@gmail.com. Comparison cases, especially around mixed lanes and the VAT-threshold year, help future readers a lot.