Hiring your first employee in Nepal is a milestone — and a compliance responsibility that surprises many business owners. Beyond agreeing on a monthly salary, there are legal obligations around Social Security Fund contributions, Tax Deducted at Source on salaries, provident fund registration, and the Labour Act's requirements for employment agreements and payslips.
Many Nepal small business owners discover these obligations only when they receive an IRD notice or an SSF inspection — by which point, back-payments and penalties have accumulated. This guide covers everything you need to know about payroll for Nepal small businesses, practically explained for someone who isn't an HR or accounting specialist.
The Nepal Payroll Framework: Overview
Nepal's payroll compliance involves three main regulatory bodies:
- Inland Revenue Department (IRD): Governs income tax deduction on salaries (TDS) and annual reporting
- Social Security Fund (SSF): Governs mandatory social security contributions from employers and employees
- Department of Labour (DoL): Enforces Labour Act requirements around employment agreements, minimum wage, leave entitlements, and payslips
For a business with even one employee, all three apply. Ignoring any one creates compliance risk.
Social Security Fund (SSF): The Big Change
The Social Security Fund, established under the Social Security Act 2074, fundamentally changed payroll compliance for Nepal's formal sector. Before SSF, businesses made contributions to either the Employees Provident Fund (EPF) or Citizen Investment Trust (CIT). Since SSF's implementation, new businesses register directly with SSF.
Contribution rates
SSF contributions are calculated as a percentage of basic salary (not total salary including allowances):
- Employee contribution: 11% of basic salary
- Employer contribution: 20% of basic salary
- Total: 31% of basic salary per employee per month
The employer's 20% contribution is your cost on top of the salary you agreed to pay. If you agreed to pay NPR 25,000 per month, your actual cost including SSF is NPR 25,000 + (20% × basic salary). If the entire NPR 25,000 is basic, your total cost is NPR 30,000 — 20% higher than the agreed salary.
What SSF covers
SSF contributions fund four schemes for enrolled workers:
- Medical treatment scheme: Coverage for illness and hospitalisation
- Accident and disability scheme: Compensation for workplace injuries
- Dependent family protection scheme: Death benefits for families
- Old age protection scheme: Pension upon retirement
This is genuinely valuable for your employees. As a marketing point for recruitment and retention, SSF-registered employment is more attractive than informal work without these protections.
SSF registration process
- Register your business with SSF at ssf.gov.np or visit the SSF office
- Register each employee with their citizenship number and bank account details
- Each employee gets an SSF ID number, which they use for future benefit claims
- Deposit monthly contributions by the end of each month
Tax Deducted at Source (TDS) on Salaries
If any employee's annual salary income exceeds the tax-free threshold, you must deduct income tax from their salary each month and deposit it with the IRD by the 25th of the following month.
Nepal income tax rates (employment income, FY 2082-83)
| Annual Income | Tax Rate |
|---|---|
| Up to NPR 5,00,000 | 0% (tax-free) |
| NPR 5,00,001 – 7,00,000 | 10% |
| NPR 7,00,001 – 20,00,000 | 20% |
| Above NPR 20,00,000 | 30% |
Note: For married taxpayers, the tax-free threshold is slightly higher. Confirm current rates with your CA as they are revised in each annual budget.
How to calculate monthly TDS
- Estimate the employee's annual salary (monthly salary × 12)
- Apply the tax slabs to calculate annual tax
- Divide annual tax by 12 to get monthly TDS amount
- Deduct this amount from the employee's monthly salary
- Deposit the deducted amount to the IRD by the 25th of the following month
Example: Employee earning NPR 50,000/month = NPR 600,000/year. Tax calculation: First NPR 500,000 = 0. Remaining NPR 100,000 at 10% = NPR 10,000. Annual tax = NPR 10,000. Monthly TDS = NPR 833.
Allowable deductions that reduce taxable income
Employees can reduce their taxable salary income through certain deductions:
- SSF employee contribution (11% of basic salary) — deductible
- Life insurance premiums (up to NPR 40,000 per year) — deductible
- Remote area allowances (for businesses in specified remote areas)
Accounting for these deductions when calculating TDS reduces the monthly deduction from employees, which helps with their take-home pay. Your CA can help you set up the correct calculation.
The Nepal Labour Act: Employment Requirements
Beyond tax and SSF, the Labour Act 2074 imposes requirements on the employment relationship itself.
Employment agreement
Every employee must have a written employment agreement. This covers:
- Job title and responsibilities
- Salary and payment schedule
- Working hours and leave entitlements
- Probation period (if applicable — maximum 6 months)
- Termination conditions
Operating without written employment agreements creates significant legal exposure in disputes. Courts will generally protect employees over employers when contracts are absent.
Minimum wage
Nepal's minimum wage is revised periodically by the government. For FY 2082-83, the minimum monthly wage for unskilled workers is NPR 17,300. Skilled and semi-skilled workers have higher minimums. Paying below minimum wage is illegal regardless of what the employee agreed to.
