Tax on FD interest in Nepal: the 5% TDS you never noticed

A friend put Rs 5,00,000 into a one-year FD at 8% last Shrawan. The bank's app showed an expected maturity of Rs 5,40,000.

When the FD rolled over the next Shrawan, the balance read Rs 5,38,000.

He texted me. "Did they get the rate wrong?"

They didn't. The Rs 2,000 gap was the 5% TDS the bank had deducted on the Rs 40,000 of interest paid. Five percent of forty thousand: two thousand. Quietly skimmed before the money landed back in his account. He'd never noticed it because he'd never run the calculator before the FD matured.

Most Nepali FD holders are in the same boat. Banks net-pay interest, the statement shows the post-tax figure, and unless you happen to be doing the multiplication by hand, the 5% is invisible.

How the deduction actually flows

A worked example, because tax laws are easier in numbers than in prose.

You put Rs 5,00,000 in a one-year FD at 8% per annum. The bank promises Rs 40,000 of interest at maturity.

Step	Amount	What happens
Gross interest accrued	Rs 40,000	The 8% on Rs 5,00,000 over one year
TDS at 5%	Rs 2,000	Bank deducts and remits to IRD
Net interest credited	Rs 38,000	Lands in your account
Maturity balance	Rs 5,38,000	Principal + net interest

The TDS doesn't appear on your account ledger as a separate "tax paid" line. The bank just credits Rs 38,000 instead of Rs 40,000. If you want to see the gross-vs-net split, ask for the annual interest certificate. Every bank issues one on request, usually free, sometimes with a Rs 50–100 processing fee.

The same math at higher numbers, for context:

FD amount	Rate	Gross interest	TDS at 5%	Net you receive
Rs 1,00,000	5%	Rs 5,000	Rs 250	Rs 4,750
Rs 5,00,000	5%	Rs 25,000	Rs 1,250	Rs 23,750
Rs 10,00,000	5%	Rs 50,000	Rs 2,500	Rs 47,500
Rs 25,00,000	5%	Rs 1,25,000	Rs 6,250	Rs 1,18,750
Rs 50,00,000	5%	Rs 2,50,000	Rs 12,500	Rs 2,37,500

The bigger your balance, the bigger the absolute deduction. But the rate stays flat, because Section 92(1)(e) makes the TDS final regardless of how much interest you earn or what other income you have.

The headline rate: 5% in practice, 6% in the statute

This is where it gets honest. The current statutory text of Section 88(3) of the Income Tax Act 2058, as mirrored on legal aggregators that incorporate amendments through the Finance Act 2080, reads "six per cent." But virtually every Nepali tax-firm guide, banking-news aggregator, and bank statement you'll see in 2026 says 5%.

The most plausible reconciliation: the statute was amended at some point and most practitioner guides have not updated. Or 5% remains the operationally enforced rate and the statutory text reflects a never-implemented bump. I haven't been able to pin the answer down across primary sources.

Practically, two things matter for you as a depositor:

• Your annual interest certificate is the source of truth. Whatever rate the bank actually withheld is what you've paid. Banks have, by every recent practitioner reference, continued to apply 5%.
• Confirm with your branch if you're filing a high-stakes return. For business owners or anyone with audit exposure, asking the bank's compliance desk in writing is cheaper than guessing.

For the rest of this post I'll use 5% in the math, because that's what your bank statement will show. If your certificate reads 6%, multiply accordingly.

The "final tax" angle: why your slab doesn't matter

Most Nepali tax decisions hinge on your marginal slab. Salary, business income, rental income, capital gains on property: all of these stack into a single taxable-income pile and get taxed at whichever slab they push you into. A high earner pays more on the next rupee than a low earner.

FD interest doesn't work that way. Section 92(1)(e) explicitly classifies bank/FI/cooperative interest paid to a natural person (where the interest isn't a business activity) as a final withholding payment. The bank's deduction is the end of the story.

What that means in practice:

Your situation	Tax on Rs 40,000 of FD interest
Student with no other income	Rs 2,000 (5%)
Salaried earner at 10% slab	Rs 2,000 (5%)
Salaried earner at 20% slab	Rs 2,000 (5%)
Salaried earner at 30% slab	Rs 2,000 (5%)
Salaried earner at 36% slab	Rs 2,000 (5%)
Business owner with Rs 1 crore taxable income	Rs 2,000 (5%)

This is a meaningful structural difference from India, where FD interest gets added to total income and taxed at slab rates (with TDS as an advance, not a final). In Nepal, a high-bracket professional saver effectively pays a flat 5% on FD interest no matter how much they earn elsewhere.

