Published June 22, 2026 · Updated August 14, 2026 with a full withholding-agent walkthrough, a filing sequence checklist, worked calculation examples, and a FAQ section.
Tax Deducted at Source (TDS) 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 TDS under the Income Tax Act 2058 to a wide range of payment types — salaries, rent, service and consultancy fees, and contract payments among them — with each category following its own prescribed treatment. Getting the rate or the base amount wrong is one of the most common compliance slips we see, and unlike an income tax error that surfaces once a year, a TDS mistake repeats every single pay cycle until someone catches it. This guide walks through who's responsible for withholding, how the calculation actually works, the deposit and filing sequence, and where the most common and costly mistakes happen.
What's in this guide
- Who's responsible for deducting
- Common categories and how they're calculated
- The VAT-inclusive calculation mistake, worked out
- Depositing and filing
- The TDS certificate
- Getting the sequence right
- A monthly TDS workflow, worked through
- How TDS connects to your annual return
- Where businesses usually go wrong
- Frequently asked questions
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 (more precisely, the tenant or business paying the landlord), and banks paying interest, among others. The obligation sits with the payer, not the recipient — which means if you're the one writing the check, invoice, or bank transfer, it's your responsibility to know whether TDS applies before the money moves, not after.
This matters because the consequences of getting it wrong land on the withholding agent first. If you fail to deduct TDS on a payment that required it, the IRD's default position treats the shortfall as your liability to make good, not a problem for the recipient to sort out later. That's a meaningful reason to build a habit of checking TDS applicability before any payment goes out, rather than assuming it's the recipient's concern.
Common categories and how they're calculated
Salary TDS follows the progressive income tax slabs for the current fiscal year, deducted monthly by the employer and adjusted across the year as an estimate of annual liability — see our FY 2083/84 income tax slabs guide for the current bands. Payments for services, contracts, rent, and consultancy fees each carry their own prescribed percentage under the Income Tax Act, applied to the payment amount rather than following the salary slab structure. The table below summarizes the broad categories a typical business will encounter and the practical details that matter most for each — for the exact current-year percentage on any specific category, always confirm against the latest IRD circular or your accountant, since these figures are periodically revised through the annual Finance Act.
| Payment category | Who withholds | How it's calculated |
|---|---|---|
| Salary | Employer | Progressive income tax slabs, applied monthly against estimated annual salary |
| Rent | Tenant / business paying the landlord | Prescribed percentage of the rent amount, before VAT if the landlord is VAT-registered |
| Service & consultancy fees | Company or business paying the service provider | Prescribed percentage of the taxable fee, before VAT |
| Contract payments | Party making the contract payment | Prescribed percentage of the contract value, before VAT |
| Interest | Bank or financial institution paying interest | Prescribed percentage of interest paid |
| Dividends | Company distributing the dividend | Prescribed percentage of the dividend amount |
Notice the recurring pattern in the "how it's calculated" column: almost every non-salary category is a percentage of the amount before VAT is added. That single detail is the source of the most common and most expensive TDS calculation error, covered next.
The VAT-inclusive calculation mistake, worked out
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. Here's why it matters in real terms. Suppose a consultant invoices a company NPR 1,00,000 for services, and — because the consultant is VAT-registered — adds 13% VAT on top, for an invoice total of NPR 1,13,000. TDS should be calculated on the NPR 1,00,000 base amount, not the NPR 1,13,000 total. Applying the withholding percentage to the inflated, VAT-inclusive figure over-withholds on every single invoice from that vendor — which either shortchanges the vendor's cash flow (since they now have to reconcile an over-withheld amount against their own return) or, if the business simply pays the vendor the difference to compensate, quietly costs the business money it didn't need to spend. Over a year of recurring invoices from the same vendor, this is not a rounding error — it compounds into a real amount, and it's a mistake we see surprisingly often in businesses that generate their own invoices and TDS workings manually rather than through accounting software configured to separate the VAT and taxable-base lines automatically. Our free Debit/Credit Note generator keeps the TDS and VAT lines separate automatically, so this specific error can't slip through.
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. In practice, the monthly cycle looks like this: deduct TDS at the point of payment throughout the month, tally the total withheld across all payment categories by month-end, deposit that total to the IRD (or a designated collecting bank) within the 25-day window, and file the ETDS return reflecting exactly what was deposited. Because this repeats every month, a business making even a handful of TDS-applicable payments a month benefits from a simple running log — payee, payment type, gross amount, TDS base, amount withheld — rather than reconstructing the month's withholding activity from scratch each time the deadline approaches.
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. For a salaried employee, this typically comes from the employer covering the full fiscal year; for a consultant or contractor working with multiple clients, it means collecting a certificate from each client that withheld TDS on their payments during the year. Losing track of these certificates on either side is a common source of reconciliation headaches at year-end — a consultant who can't produce certificates matching what clients actually withheld may end up unable to claim the full credit they're entitled to, effectively paying tax twice on the same income until the discrepancy is sorted out.
Getting the sequence right
The practical order is straightforward, even though it's easy to get out of sequence under day-to-day pressure:
- Identify that a payment is subject to TDS before it goes out — this needs to happen at the invoice or payment-approval stage, not after the money has already moved.
- Deduct at the correct rate, calculated on the correct base amount (before VAT, per the example above) before paying the recipient.
- Deposit the withheld amount with the IRD within the deadline, typically within 25 days of month-end.
- File the ETDS return reflecting the deposit accurately.
- Issue a certificate to the recipient so they can claim credit on their own return.
Skipping the sequence — paying a vendor or landlord in full and trying to "true up" TDS later — creates exactly the kind of gap an IRD review tends to catch, and retroactively withholding from someone you've already paid in full is an awkward conversation that's entirely avoidable by getting the sequence right the first time.
