Within Singha Durbar bureaucracy, there is a long-circulating belief that the government determines the tax exemption threshold based on the salary of an Under Secretary. There is no formal evidence to support this claim, but neither does it seem entirely baseless. Looking at the current threshold, virtually no one below the Under Secretary level falls within the taxable bracket.
The current government – that has been elected after the dramatic political change of September 8-9 by frustrated youths as a rejection of unemployment and middlemen-dominated politics, and elections aftermath – is preparing to present its first budget. This time, amid rising expectations for change and increasing living costs, the government has indicated that it may raise civil servants’ salaries and revise income tax exemption thresholds. However, the Finance Ministry is still calculating whether resources can support such move.
Economist Dr Chandramani Adhikari suggests increasing the current annual tax exemption threshold for unmarried individuals from Rs 500,000 to Rs 1 million, and for married couples from Rs 600,000 to Rs 1.2 million. According to him, ensuring citizens’ basic needs – food, shelter, and clothing – is fundamentally the government’s responsibility.
Economists have also argued that, along with raising the tax-free threshold, Nepal should simplify its current multi-layered personal income tax structure by introducing only two standard tax slabs of 15 percent and 25 percent, while imposing an additional 25 percent surcharge on extremely high-income earners.
At present, Nepal’s personal income tax system ranges from a 1 percent social security tax to progressive rates as high as 36 percent. For incomes above Rs 5 million, the effective tax rate can reach 39 percent.
As debate over tax reform intensifies, economists are emphasizing not only the need to raise exemption limits but also to simplify the complex tax structure. They argue that when salaried individuals with fixed and regular incomes move beyond the exemption threshold, they are left with little disposable income. If more money remains in people’s hands, they can spend more freely, boosting market demand.
At a time when consumption is declining, private sector confidence is weak, and urban living costs are rising, Dr Adhikari argues that increasing the income tax threshold is one of the few ways the government can provide relief to citizens and stimulate market demand without significantly reducing revenue.
Economist Dr Resham Thapa, however, believes salary increment would be more effective than raising the exemption threshold. According to him, increasing wages without altering tax thresholds would generate stronger aggregate market demand.
But Dr Adhikari counters that salary hikes alone could fuel inflation, making an increase in the tax-free threshold a more appropriate policy response.
Meanwhile, economist Dr Baikuntha Aryal says that if the Singha Durbar ‘canteen gossip’ is taken seriously – namely that the current Rs 600,000 exemption threshold corresponds to the salary of a Under Secretary – then any increase in the threshold would require a substantial salary increase for civil servants as well. Given the government’s limited fiscal capacity, he argues, that would not be feasible. According to Dr Aryal, if the government truly wants to expand the middle class, there is no alternative to increasing disposable or savings-capable income.
Under the current pay scale of the Finance Ministry, an Under Secretary’s basic monthly salary stands at Rs 48,737, along with a grade allowance of Rs 1,625. This brings total regular monthly earnings to around Rs 50,000, translating into an annual income of roughly Rs 600,000.
This means that, under the present structure, Under Secretaries remain just outside the tax-free threshold. Perhaps that is why the belief persists within Singha Durbar that income tax thresholds are informally linked to Under Secretaries’ salaries. However, taxable income also includes perks like Dashain bonus, provident fund contribution, and other benefits. A former administrator says that while the theory may not be technically exact, the salary scale of Under Secretaries might have indeed serve as a reference point in policy discussions.
According to the Economic Survey 2082/83 presented on Wednesday by Finance Minister Dr Swarnim Wagle in the Federal Parliament, the number of employees currently serving in government offices stands at 85,240, excluding the army, police, and teachers. Including those groups, more than 500,000 people are believed to receive salaries from the state treasury.
As mandated by the Constitution, the budget for Fiscal Year 2026-27 is set to be unveiled tomorrow, Friday, on Jestha 15. Inside the Finance Ministry, final calculations on tax rates are still being done among the budget preparation team and Finance Minister.
Economist Dr Adhikari says the real test for Finance Minister Dr Wagle will be whether the income tax threshold finalized overnight at the ministry can truly initiate a meaningful policy shift.
On one hand, restructuring Nepal’s personal income tax system is necessary to provide relief to fixed-income taxpayers and revive domestic economic activity. On the other hand, restoring confidence in the private sector remains an equally pressing challenge for Finance Minister through the budget.
Economist Dr Thapa says expectations from Dr Wagle are particularly high because he has repeatedly signaled his intention to reduce the tax burden on citizens at a time of falling consumption, weak private sector morale, and rising urban living expenses.
Dr Adhikari also argues that the current tax exemption threshold no longer reflects inflation, rising rents, education and healthcare costs, and the growing financial pressures faced especially by urban households. Raising the threshold, he says, would increase the purchasing power of salaried people, improve tax compliance, and provide relief to employees in the formal sector.
However, a recent policy analysis based on data from the National Statistics Office (NSO) suggests that the benefits of such reforms may disproportionately favor upper-middle and high-income households rather than the broader middle class.
According to the Living Standards Survey, Nepal’s average annual household income is Rs 551,148, while median income stands at only Rs 383,389. Even households in the fourth consumption quintile have an average annual income of only around Rs 600,000, roughly equivalent to the current exemption threshold for married couples.
Still, structure of economy and market prices have changed drastically in recent years.
Therefore, while raising the exemption threshold may be economically justified, dismantling the progressive tax structure for higher-income groups could disproportionately benefit wealthy taxpayers and weaken the government’s revenue collection capacity.
According to the Inland Revenue Department, the government collected Rs 108.27 billion in personal income tax during fiscal year 2024-25. However, economists note that only a portion of that revenue – mainly taxes related to salaries, remuneration, and business income – would be directly affected by changes to the personal income tax threshold.
Economists therefore advocate a balanced approach to reform. They argue that while exemption thresholds can be increased to support the salaried middle class, higher progressive tax rates should remain in place for incomes above Rs 3 million and Rs 5 million, or additional levies should be imposed on ultra-high earners.
According to them, such a structure would provide meaningful relief to middle-income households while minimizing the risk of major revenue losses.
As the government seeks to balance taxpayer relief, revenue mobilization, and economic recovery, the proposed income tax reforms are expected to become one of the central economic debates surrounding the fiscal year 2026-27 budget.
Rather than merely validating Singha Durbar canteen gossip, many expect Finance Minister Dr Wagle to raise the income tax threshold and simplify tax rates in order to stimulate the economy. As the economists have argued, the budget for next fiscal year is also an opportunity for the renowned economist-turned-finance minister Dr Wagle to prove himself in the office.
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