Government Proposes Major Tax Relief for Nepal’s Share Market Investors

The government is preparing to provide significant tax relief to share market investors by reducing capital gains tax rates and introducing a system under which tax would be levied only on net profits after adjusting losses.

The proposed measures are part of an action plan aimed at reforming Nepal’s capital market and making it more investment-friendly. The government has proposed lowering the capital gains tax on profits earned by individual investors from the sale of shares of listed companies, with a particular focus on encouraging long-term investment.

Under the proposed arrangement, individuals holding shares for more than 365 days would be subject to a capital gains tax of 3.75 percent on profits from their sale. The current tax rate for such long-term investments is 7.5 percent.

Similarly, the government has proposed reducing the capital gains tax on shares held for 365 days or less to 5 percent. At present, profits from short-term share transactions by individual investors are subject to a 10 percent capital gains tax.

The proposed reduction would significantly lower the tax burden on both long-term and short-term investors.

A major feature of the proposed reform is the introduction of a mechanism to adjust losses incurred from share transactions against profits from other share sales within the same income year.

Under the proposed provision, if an investor incurs a loss from the sale of one listed security and earns a profit from selling another listed security during the same income year, the loss would be allowed to be offset against the profit.

Following a study of the existing capital gains tax calculation system, the government plans to improve the mechanism so that profits and losses can be automatically adjusted through the transaction and settlement system.

Once gains and losses from all eligible transactions are adjusted, capital gains tax would be collected only if the investor records an overall net profit.

For example, if an investor earns a profit from one share transaction but suffers a larger loss from another transaction during the same income year, tax would not be calculated separately on the profitable transaction. Instead, the investor's overall gain or loss would be considered, and capital gains tax would be imposed only if the final calculation shows a net profit.

The action plan also proposes recognizing the capital gains tax collected from natural persons as final tax, providing greater clarity and simplifying the tax treatment of individual investors.

Currently, losses from separate share transactions are not effectively reflected when calculating capital gains tax. As a result, investors can be required to pay tax on an individual profitable transaction even when their overall portfolio has suffered a loss during the same income year.

The proposed loss-adjustment mechanism is expected to address this issue by ensuring that investors are taxed based on their overall net gains rather than isolated profitable transactions.

The government believes the proposed reforms could encourage long-term investment in Nepal's capital market while reducing the overall cost of transactions. Lower tax rates and a more equitable tax calculation system could also improve investor confidence and encourage the flow of additional capital into the stock market.

However, the proposals outlined in the capital market reform action plan will require necessary amendments to the relevant tax laws, regulations, and transaction systems before they can be implemented.