Nepal remains one of the poorest countries in South Asia in terms of per-capita income, with weak public services to show for it — yet its working class pays some of the highest taxes in the region.

The country’s personal income tax rate is a whopping 39 percent.

Interestingly, experts say the public perception that high tax rates drive higher revenue is also misplaced.

“Actually, only around Rs 4–5 billion is collected from this high rate,” says Sudarshanraj Pandey, a chartered accountant and tax expert.

The government led by the Rastriya Swatantra Party (RSP) is set to bring a budget in less than two weeks. Finance Minister Swarnim Wagle, an economist himself, has been vocal about Nepal’s high tax rates.

Since this is the first majority government Nepal has had in years, some departures from traditional budgets are expected. However, what exactly Wagle is planning regarding income taxes will be known on May 29.

Wagle recently stressed that the middle class must be protected for the country to prosper, and that tax burdens on this group should be reduced.

At the Kantipur Economic Summit 2026 on May 13, he highlighted the need to reform the tax system to reduce the tax burden on the middle class, promote service-based industries, and create opportunities to export services globally.

Nepal currently applies six personal income tax slabs. Income below Rs500,000 for individuals and Rs600,000 for couples remains exempt from income tax. However, salaried employees still pay a one percent social security tax even within the lowest income slab. By comparison, countries such as India, Sri Lanka and the Maldives have set significantly higher thresholds for tax exemption.

The one percent tax does not apply to pension income, pension funds, or contributions made to contribution-based social security funds.

Beyond the exempt threshold, tax rates range from 10 percent to 39 percent. Income between Rs500,000 and Rs700,000 is taxed at 10 percent, earnings between Rs700,000 and Rs1 million at 20 percent, income up to Rs2 million at 30 percent, earnings between Rs2 million and Rs5 million at 36 percent and income above Rs5 million at 39 percent.

According to the Inland Revenue Department, in FY 2024-25, around 11,000 taxpayers paid taxes at rates of 30 percent or higher, generating roughly Rs 1 billion in revenue.

Experts say the problem is not necessarily that the country has high tax rates; rather, what is more concerning is the lack of corresponding public services. Public hospitals lack quality care, trust in public schools is low, and roads, sewage systems, public transport, and administrative services remain inadequate. Health insurance programmes are weak, forcing the middle class to pay high taxes while also spending heavily on healthcare and education.

High taxes without corresponding services can discourage tax compliance and increase the risk of tax evasion.

Laxman Aryal, a former government secretary and tax administration expert, says high rates encourage informal economic activity.

“As income rises, people either reduce their working hours or look for ways to evade taxes,” Aryal said.

He recommends reducing tax rates where possible and raising the mandatory tax threshold, as many income earners are not being taxed appropriately.

“It would be wise to reconsider capital gains tax, currently at 7.5 percent, which could be raised to 15–20 percent, and set rates based on transaction amounts,” he said.

Pandey pointed to neighbouring India, where the government reduced Goods and Services Tax (GST) rates without seeing a fall in overall revenue collection. Before the GST system was introduced, indirect taxes in India reached as high as 55 percent, while the maximum GST rate is now 24 percent. Pandey believes that even if tax rates are lowered, overall revenue will not decline as long as the tax base is expanded.

According to Pandey, Nepal cannot compare itself with European countries that impose high taxes because those nations provide strong social security systems and reliable public services.

“In Nepal, people not only earn for themselves but also for their children’s future because state support remains weak despite high tax rates,” he said.

Nepal’s top personal income tax rate stands at 39 percent. By comparison, the maximum rate is 30 percent in India, though surcharges can raise it further; 36 percent in Sri Lanka; 35 percent in Pakistan; 30 percent in Bhutan; 25 percent in Bangladesh; 20 percent in Afghanistan; and 15 percent in the Maldives.

Despite the high tax rates, Nepal continues to struggle with poor healthcare services, weak public education, unreliable transport systems, inadequate drinking water supply and ineffective administration. Many middle-class families also spend heavily on private education and healthcare because of declining confidence in public institutions.

Experts say Nepal’s social security system also remains limited. Although the Social Security Fund has expanded gradually, large sections of the private sector and the informal economy remain outside its coverage.

Aryal said the government should first increase the income threshold for compulsory taxation and bring more people into the formal tax system. He also called for clarity on taxation related to share trading and capital gains. “Instead of maintaining such high income tax rates, the government could increase capital gains tax gradually to 15 or 20 percent depending on transaction size,” he said.

As the taxes collected by the government are spent through the national budget, there is no precise breakdown of where the money ultimately goes. However, former secretary Aryal said that around 75 percent of the government’s total expenditure is financed through revenue collection, 10 percent through domestic borrowing, and the remaining amount through foreign loans, foreign assistance and grants.

Tax expert Rup Khadka said Nepal’s effective income tax rate remains among the highest in the region. “Both the statutory and effective personal income tax rates in Nepal are among the highest in South Asia,” he said.

Khadka said Nepal introduced personal income tax primarily to reduce inequality alongside revenue collection. During the tax reforms of the 1990s, the system was simplified and rates were reduced. However, he believes the current structure again requires revision because of growing dissatisfaction among salaried workers.

Khadka also argued that the one percent social security tax should be abolished. According to Khadka, very high tax rates often shrink the tax base because taxpayers begin searching for ways to conceal income.

Finance Minister Wagle acknowledged concerns over the growing burden on the middle class while speaking at the Kantipur Economic Summit 2026 in Kathmandu last week.

Tax expert Khadka said Nepal introduced personal income tax not only to raise revenue but also to reduce income inequality in society. He noted that, following the first generation of tax reforms introduced in the 1990s, the personal income tax structure was simplified to just two rates of 15 percent and 25 percent.