Chapter 1: Introduction | Fundamentals of Financial System (BBS 3rd Year) | TU

FINANCIAL SYSTEM IN NEPAL

Complete Exam Notes – Fundamentals of Financial System (BBS 3rd Year)

Chapter 1: Introduction

Based on NRB statistics (Mid-July 2026), BAFIA 2073, NRB Act 2058, Securities Act 2063 and Insurance Act 2079

Prepared by Santosh Tharu | www.tharusantosh.com.np

⬇ Download PDF Notes

1Concept of Financial System

DefinitionThe financial system of a country is the set of institutional arrangements (institutions, instruments, markets, laws and regulators) that mobilize resources from surplus units to deficit units in the economy.

Some people and organizations earn more than they spend, while others need more money than they have. The financial system links the two groups so that idle savings become productive investment.

SURPLUS UNITSSavers / Lenders

Savings→

FINANCIAL SYSTEMInstitutions, Assets, Markets, Laws

Funds→

DEFICIT UNITSBorrowers / Spenders

Surplus Units and Deficit Units

	Surplus Units (Savers)	Deficit Units (Borrowers)
Position	Income is greater than spending	Spending / investment needs exceed income
Examples	Households, retired persons, remittance-receiving families, profitable firms	Businesses, government, farmers, students, home buyers
Role	Lend / invest and earn interest, dividend or capital gain	Borrow / issue securities and pay interest or dividend

Key Features

• Mobilizes savings and channels them into productive investment.
• Facilitates payments and exchange of goods and services.
• Allocates resources efficiently across sectors (agriculture, hydropower, industry, services).
• Manages risk through insurance, diversification and hedging.
• Supports monetary policy and economic stability through the central bank.
• Promotes economic growth, capital formation and employment.

2Components of Financial System

A well-functioning financial system has five inter-related components:

FINANCIAL SYSTEM OF A COUNTRY

Financial Institutions

Financial Assets

Financial Markets

Acts and Regulations

Regulatory Authorities

Component	Meaning	Nepalese Examples
Financial Institutions	Organizations that collect funds and provide financial services	Commercial banks, insurance companies, EPF, CIT
Financial Assets	Claims (instruments) created and traded in financial markets	Shares, bonds, treasury bills, deposits, insurance policies
Financial Markets	Markets that channel funds from surplus to deficit units	NEPSE, T-bill market, inter-bank market
Acts and Regulations	Laws, rules and directives governing financial activities	NRB Act 2058, BAFIA 2073, Securities Act 2063
Regulatory Authorities	Bodies that license, supervise and monitor participants	NRB, SEBON, Nepal Insurance Authority

3Financial Institutions

Financial institutions collect funds from savers and provide funds or financial services to users. They are divided by whether they accept deposits from the general public.

Basis	Depository Institutions	Non-Depository Institutions
Meaning	Financial institutions that accept deposits from the general public	Financial institutions that do not accept deposits from the general public
Source of funds	Savings, current, fixed and other deposits	Premiums, contributions, share capital, units sold, fees
Examples in Nepal	Commercial banks, development banks, finance companies, microfinance institutions, savings and credit cooperatives, Postal Savings Bank	Insurance companies, EPF, Citizen Investment Trust (CIT), Social Security Fund (SSF), merchant banks, mutual funds, securities companies, stock brokers, NEPSE, CDSC
Main function	Accept deposits, grant loans, offer payment services	Contractual savings, insurance, investment management, capital market support
Regulator	Mainly Nepal Rastra Bank (cooperatives: cooperative regulator)	SEBON, Nepal Insurance Authority, respective Acts

Classification of BFIs by Nepal Rastra Bank

Class	Type of Institution	Governing Act	Notes
A	Commercial Banks	BAFIA 2073	Full banking services; national level
B	Development Banks	BAFIA 2073	National or provincial / district level
C	Finance Companies	BAFIA 2073	Limited banking services
D	Microfinance Financial Institutions	BAFIA 2073	Small loans to low-income and rural groups

4Financial Assets

DefinitionFinancial assets are assets (claims on future income or wealth) that are traded in financial markets. They have value because of the contractual right they represent, not physical substance.

Types of Financial Assets

Category	Examples	Features
Money market instruments	Treasury bills, call money, certificates of deposit, commercial paper, repo	Maturity up to one year; low risk; high liquidity
Capital market instruments	Ordinary shares, preference shares, debentures, development / citizen bonds, mutual fund units	Long term; higher return and risk
Deposits and savings	Savings, current, fixed deposits	Safe, liquid; issued by depository institutions
Insurance and pension	Life and non-life policies, EPF / SSF contributions	Contractual, long-term protection and retirement saving
Derivatives	Forwards, futures, options, swaps	Value derived from underlying asset; limited use in Nepal

Real Assets vs Financial Assets

Basis	Real Assets	Financial Assets
Nature	Tangible, physical (land, building, gold, machinery)	Intangible claims (shares, bonds, deposits)
Value source	Utility and physical use	Right to future cash flow
Liquidity	Generally low	Generally high
Transaction cost	High	Lower

Characteristics of Financial Assets

• Liquidity – ease of converting into cash without loss.
• Return – interest, dividend or capital gain.
• Risk – uncertainty of getting the expected return.
• Maturity – time until the claim is repaid.
• Marketability and divisibility – can be traded easily in small units.

