WHT on Non-contributory ARF

What is non-contributory ARF

There are few approved retirement fund (ARF), which pays their retirement payment to the member without their actual contribution. Employer transfers fund the ARF. ARF maintains separate books of accounts. As per the notice of the employer ARF pays retirement payment to the employee. Similar provision is applicable to the GON staff. When GON staff retires, MOF release separate fund for retirement payment.

All cases of these payment, WHT is 5% on 50% of gross payment, subject to minimum non-tax portion is Rs.500,000.


Who should withhold WHT ?

According to Sec. 88-89, payer makes WHT on its payment. For the retirement payment, the payer may be as follows:

  • If the payer is ARF, ARF withholds WHT (Rate 5% on 50% of gross payment subject to minimum Rs. 5 lakh)
  • If the payer is GON, GON office withholds WHT (Rate 5% on 50% of gross payment subject to minimum Rs. 5 lakh)
  • If the payer is URF, URF withholds WHT (Rate 5% on gain over own contribution)
  • If the payer is Employer, employers withholds WHT (Rate 15% on gross payment)


Contributory/ non-contributory

From 2058/12/19 to 2064/03/31, there was no concept of contributory or noncontributory retirement fund. However, from 2064.04.01, a provio was inserted in Explanation of Sec. 65 saying, in case the URF (URF bold and underlined for emphasis) payment is non-contributory, 5% benefit is not allowed~ means 15% WHT from URF. Until 2064 Ashadh, both ARF and URF payments obtain tax benefit, whether contributory or non-contributory. However, inbuilt mistake under URF was corrected by amendment, but not to ARF.


Loss of tax

Non-contribution benefit has withdrawn from URF but not from ARF. In the case of retirement payment from non-contributory ARF and non-contributory payment from GON, State foregoing the tax. For the GON payment, it is expressively forgiving and from non-contributory ARF impliedly. Suggestion to the amendments were discarded many times. It seems law drafter are reluctant to these tax losses. Logically seems something else, however, legally, non-contributory ARF payment can continuously obtain the benefit of 5% on 50% of gross payment subject to minimum Rs. 5 lakh. Because of this loophole, payments from different ARF without contribution has taxed at 5%.


Does employer require to withhold further 10% to make it 15%? 

Legally, this is the payment from ARF, so, employer cannot withhold tax. There is not any legal right to the employer to withhold the tax difference (employer is Employer but not Empire). If state waives the tax, we cannot make logical comparison for taxing a payment. Way forward No question, if State waives for tax to someone. However, someone receiving from employer are paying 15% and someone under scheme paying 2.5% or less, is not same-footing principle. We may re-request the Revenue Advisory Committee and Inland Revenue Department to obey same-footing principle of taxation. Until any amendments, retirement payments from non-contributory ARF and noncontributory GON obtains benefit of 5% continuously.

Relax on retirement; cheers…….smiley


Bhava Nath Dahal

Bhava Nath  Bhava Nath

About me

Bhava Nath Dahal is a renowned tax consultant and trainer in Nepal and the author of the bestselling tax book titled, “Income Tax and Value Added Tax.” Mr. Dahal was felicitated by Nepal Government in 2016 for his outstanding contribution to the public through tax education. Mr. Dahal is highly regarded for his understanding of Nepalese tax and has provided opinion on complex tax issues for all key industries in Nepal.

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