Leave entitlements
- Annual leave: 1 day for every 20 days worked (approximately 18 days per year)
- Sick leave: 12 days per year
- Maternity leave: 98 days for female employees
- Public holidays: All gazetted public holidays
Payslips
The Labour Act requires employers to provide payslips showing gross salary, all deductions, and net pay for each payment period. Failure to provide payslips is a Labour Act violation. For businesses managing payroll manually, generating compliant payslips every month is a significant administrative burden. Payroll software handles this automatically.
Gratuity
Employees who have completed at least 1 year of continuous service are entitled to gratuity on termination (voluntary or involuntary). The formula: (monthly basic salary × service years × rate). For SSF-registered employees, gratuity may be handled through SSF's old age protection scheme. Confirm with your CA how this applies to your registered employees.
The Practical Monthly Payroll Process
For a business with 1-10 employees, here's the streamlined monthly payroll process:
- Calculate gross salaries for each employee (basic + applicable allowances)
- Calculate deductions: SSF (11%), TDS, any authorised advances
- Pay net salary to each employee's bank account by the agreed pay date
- Add employer SSF (20%) to your cost centre
- Deposit SSF contributions (31% total) to SSF by month end
- Deposit TDS with IRD by the 25th of following month
- Generate payslips and provide to each employee
- File TDS return (monthly return required even if zero)
Common Payroll Mistakes Nepal Businesses Make
Paying "off the books"
Paying staff without SSF registration or TDS deduction to reduce costs is extremely common in Nepal's informal sector. The risk: if discovered through an IRD audit or SSF inspection, you owe all back-payments plus penalties. For employees who later claim labour rights (through court or DoL), the absence of payroll records hurts you significantly.
Calculating SSF on total salary instead of basic salary
SSF contributions are based on basic salary, not total package. If you pay NPR 30,000 total (NPR 20,000 basic + NPR 10,000 allowances), SSF is 31% of NPR 20,000 — not 31% of NPR 30,000. Over-calculating inflates your cost; under-calculating creates a shortfall that SSF can assess later.
Missing TDS deposits
Deducting TDS from employee salaries but not depositing it with the IRD is treated as tax theft — you've collected money that belongs to the government and kept it. Penalties are severe. Set a calendar reminder: TDS deposit by the 25th of each month, without exception.
Not filing the TDS return when there's nothing to pay
Even in months where you have no TDS to deposit (no employees above the threshold), you must still file a nil TDS return. Many businesses don't know this. Filing penalties apply for missed returns even when the tax amount is zero.
Frequently Asked Questions
Q: I have a part-time employee who works 3 days a week. Do SSF rules apply?
A: SSF obligations apply to all employees, including part-time workers. However, contributions are proportional to actual wages paid. If a part-time employee earns NPR 8,000/month, SSF contributions are based on that figure. Ensure their employment agreement clearly defines the part-time terms.
Q: Can I pay employees in cash instead of bank transfer?
A: Cash payment is not prohibited, but it creates record-keeping challenges. Bank transfers create automatic documentation of payment dates and amounts, which protects you if an employee claims they weren't paid. For SSF and TDS purposes, you need documentary evidence of payment — bank transfers make this straightforward.
Q: My employee left voluntarily after 8 months. Do I owe them gratuity?
A: No. Gratuity is payable after 1 year of continuous service. An employee who leaves before completing 1 year is not entitled to gratuity under the Labour Act. However, you must pay all outstanding salary and any accrued leave encashment on the day they leave.
Q: I gave a staff member an advance on their salary. How do I handle this in payroll?
A: Record the advance as a loan from the business to the employee. When processing the month's payroll, include the advance as a deduction from gross salary. Ensure it's shown on the payslip so both parties have a clear record. For large advances, have the employee sign an acknowledgment document.
Q: What's the penalty for not registering with SSF?
A: The SSF Act prescribes penalties of up to NPR 25,000 for employers who fail to register when required, plus back-assessment of all contributions that should have been made, with interest at 0.1% per day on the outstanding amount. An SSF inspection can retrospectively assess contributions going back to when your first employee was hired.
Q: How do I handle payroll during the festival season when staff take extended leave?
A: The Labour Act's leave entitlements cover festival leave through the public holiday provisions. Extended leave beyond the statutory entitlement should be agreed in writing — either as paid leave drawn from the annual leave balance, or unpaid leave. Deductions for unauthorised absence must be calculated based on the daily rate (monthly salary ÷ 26 working days).
Q: Is there payroll software designed for Nepal's specific requirements?
A: Several Nepal-specific payroll tools exist. Look for software that handles BS-date payslips, SSF calculation on basic salary, Nepal income tax slabs, and TDS return generation. For businesses with 1-5 employees, a well-designed spreadsheet template with the right formulas is often sufficient. For 10+ employees, dedicated payroll software saves significant time and reduces calculation errors.
Nepal's payroll compliance framework is genuinely more complex than many business owners expect. But it's manageable with good systems and awareness of the key deadlines. The cost of getting it right — primarily your time and a small administrative overhead — is far lower than the cost of getting it wrong. Register with SSF, set up your TDS deductions, and generate payslips every month. These habits protect your business and protect your employees.