Two implications:

1. You don't need to declare FD interest on your annual return. If your only income is salary (TDS already deducted by employer) and FD interest (5% deducted by bank), the return is essentially formality. Both lines have been settled at source.
2. FDs are more tax-efficient for high earners than they look. Compared to other interest-bearing instruments where slab rates apply, the flat 5% creates a quiet tax shelter for the 30%+ slab earners. Not a dramatic one — the gross rates are already low — but real.

The Rs 25,000 exemption that doesn't apply to you

You will see this number quoted in passing across blogs and forum threads: "the first Rs 25,000 of interest is tax-free in Nepal." It is technically a real provision. It is also almost certainly not yours.

Section 11(2) of the Income Tax Act 2058 grants a Rs 25,000 annual exemption on interest income, but only when that interest is earned from deposits at:

• A micro-finance institution (laghu-bitta)
• A rural development bank
• A postal saving bank (दाक प्रशासन कोषा)
• A cooperative operating in a rural municipality

That's the entire list. A commercial bank FD doesn't qualify. A development bank in Kathmandu doesn't qualify. A cooperative in Lalitpur Metropolitan City probably doesn't qualify either (rural vs urban municipality status matters).

Where the exemption does bite: a member-depositor at a rural-municipality cooperative who earns Rs 25,000 of annual interest pays no TDS on the first Rs 25,000, then standard TDS on anything above. On a 10% cooperative FD, that's the first Rs 2,50,000 of principal earning tax-free interest. Useful if your village has a healthy cooperative; irrelevant if you're depositing at Nabil Bank in Naxal.

One blog claim worth flagging as wrong: "if your interest from a single bank exceeds Rs 25,000, 5% TDS kicks in." This is a confused mash-up of the cooperative exemption and the commercial-bank TDS rule. Commercial banks deduct 5% from the very first rupee. There is no threshold.

Cooperatives: same rate, uneven compliance

The cooperative angle is worth its own section because it's where most of the confusion lives.

Section 88(3) explicitly lists "co-operative" as a withholding agent. By law, a cooperative paying interest to a member-depositor must deduct TDS at the same 5% rate as a commercial bank. The legal obligation does not differ.

Three real-world wrinkles:

• Compliance is uneven. Larger savings cooperatives in Kathmandu Valley generally withhold TDS and issue certificates the same way banks do. Smaller cooperatives, especially those without professional accounting staff, sometimes skip the TDS deduction or pay gross and let the depositor sort out their own tax liability. Nothing in this post should be read as encouraging that behaviour; the legal position is unambiguous.
• Rural cooperatives stack the Section 11 exemption on top. If the cooperative is in a rural municipality and you're a member, the first Rs 25,000 of interest is tax-free; only the excess attracts 5% TDS. Many rural cooperatives advertise this implicitly via "double-digit returns" headlines.
• Cooperatives that themselves qualify for income tax exemption (rural cooperatives in agriculture/forest activities) can pay higher gross rates because their corporate tax bill is lighter. The depositor still pays the same TDS rate, but the gross interest rate is structurally higher than what a tax-paying commercial bank can offer. This is the genuine economic reason behind 11%+ cooperative headline rates, separate from any risk premium.

The full risk analysis sits in the cooperative FD post. The point here is narrower: the TDS treatment doesn't differ. The risk profile does.

What 5% does to your real return

The 5% looks small on a single FD. Across decades of compounded savings, it adds up to a meaningful drag, especially when stacked against inflation.

A current commercial bank FD pays around 5% per annum at the top end as of Baisakh 2083 (April 2026) — rates have fallen significantly from the 12%+ levels of January 2023. Nepal's recent inflation print: 3.62% YoY in mid-March 2026, with the average for the FY review period at 2.13%.