A monthly TDS workflow, worked through
It's easier to see how this fits together with a simple month laid out end to end. Take a small consulting company that, in a given month, pays a monthly office rent, one consultant's invoice, and runs payroll for three employees.
- Rent payment: the landlord's invoice is for the base rent amount. The company withholds TDS on that base figure and pays the landlord the net amount, keeping a record of the gross rent, the TDS withheld, and the net paid.
- Consultant invoice: the consultant's invoice shows a taxable fee plus 13% VAT on top. The company calculates TDS on the taxable fee only — not the VAT-inclusive total — withholds that amount, and pays the consultant the balance.
- Payroll: each employee's monthly TDS is calculated against the current fiscal year's progressive income tax slabs, based on their estimated annual salary, and withheld directly from their pay.
- Month-end tally: the company adds up everything withheld across rent, the consultant payment, and all three payrolls into a single total for the month.
- Deposit and file: that total is deposited with the IRD within the 25-day window, and an ETDS return is filed reflecting the deposit.
- Certificates: the company issues a TDS certificate to the landlord and to the consultant for that month's withholding, and keeps its own payroll TDS records organized for each employee's annual certificate at fiscal year-end.
None of these six steps is complicated in isolation. What makes TDS compliance genuinely time-consuming for a growing business is that this entire sequence repeats every month, across every payment category the business has — which is exactly why businesses that get this wrong tend to get it wrong repeatedly rather than as a one-off slip.
How TDS connects to your annual return
TDS isn't a tax in its own right — it's a prepayment mechanism. Whatever's withheld from your income throughout the year gets credited against your actual annual tax liability when you file your return, based on your income tax slab and any deductions you're entitled to. If your total TDS withheld across the year exceeds your actual liability, you're due a refund of the difference; if it falls short, the balance is payable at filing. This is exactly why keeping TDS certificates organized throughout the year matters so much — without them, you can't substantiate the credit you're claiming, and a return that claims credit without supporting certificates is one of the more obvious things an IRD review will flag.
Where businesses usually go wrong
- Calculating TDS on the VAT-inclusive invoice total instead of the taxable base amount — the single most common and most expensive error, detailed above.
- 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 — sometimes not until an IRD review flags the gap.
- Missing the 25-day monthly deposit window because TDS tracking isn't built into the regular payment workflow, leaving it to be reconstructed under deadline pressure each month.
- Losing track of TDS certificates — either failing to issue them promptly as a payer, or failing to collect them from every client as a recipient, both of which create reconciliation problems at annual filing time.
- Applying last year's rates without checking for updates. TDS categories and percentages are periodically revised through the annual Finance Act, so a rate that was correct last fiscal year isn't automatically correct this year.
Beyond the VAT-inclusive calculation error, the other common mistake worth repeating is simply not recognizing that a payment is subject to TDS at all — it's a checklist failure more often than a legal judgment call, and a quick "does this payment type require withholding" check before any invoice is paid catches most of these before they become a problem. If you'd rather not track this in-house, our TDS compliance service and payroll service both handle withholding, deposit, and ETDS filing on an ongoing basis.
Frequently asked questions
Who is legally responsible if TDS isn't deducted correctly?
The withholding agent — the party making the payment — carries the responsibility. If TDS isn't deducted when it should have been, the IRD's default position treats the shortfall as the payer's liability to make good, not the recipient's.
Should TDS be calculated before or after VAT is added to an invoice?
Before. TDS is calculated on the taxable base amount, not the VAT-inclusive invoice total. Applying it to the inflated total is one of the most common and costly TDS errors businesses make.
How often does TDS need to be deposited with the IRD?
Monthly. TDS deducted in a given month is typically due for deposit within 25 days of month-end, through the online taxpayer portal or a designated bank, followed by an ETDS filing.
What is a TDS certificate used for?
It's the documentation a recipient needs to claim credit for TDS already withheld from their income when filing their own annual return. Without it, you can't substantiate the credit you're claiming.
Does TDS apply to payments between two companies, or only to individuals?
It applies broadly — to payments for services, rent, contracts, interest, and dividends regardless of whether the recipient is an individual or a company, in addition to salary payments to employees.
What happens if TDS withheld during the year is more than my actual tax liability?
You're due a refund of the difference when you file your annual return, provided you can substantiate the amount withheld with your TDS certificates.
Where can I find the current TDS percentage for a specific payment category?
Rates are set under the Income Tax Act 2058 and periodically revised through the annual Finance Act. Confirm the current rate for your specific transaction against the latest IRD circular or with your accountant before finalizing a payment — our tax services team can confirm this for you.
Is TDS always just a prepayment, or can it be the final tax on that income?
It depends on the category. For salary, rent, service fees, and contract payments, TDS is generally a prepayment credited against your final annual liability when you file your return. Other specific categories can be treated differently — for example, tax withheld on the sale of listed shares was made a final tax under the FY 2083/84 budget, meaning no further reconciliation is needed on the annual return for that particular income; see our guide to that change. Because treatment varies by category, don't assume every TDS deduction on your return works the same way — confirm rather than guess.
Do small businesses below the VAT threshold still need to worry about TDS?
Yes — TDS obligations are separate from VAT registration status. A small business that isn't VAT-registered can still be a withholding agent the moment it pays an employee's salary, rents an office, or engages a consultant, since those obligations are tied to the nature of the payment, not the payer's VAT status.
Bottom line
TDS compliance in Nepal comes down to three habits: knowing which payments require withholding before the money moves, calculating on the correct pre-VAT base amount, and keeping the deposit-filing-certificate sequence intact every single month. None of it is individually complex, but because it repeats on a monthly cycle rather than an annual one, small errors compound quickly if they're not caught early. When in doubt about a specific payment type or rate, confirm before you pay rather than after.
