Processing payroll in Nepal means dealing with at least four statutory calculations every month: Employee Provident Fund (EPF), Social Security Fund (SSF), income tax (TDS on salary), and — if applicable — gratuity provisioning. Get any of these wrong and you face penalties from the relevant government body, or worse, unhappy employees whose take-home pay was incorrectly calculated.
This guide explains how each calculation works in FY 2083/84, with worked examples you can verify yourself.
1. Employee Provident Fund (EPF / PF)
Provident Fund is mandatory for most formal-sector employees under the Provident Fund Act. Both the employee and the employer contribute 10% of the employee’s basic salary each month.
Employee contribution: 10% of basic salary (deducted from the employee’s pay)
Employer contribution: 10% of basic salary (an additional cost for the employer)
Total going to EPF account: 20% of basic salary
Worked example:
Employee basic salary: NPR 30,000
Employee PF deduction: NPR 30,000 × 10% = NPR 3,000 (reduces take-home pay)
Employer PF contribution: NPR 30,000 × 10% = NPR 3,000 (employer cost, not deducted from employee)
Total EPF credit this month: NPR 6,000
Note: PF is calculated on basic salary only, not on allowances (HRA, DA, travel allowance, etc.). Make sure your salary structure clearly separates basic from allowances.
2. Social Security Fund (SSF)
SSF was introduced under the Social Security Act, 2074 and is mandatory for companies that have registered with the Social Security Fund. SSF covers health, accident, retirement, and dependent benefits for enrolled employees.
For businesses enrolled in SSF (rather than the older EPF scheme), the contribution structure is:
- Employee contribution: 11% of basic salary (deducted from pay)
- Employer contribution: 20% of basic salary (employer cost)
Important: An employee should be enrolled in either EPF or SSF — not both. Check your company’s registration to determine which applies. Companies registered with SSF typically have their employees’ EPF contributions transferred to SSF.
Worked example (SSF-enrolled employee):
Employee basic salary: NPR 30,000
Employee SSF deduction: NPR 30,000 × 11% = NPR 3,300
Employer SSF contribution: NPR 30,000 × 20% = NPR 6,000
3. Income Tax (TDS on Salary) — Section 88(1)
Income tax on salary is deducted at source (TDS) by the employer each month under Section 88(1) of the Income Tax Act 2058. The tax is calculated on annual taxable income and then divided by 12 for the monthly deduction.
Step-by-step calculation
Step 1: Calculate annual gross salary
Add up all earnings: basic salary × 12 + HRA × 12 + DA × 12 + any other regular allowances × 12 + one-time payments (festival bonus, performance bonus).
Step 2: Subtract PF/SSF employee contribution
PF and SSF employee contributions are tax-deductible. Subtract the annual employee PF or SSF contribution from gross salary.
Step 3: Subtract CIT (if applicable)
If the employee contributes to a Citizen Investment Trust (CIT) scheme, that amount is deductible up to NPR 3,00,000 per year.
Step 4: Apply basic exemption
The annual income below the basic exemption threshold is tax-free:
- Single individuals: NPR 5,00,000 per year (FY 2083/84 — verify current slab from ird.gov.np)
- Married individuals: NPR 6,00,000 per year
Step 5: Apply progressive tax slabs
Apply the tax slab rates to the taxable income above the exemption threshold. The slab rates are updated each year in the Finance Act. Always verify current rates from ird.gov.np or your CA at the start of each fiscal year.
Step 6: Divide annual tax by 12
This gives the monthly TDS amount to deduct from the employee’s salary.
Worked example
Employee: Married, basic salary NPR 50,000/month, HRA NPR 10,000/month, enrolled in EPF
| Annual gross (salary + HRA) | NPR 7,20,000 |
| Less: Employee PF (10% of basic × 12) | NPR (60,000) |
| Net taxable income | NPR 6,60,000 |
| Less: Married basic exemption | NPR (6,00,000) |
| Income above exemption | NPR 60,000 |
| Tax at first slab rate (verify current rate) | NPR ~6,000 |
| Monthly TDS (÷ 12) | NPR ~500 |
This is a simplified illustration. Actual slab rates and threshold amounts change with each Finance Act — always use software or confirm with your CA before processing payroll.
4. Gratuity
Under the Labour Act 2074, employees who have completed 1 year of continuous service are entitled to gratuity. Gratuity is an employer obligation — it is not deducted from the employee’s salary.
The standard provisioning rate is 8.33% of basic salary per month (equivalent to one month’s basic salary per year of service). Udyot provisions gratuity automatically each payroll run and posts it to a Gratuity Payable ledger.
Gratuity becomes payable when an employee leaves the company after completing the minimum service period. The formula: (last basic salary / 30) × number of service days.
Putting it all together — the monthly payslip
| Item | Amount (NPR) |
|---|---|
| Basic Salary | 50,000 |
| House Rent Allowance | 10,000 |
| Gross Earnings | 60,000 |
| Less: PF Employee (10% of basic) | (5,000) |
| Less: Income Tax (TDS) | (500) |
| Net Take-Home | 54,500 |
| Employer contributions (additional cost to employer): | |
| PF Employer (10% of basic) | 5,000 |
| Gratuity provision (8.33% of basic) | 4,165 |
| Total cost to employer | 69,165 |
Using software to automate payroll
Manual payroll calculations for more than 5–10 employees quickly become error-prone. Payroll software like Udyot automates all of the above: it calculates PF/SSF/gratuity, applies the correct tax slabs per employee (including marital status and CIT), tracks year-to-date TDS for accurate ongoing deductions, and generates payslips and statutory returns (EPF return, SSF return, TDS Annex-10) in IRD-accepted formats.
For a free 14-day trial of Udyot’s payroll module, see our pricing plans.