The real-return math:

Layer	Rate	What's left
Gross FD rate	5.00%	5.00%
After 5% TDS	-0.25%	4.75%
After 3.62% recent inflation	-3.62%	1.13%

A 1.13% real return is barely enough to compound wealth. It's a parking spot for money you need accessible within a year or two, not a wealth-building instrument. The relationship inverts at higher inflation prints: when inflation runs above the post-tax rate, an FD is a real-terms loss, slowly.

Three honest comparisons:

• Cooperative FD at 10% gross, same 5% TDS, gives 9.5% post-tax. Net of 3.62% inflation: ~5.9% real. That's a wide margin over commercial bank FDs, which is why the risk-on saver gets tempted. The risk side of that ledger sits in the cooperative FD post linked above.
• CIT or PF at ~7–8% gross, with tax-favoured contributions (the deduction is at marginal rate, not the 5% flat) and post-tax withdrawal slabs that are friendlier than the FD treatment for low-balance withdrawals. The CIT vs PF vs SSF post walks through the math.
• NEPSE secondary market and equity mutual funds carry capital gains tax at 5% / 7.5% on shares and equity-MF dividends are typically exempt to natural persons (treaty / structural carve-outs). The volatility is real, but the tax drag at the wealth-building end is structurally lighter than the FD's. The NEPSE vs SIP vs FD post gets into the comparison.

None of which is an argument against having an FD. The emergency fund and short-horizon money belong in something safe and predictable. Just don't expect 5% gross at a commercial bank to do meaningful real work on your long-term wealth.

The NRN angle, briefly

If you hold a Non-Resident Nepali account (NRN savings, NRN FD, or a foreign-currency deposit in Nepal as a non-resident), the rate is different.

Interest paid to non-residents on Nepal-source income is taxed at 15% under Section 88(1) — three times the resident rate. It's also a final withholding tax, so the NRN depositor doesn't owe additional tax in Nepal on that interest. Treaty relief (DTAA) may apply in the depositor's country of residence; check your local accountant.

The 15% rate applies whether the deposit is in Rs or in USD/GBP/AUD. The convenience of holding earnings in Nepal as an NRN comes with a tax cost that's worth pricing in before deciding how much to park here vs invest at the host country.

For details on the broader NRN account decision, see the sending money home / NRN post.

What the post is not saying

A few common interpretations to head off:

• Not saying FDs are bad. Predictable yield, principal protection, and liquidity for short horizons are genuine benefits. The 5% TDS is a known cost, not a deal-breaker.
• Not saying you should chase cooperative rates to dodge taxes. Cooperatives must withhold the same 5%. The reason their gross rates are higher is structural (their own tax exemption and their risk premium), not a tax-arbitrage benefit to depositors.
• Not saying you can avoid filing because of final-tax status. If you have business income, rental income, or other untaxed sources, the FD interest being settled at source doesn't change your filing obligation for those other lines.

Tracking it cleanly in your records

When you log an FD in Kharchapatra, the conventions that keep the picture honest:

• Track gross interest, not net. When the FD matures or pays a periodic interest, log the full gross interest as income and the 5% as an expense category called "TDS - FD interest" or similar. Logging only the net hides the tax drag from your year-end review and makes your effective yield look better than it is.
• Use the annual interest certificate as the reconciliation document. Once a year, pull the certificate from your bank, compare to what's in the app, and adjust if there's a gap. Banks occasionally apply TDS at slightly different points in the cycle than you've logged.
• Don't mix FD interest with savings account interest in the same category if the rates differ. Some banks pay a TDS-rate-different yield on premium savings products; track them separately.

What you actually need to know

Three things, in order:

1. The 5% is real and final. Every rupee of FD interest at a Nepali commercial bank is taxed at source. Your slab doesn't matter; the bank's deduction settles the tax. You don't need to declare it on your annual return.
2. The Rs 25,000 exemption you've seen quoted is not yours unless you're depositing at a rural cooperative, micro-finance institution, postal saving bank, or rural development bank. Commercial bank FDs get TDS on rupee one.
3. The real return is small, post-TDS, post-inflation. At a 5% gross / 5% TDS / 3.6% inflation Nepal, you're earning around 1.1% real. That's a parking yield, not a wealth-building yield. Treat FDs accordingly.

If your interest certificate shows a TDS rate other than 5% (whether higher or zero), email parjanya57@gmail.com with the bank name. Comparison cases help future readers debug their own certificates faster.

This post is part of the Nepal Money Basics guide — the tax section.