5Financial Market

DefinitionA financial market is the market that channels funds from surplus units to deficit units by providing a place or mechanism to buy and sell financial assets.

Functions of Financial Markets

• Mobilization of savings and their allocation to productive uses.
• Price discovery – buyers and sellers set interest rates and share prices.
• Liquidity – investors can sell assets quickly.
• Reduces transaction and information cost.
• Risk sharing and diversification across many assets.

Classification of Financial Markets

Basis	Types	Explanation
Maturity of asset	Money market and Capital market	Short-term (up to 1 year) vs long-term funds
Stage of issue	Primary and Secondary market	New issue (IPO, FPO, bond issue) vs trading of existing securities
Asset traded	Equity, debt, foreign exchange, derivative market	Shares; bonds and loans; currencies; futures and options
Structure	Organized (exchange) and Over-the-counter	NEPSE trading vs direct bank-to-bank dealing

Money Market vs Capital Market

Basis	Money Market	Capital Market
Maturity	Up to one year	More than one year
Instruments	T-bills, call money, CDs, commercial paper	Shares, debentures, long-term bonds
Purpose	Working capital and liquidity management	Fixed capital, expansion, projects
Risk and return	Low	Higher
Nepalese institutions	NRB, commercial banks (inter-bank market)	NEPSE, CDSC, SEBON, merchant banks

6Acts and Regulations

Acts and regulations create the legal framework that defines who can operate, what they can do, and how consumers and the system are protected. (Years are in Bikram Sambat.)

Act	Main Purpose
Nepal Rastra Bank Act, 2058 (2002)	Establishes NRB as central bank; monetary policy, currency issue, supervision of BFIs
Bank and Financial Institutions Act (BAFIA), 2073 (2017)	Licensing, operation, capital, supervision and winding up of Class A, B, C and D institutions
Companies Act, 2063 (2006)	Incorporation, management and winding up of companies; share issue
Securities Act, 2063 (2007)	Regulates issue and trading of securities; establishes SEBON, stock exchange and brokers
Insurance Act, 2079 (2022)	Regulates insurance business; establishes the Nepal Insurance Authority
Deposit and Credit Guarantee Act, 2073 (2017)	Protects small depositors through deposit insurance and credit guarantee
Foreign Exchange (Regulation) Act, 2019 (1962)	Controls foreign exchange transactions and reserves
Negotiable Instruments Act, 2034 (1977)	Law on cheques, bills of exchange and promissory notes
Assets (Money) Laundering Prevention Act, 2064 (2008)	Prevents money laundering and terrorist financing
Banking Offence and Punishment Act, 2064 (2008)	Defines and punishes banking offences
Banks and FIs Debt Recovery Act, 2058 (2002)	Debt recovery for BFIs through the Debt Recovery Tribunal
Cooperatives Act, 2074 (2017)	Registration, operation and regulation of cooperatives
Employees Provident Fund Act, 2019 (1962)	Establishes EPF; retirement savings of employees
Citizen Investment Trust Act, 2047 (1991)	Establishes CIT for mobilizing small savings and retirement schemes
Contribution-Based Social Security Act, 2074 (2017)	Social Security Fund (SSF) contributory benefits

NoteBesides Acts, NRB Unified Directives, SEBON Rules / Guidelines and Insurance Authority Directives regulate day-to-day operations (capital adequacy, CRR / SLR, single obligor limit, KYC and others).

7Regulatory Authorities

Regulatory authorities license, supervise and monitor financial participants to protect depositors and investors and keep the system stable.

Ministry of Finance (Government of Nepal)

Nepal Rastra BankBanks, FIs, forex, monetary policy

SEBONCapital market, NEPSE, CDSC

Nepal Insurance AuthorityLife, non-life, re-insurance

Cooperative RegulatorsSavings and credit cooperatives

Authority	Area Regulated	Key Role
Nepal Rastra Bank (est. 2013 BS / 1956)	Banks and financial institutions, money market, foreign exchange	Central bank; monetary policy; issues currency; banker to government and banker's bank; licenses and supervises BFIs; manages foreign reserves
Ministry of Finance	Overall financial and fiscal policy	Government policy, budget, public debt, state-owned financial institutions
Securities Board of Nepal (SEBON, est. 2050 BS / 1993)	Capital market	Approves securities issues; regulates NEPSE, CDSC, brokers, merchant bankers, mutual funds; investor protection
Nepal Insurance Authority (under Insurance Act 2079)	Insurance sector (earlier Beema Samiti)	Licenses and supervises life, non-life and re-insurance companies, agents and surveyors
Cooperative regulators (Dept. of Cooperatives / National Cooperative Regulatory Authority)	Savings and credit cooperatives	Registration, monitoring and supervision of cooperatives
Office of the Company Registrar	Companies	Registers companies and enforces Companies Act
Deposit and Credit Guarantee Fund	Deposit insurance	Guarantees small deposits of BFIs

