The government’s decision to double the annual income-tax threshold to Rs1 million means even some of Nepal’s highest-paid public officials will pay no personal income tax this fiscal year.

The government doubled the annual income-tax threshold from Rs500,000 to Rs1 million, effectively taking salaried workers earning up to about Rs100,000 a month out of the income-tax net from this fiscal year. Prime minister, ministers, chief secretary and security chiefs among top officials benefiting from higher tax ceiling. They, however, still have to pay a mandatory one percent social security contribution.

While the higher threshold gives relief to millions of salaried workers, it also takes many of the country’s highest-paid public officials out of the income-tax net, raising questions about whether the new tax structure is equitable and progressive.

Under the latest government pay scale, the chief secretary earns Rs90,594 a month. With the annual Dashain allowance, his total earnings reach Rs1,177,722.

But the Income Tax Rules allow deductions for contributions to the Employees’ Provident Fund and approved retirement schemes such as the Citizen Investment Trust. Under Rule 21, taxpayers can deduct up to Rs500,000 or one-third of assessable income, whichever is lower.

As a result, people earning between Rs1.4 million and Rs1.5 million annually can, in some cases, bring their taxable income below Rs1 million and pay no personal income tax.

The exemption extends to the country’s political leadership. The prime minister receives Rs77,640 a month, cabinet ministers Rs72,730 and federal lawmakers Rs66,070. Their salaries have not been revised since 2021, even though the government increased the pay of civil servants, constitutional officials and judicial officers this year.

Top security officials are similarly outside the income tax net. The chief of army staff receives Rs90,594 a month, while the inspector general of Nepal Police and inspector general of the Armed Police Force each earn Rs84,576.

Some senior judicial and constitutional officials have basic salaries above the Rs1 million threshold. The Chief Justice earns Rs112,522 a month, Supreme Court justices Rs93,547, High Court chief judges Rs90,640 and heads of constitutional bodies Rs93,547.

Even for these officials, however, retirement fund deductions can substantially reduce or eliminate their tax liability, according to tax calculations based on the revised provisions.

Finance secretary Ghanshyam Upadhyaya defended the higher threshold, saying the government wanted to put more money in people’s hands and boost consumption.

“The government’s objective is to increase disposable income, generate effective market demand, and revitalise overall economic activity,” Upadhyaya said.

He argued that higher consumer spending would ultimately generate additional revenue through indirect taxes. According to him, between 35 and 40 percent of government capital expenditure typically returns to the state as tax revenue when money circulates through the economy.

Tax experts and former policymakers, however, say the policy risks weakening Nepal’s progressive tax system.

Former finance minister Yuba Raj Khatiwada said the change effectively removes more than a third of taxpayers who previously fell within the Rs500,000-to-Rs1 million income bracket from the direct tax base.

“Ministers, special-class bureaucrats, constitutional body members, and military and police chiefs are no longer paying income tax,” Khatiwada said.

He also criticised the simultaneous reduction of the highest income tax rate from 39 percent to 29 percent. He said the government was shifting the burden towards indirect taxes, including taxes on electricity, ride-hailing services, health and education.

“While exempting a large portion of the population from direct taxes, the government has simultaneously lowered the top income tax bracket from 39 percent to 29 percent,” Khatiwada said. “To offset the resulting revenue losses, new taxes have been imposed on essential consumption areas such as electricity, ride-hailing, health, and education.”

Such a shift, he argued, disproportionately affects lower-income households because indirect taxes are paid by consumers regardless of their income.

Tax expert Vidyadhar Mallik said the higher threshold would provide substantial relief to middle-income earners but little benefit to the poorest households, many of whom were already outside the direct tax system.

“Most low-income citizens were already outside the direct tax net,” Mallik said. “Now, with the imposition of Value Added Tax (VAT) on electricity consumption exceeding 50 units and on ride-hailing services, low-income citizens are being forced to bear a heavier indirect tax burden.”

He questioned the rationale for raising the threshold so sharply in a single fiscal year.

Senior chartered accountant Sudarshan Raj Pandey said income tax thresholds should be based on objective and predictable criteria rather than being adjusted arbitrarily.

“Tax brackets should be benchmarked against objective indicators, such as the salary scale of a Section Officer or GDP metrics, to prevent arbitrary adjustments,” Pandey said.

He noted that tax revisions in 2001, 2002 and 2007 had loosely linked income thresholds to the salaries of entry-level government officers. Later changes, however, progressively raised the threshold and excluded higher-paid officials.

Arguments that taxing government employees amounts to the state taxing itself are also misplaced, Pandey said. “International practice nowhere exempts public servants from personal income tax.”

Under the revised structure, annual income up to Rs1 million is taxed at one percent. Income between Rs1 million and Rs1.5 million at 10 percent; Rs1.5 million to Rs2.5 million at 20 percent; Rs2.5 million to Rs4 million at 27 percent; and income above Rs4 million at 29 percent.

The budget has also changed the capital gains tax on share transactions. The rate is now 7.5 percent for shares held for more than a year and 10 percent for shares held for less than a year.

Separately, the Financial Bill 2026 abolished excise duties on 360 commodities and consolidated several charges collected through customs, including the infrastructure development tax and road maintenance fees, into a single Green Tax.

The changes have widened the debate over who should bear Nepal’s tax burden as the government seeks to spur consumption while shoring up revenue.

For critics, the central concern is not simply how much tax the government collects, but who is being asked to pay it.