Tax Deducted at Source means the party making a payment withholds tax upfront and deposits it with the IRD, rather than leaving the recipient to pay it later. Nepal applies different TDS rates depending on what's being paid and to whom — getting the rate wrong is one of the most common compliance slips we see.
Who's responsible for deducting
Under the Income Tax Act 2058, the party making a payment — called the withholding agent — deducts TDS before paying the recipient, known as the withholdee. This applies to employers paying salaries, companies paying consultants or contractors, landlords being paid rent, and banks paying interest, among others.
Common categories and how they're calculated
Salary TDS follows the progressive income tax slabs, deducted monthly by the employer. Payments for services, contracts, rent, and consultancy fees each carry their own prescribed percentage, applied to the payment amount. A frequent, costly mistake: calculating TDS on the invoice total including VAT, when it should be calculated on the taxable amount before VAT is added.
Depositing and filing
TDS deducted in a given month must be deposited to the IRD, typically within 25 days of month-end, through the online taxpayer portal or a designated bank. Filing is done via ETDS — electronic TDS — which has effectively replaced manual filing and is now expected of all withholding agents.
The TDS certificate
After depositing TDS, the payer issues the recipient a TDS certificate, which the recipient then uses to claim credit for that amount when filing their own annual return. Losing track of these certificates on either side is a common source of reconciliation headaches at year-end.
Getting the sequence right
The practical order is: identify that a payment is subject to TDS, deduct at the correct rate before paying the recipient, deposit the withheld amount with the IRD within the deadline, and issue a certificate. Skipping the sequence — paying in full and trying to "true up" TDS later — creates exactly the kind of gap an IRD review tends to catch.
Where businesses usually go wrong
Beyond the VAT-inclusive calculation error, the other common mistake is simply not recognizing that a payment is subject to TDS at all — professional fees and rent are the two categories most often paid in full by mistake, with the withholding obligation only noticed later.
