Payroll Services in Nepal: A Comprehensive Overview

Payroll Service in Nepal involves overseeing the financial aspects of employees, including salaries, bonuses, wages, retirement funds, deductions, and net pay. It includes careful calculations based on the employment contract and company policies. Additionally, it takes into account existing income tax laws to calculate tax deductions for each employee, with corresponding returns filed accordingly. Essentially, Payroll Management gives accurate and transparent financial records for every individual within the company.

For businesses looking to establish in Nepal, understanding the complexities of payroll processing in Nepal is also important. Nepal’s GDP growth and its business-friendly regulations have attracted numerous companies to set up offices in the country. However, before onboarding employees, it is important to understand Nepal’s payroll policies and procedures.

How is Payroll Calculated in Nepal?

The payroll process in Nepal involves various components such as gross salary, allowances, net salary, and mandatory deductions like taxes and social security payments.

In certain instances, companies choose to streamline their operations by outsourcing their payroll service in Nepal to third-party entities. These specialized service providers take on the responsibility of managing the complexities of payroll, including calculations, deductions, and compliance with regulations. This approach allows companies to focus on their core functions, handing the expertise of external professionals to ensure accurate and efficient payroll management. It can be a strategic decision, especially for businesses looking to enhance efficiency, reduce operational burdens, and benefit from the specialized knowledge offered by external payroll processing services.

Exploring the Essential Components of Payroll Service in Nepal

Cost to Company (CTC)

The Cost to Company, also known as CTC, represents the total expenditure incurred by the company for bringing onboard an employee. It encompasses various elements contributing to the overall investment in each employee.

Gross Salary

Comprising both fixed and variable pay, the gross salary reflects the maximum earning potential of an employee. It showcases the total amount before any mandatory payroll deductions are applied in Nepal.

Net Salary

The net salary is what employees receive in their bank accounts after all mandatory payroll deductions have been accounted for. These deductions may include income tax, social security contributions, and other standard Nepali employer payroll taxes.

Basic Salary

Forming about 40% of an employee’s total pay, the basic salary serves as the foundation for determining other aspects of the payroll in Nepal, such as allowances and bonuses. Corporate policies and industry norms play a significant role in defining the basic compensation for employees.

Allowances

Nepal offers a variety of allowances to employees, designed to provide additional motivation. These allowances serve as extrinsic rewards, enhancing the overall compensation package for employees.

Bonus

As per Nepali law, companies are obligated to provide bonuses to their employees. This legal requirement ensures that employees receive additional compensation beyond their regular salary, contributing to overall job satisfaction and financial well-being.

How to Set Up a Payroll Service in Nepal

1. Establishing a standard payroll process is important for effective onboarding. 
2. Decide on the type of subsidiary business.
3. Collect essential documents for government registration.
4. Register employees with Nepal’s social security and taxation system.
5. Open necessary bank accounts for transactions.
6. Calculate overtime pay and gross salary.
7. Deduct mandatory payroll contributions and taxes.
8. Choose a reliable payroll system.
9. Select a suitable payroll cycle.

Navigating Payroll Contributions:

The payroll service in Nepal decided based on the payroll rules and regulations in Nepal. 

Minimum wages

The minimum wage is the base component of the payroll in Nepal. All employers must pay a salary that is at least equal to the minimum wage. All employees in Nepal are entitled to a monthly minimum payment of NPR Rs. 17,300 per month.

Overtime

All Nepal employees must work 8 hours a day, six days a week. However, employees who work beyond these regular hours are entitled to overtime pay. 

Employers are required to pay 150% of the regular wage for overtime. 

The maximum weekly and daily overtime hours should be 20 hours.

Every business must register the employee’s daily working hours. 

Social Security contribution

Securing Employee Welfare through Social Security Contributions in Nepal

1. Employer Contribution

Every employer in Nepal plays a vital role in ensuring the well-being of their workforce by contributing to social security. This contribution is a significant component of the overall compensation structure and is directly remitted to the relevant authorities by the company. Specifically, employers allocate 20% of the employee’s basic salary toward social security, reinforcing their commitment to employee welfare.

2. Employee Contribution

Employees actively participate in supporting social security schemes in Nepal through their contributions. They allocate 11% of their basic salary to various social security accounts. This joint effort, with both employers and employees contributing, results in a combined 31% of the basic salary being directed towards diverse social security schemes.


 

This table provides a clear breakdown of the contribution percentages for each scheme under the Social Security Fund in Nepal.

Taxes

All the employees have to pay taxes on their income in accordance with Nepal’s payroll tax rate. Nepal follows a progressive taxation system where the tax rate increases with income. 

Annual Income Range (NPR) Tax Rate:

Less than 5,00,000          1%

5,00,001 – 7,00,000         10%

7,00,001 – 10,00,000        20%

10,00,001 – 20,00,000      30%

More than 20,00,000       36%
 

And the income tax rates for a married couple in Nepal:

Annual Income Range (NPR) Tax Rate

Less than 6,00,000         1%

6,00,001 – 8,00,000        10%

8,00,001 – 11,00,000      20%

11,00,001 – 20,00,000    30%

More than 20,00,000     36%

Bonus

In Nepal, all employees are entitled to receive bonuses according to the Bonus Act under payroll service in Nepal. To qualify, an individual must have worked for the company for at least six months. The bonus amount is calculated based on the monthly income, with employees earning at least double the minimum wage receiving a bonus equivalent to eight months’ income. For those earning less than twice the minimum wage, the bonus is equal to six months’ income. This ensures fair compensation and acknowledgment for employees’ dedication and tenure.

Establishing Clear Employment Terms and Fair Termination Policies

A well-crafted employment contract is vital with regards to payroll service in Nepal, outlining both the rights of employees and clear termination provisions to prevent potential issues. It should detail various employee rights with aspects like compensation, working conditions, vacation allowances, and additional benefits.

Termination of an employee must be justified and align with legal principles. Here are instances where termination is deemed justifiable:

1. Mutual Agreement: Termination should occur when both the employer and the employee mutually agree to end the contract.
2. Legal Violations: If an employee engages in unlawful activities during their tenure, termination is justified based on legal grounds.
3. Organizational Changes: Significant internal structural changes within a company can be grounds for termination, requiring careful consideration and adherence to employment laws.

When termination is necessary, the employer is obliged to clearly state the cause in the termination letter provided to the employee. Additionally, businesses are mandated to offer severance pay as a form of support to terminated employees. This approach ensures fairness and transparency in employment practices, fostering a healthy employer-employee relationship.

Nepal Payroll Processing Company: Frontline Consult

As a government-licensed HR company, Frontline Consult delivers a diverse range of customizable HR solutions to organizations across Nepal. Frontline Consult understands the complexities of payroll management and covers accurate payroll calculations, attendance maintenance, tax deductions, SSF deductions, and timely deposits to government agencies.

Frontline Consult ensures compliance with Nepal’s payroll rules, covering minimum wages, overtime, and social security contributions. The company’s commitment to legal requirements guarantees a fair and secure compensation structure for employees.

Clear employment contracts, termination provisions, and justification for termination are vital aspects that Frontline Consult emphasizes. The company ensures legal compliance and fair treatment of employees.