The Government of Nepal has introduced a significant amendment to the cash payment provisions under the Income Tax Act. Previously, only taxpayers with an annual turnover exceeding Rs. 20 lakh were restricted from making cash payments above Rs. 50,000 per transaction. Under the latest amendment, every taxpayer, regardless of annual turnover, is subject to a maximum cash payment limit of Rs. 25,000 per transaction, except in specified circumstances.

This change aims to promote transparent financial transactions, encourage digital payments, and reduce tax evasion. Businesses and individuals who fail to comply may lose the ability to claim certain expenses as deductible for tax purposes.

In this article, you'll learn what has changed, who is affected, the tax implications, available exceptions, and practical steps to ensure compliance.

What Is the New Cash Payment Limit in Nepal?

The new provision states that a person shall not make a cash payment exceeding Rs. 25,000 in a single transaction during an income year, except where the law specifically permits otherwise.

The restriction applies to all taxpayers, making it one of the most significant compliance changes introduced for FY 2083/84.

Overview of the Rs. 25,000 Rule

Under the revised rule:

• Cash payments above Rs. 25,000 in a single transaction are generally prohibited.

• The rule applies to all persons, irrespective of business size or turnover.

• Expenses paid in violation of this provision are generally not deductible while calculating taxable income.

Purpose of the New Provision

The government introduced this amendment to:

• Encourage digital and banking transactions.

• Increase transparency in business payments.

• Reduce unrecorded cash transactions.

• Strengthen tax compliance.

• Minimize tax avoidance through undocumented expenses.

Key Changes in the Cash Payment Rules

The amendment introduces two major changes.

1. Removal of the Rs. 20 Lakh Turnover Threshold

Previously, only businesses with an annual turnover exceeding Rs. 20 lakh were required to follow the cash payment restriction.

Now, this threshold has been completely removed.

Every taxpayer, regardless of annual turnover, must comply with the Rs. 25,000 limit.

2. Reduction of the Cash Payment Limit

The earlier per-transaction cash payment limit of Rs. 50,000 has been reduced to Rs. 25,000.

This means businesses need to rely more on banking channels for higher-value payments.

Comparison Between the Old and New Rules

Who Must Follow the Rs. 25,000 Cash Payment Rule?

The revised provision applies broadly to all taxpayers, including:

Individuals

Individuals making payments related to taxable activities must comply with the prescribed limit.

Sole Proprietorships

Small businesses that previously fell below the Rs. 20 lakh turnover threshold are now also covered.

Partnerships and Companies

All registered firms and companies must ensure that payments exceeding Rs. 25,000 are made through approved banking channels unless an exception applies.

Non-Profit Organizations

Organizations subject to income tax compliance requirements should also follow the revised payment rules where applicable.

Tax Impact of Cash Payments Above Rs. 25,000

One of the most important consequences of non-compliance is the loss of tax deductibility.

Non-Deductible Expenses

If a business makes a cash payment exceeding Rs. 25,000 in a single transaction without qualifying under an exception, that expense will generally not be allowed as a deductible business expense while calculating taxable income.

Increased Tax Liability

When expenses become non-deductible:

• Taxable income increases.

• Income tax payable may also increase.

• Businesses could face additional scrutiny during tax assessments.

Practical Examples

Example 1

A business purchases office furniture worth Rs. 40,000 and pays entirely in cash.

Result:
The expense may not be deductible for tax purposes.

Example 2

A company pays Rs. 40,000 through bank transfer.

Result:
The payment complies with the rule and remains eligible for deduction, subject to other tax provisions.

Example 3

A supplier receives Rs. 22,000 in cash.

Result:
The transaction falls within the permitted limit.

Exceptions to the Cash Payment Restriction

The law provides certain specified circumstances where higher cash payments may still be permitted.

These exceptions are prescribed under the relevant tax laws and regulations. Taxpayers should maintain adequate supporting documentation whenever relying on an exception.

Before making large cash payments, it is advisable to verify whether the transaction qualifies under the applicable legal provisions.

How Businesses Can Stay Compliant

Businesses should review their payment practices and strengthen internal controls.

Use Banking Channels

Prefer:

• Bank transfers

• ConnectIPS

• Mobile banking

• Internet banking

• QR payments

• Cheque payments

Maintain Proper Documentation

Always keep:

• Payment vouchers

• Bank statements

• Tax invoices

• Contracts

• Digital payment confirmations

Train Accounting Staff

Ensure employees understand:

• Cash payment restrictions

• Documentation requirements

• Tax implications

Common Mistakes to Avoid

Businesses should avoid:

• Making cash payments above Rs. 25,000 without checking legal exceptions.

• Assuming the rule applies only to large businesses.

• Claiming non-deductible cash expenses in tax returns.

• Maintaining incomplete payment records.

Benefits of the New Rule

Although compliance requirements have increased, the amendment offers several long-term benefits.

• Improved financial transparency.

• Better audit trails.

• Reduced risk of tax disputes.

• Increased use of digital payments.

• Stronger financial governance.

Frequently Asked Questions (FAQs)

Does the Rs. 25,000 limit apply to all taxpayers?

Yes. The turnover threshold has been removed, so the rule now applies universally unless an exception is available.

Can I claim a tax deduction if I pay more than Rs. 25,000 in cash?

Generally, no. Such expenses are typically not deductible unless they fall within specified exceptions.

Does the rule apply to individuals?

Yes. The provision applies to all persons covered by the Income Tax Act.

Are there any exceptions?

Yes. Certain specified circumstances may allow higher cash payments. Taxpayers should refer to the applicable laws and regulations before relying on an exception.

What payment methods should businesses use?

Businesses should use banking and digital payment methods such as bank transfers, cheques, ConnectIPS, internet banking, mobile banking, and QR payments whenever possible.

Conclusion

The introduction of the Rs. 25,000 cash payment limit marks a major shift in Nepal's tax compliance framework. By removing the previous Rs. 20 lakh turnover threshold and reducing the allowable cash payment limit from Rs. 50,000 to Rs. 25,000, the government has made the rule applicable to virtually all taxpayers.

Businesses should review their payment policies, encourage digital transactions, and maintain proper documentation to avoid losing valuable tax deductions. Adopting compliant payment practices today will help reduce tax risks and improve financial transparency in the long run.

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