8Size and Structure of Nepalese Financial System

Number of Financial Institutions

Licensed banks and financial institutions (BFIs) as per Nepal Rastra Bank, Mid-July 2026 (Asar End 2083):

S.N.	Type of Institution	Class	Number
1	Commercial Banks	A	20
2	Development Banks	B	17
3	Finance Companies	C	16
4	Microfinance Financial Institutions	D	51
5	Infrastructure Development Bank	-	1
	Total NRB-licensed BFIs		105

Number of BFIs by type (Mid-July 2026)

20

17

16

51

1

Commercial Banks (A)Development Banks (B)Finance Cos. (C)Microfinance (D)Infra. Dev. Bank

Other (non-BFI) financial institutions

• Insurance companies – life, non-life and re-insurance, regulated by Nepal Insurance Authority.
• Contractual / provident funds – EPF, CIT, Social Security Fund.
• Capital market institutions – NEPSE (stock exchange), CDSC (depository), merchant banks, mutual funds, stock brokers.
• Cooperatives – a very large number of savings and credit cooperatives across the country.
• Postal Savings Bank and other specialized institutions.

Assets Held by Financial Sectors

The Nepalese financial system is bank-dominated: commercial banks hold the largest portion of total financial sector assets.

Sector	Relative Share of Assets	Remark
Commercial banks	Largest (dominant)	Main source of credit; wide branch network
Development banks	Small	Mostly regional / sectoral lending
Finance companies	Very small	Declining due to mergers
Microfinance institutions	Small	Rural and priority-sector reach
Insurance companies	Growing	Life insurance has the larger share
EPF, CIT, SSF	Large long-term funds	Retirement and contractual savings
Cooperatives	Significant	Semi-formal; large membership

Figures change every month. For exams, quote the latest numbers from NRB's Banking and Financial Statistics / Financial Stability Report.

Structure of the Nepalese Financial System

NEPALESE FINANCIAL SYSTEM

FORMAL SECTORNepal Rastra BankCommercial / Development banksFinance companies, MicrofinanceInsurance companiesEPF, CIT, SSFNEPSE, CDSC, SEBON

SEMI-FORMAL SECTORSavings and credit cooperativesNGOs doing microfinancePostal savings

INFORMAL SECTORMoneylendersDhukuti (ROSCA)Friends / relativesLandlords, traders

• The system has gone through liberalization (since the 1980s), mergers and acquisitions, leading to fewer but stronger BFIs.
• Mergers reduced the number of commercial banks, development banks and finance companies in recent years.
• The capital market is still small and developing; one stock exchange (NEPSE) and one depository (CDSC).

9Process of Funds Transfer from Surplus Units to Deficit Units

Funds move from savers to borrowers in two ways:

Direct Transfer	Indirect Transfer
Surplus units lend directly to deficit units, who issue claims (shares, bonds) to them.	Surplus units lend through a financial intermediary, which then lends to deficit units.

10Direct Transfer of Fund

MeaningDirect transfer is the process in which surplus units directly provide funds to deficit units without an intermediary creating a new claim. The deficit unit issues a direct (primary) security to the lender.

SURPLUS UNITSSavers / Investors

Money / Funds→

DEFICIT UNITSIssuers / Borrowers

Direct claims (shares, bonds, IOU) flow back to the saver. Brokers or underwriters only assist.

Examples

• Buying shares in an IPO or rights issue.
• Buying government development bonds or treasury bills directly.
• Lending to a friend or relative against a promissory note.
• Buying debentures issued by a company.

Advantages	Disadvantages
Lender may earn higher return; no intermediary margin	High search and information cost to find a counterparty
Borrower gets funds at lower cost (no spread)	Higher risk because there is no diversification
Direct relationship / control (shareholder rights)	Mismatch of amount, maturity and risk preferences
Flexible terms by mutual agreement	Lower liquidity and weak protection if default occurs

11Indirect Transfer of Fund

MeaningIndirect transfer is the process in which funds move from surplus to deficit units through a financial intermediary. The intermediary issues indirect (secondary) securities (deposit receipts, policies) to savers and acquires primary securities (loan agreements) from borrowers.

SURPLUS UNITSDepositors

Deposits / premium→

FINANCIAL INTERMEDIARYBank, Insurer, Fund

Loans→

DEFICIT UNITSBorrowers

Examples

• Depositing in a bank that lends to businesses and households.
• Paying insurance premium; the insurer invests in bonds, shares and loans.
• Contributing to EPF / SSF / CIT; funds are invested in the economy.
• Buying mutual fund units that invest in a portfolio of shares.

Advantages	Disadvantages
Lower search and transaction cost	Intermediary charges a margin (interest spread, fees)
Risk reduced through diversification and expertise	Savers have less control over use of funds
Flexible amount and maturity; high liquidity for savers	Risk of intermediary failure (needs regulation and deposit guarantee)
Professional appraisal and monitoring of borrowers	Savers earn lower return than direct lending

Direct vs Indirect Transfer of Funds

Basis	Direct Transfer	Indirect Transfer
Intermediary	Not involved	Involved (bank, insurer, fund)
Claim received by saver	Primary (direct) security	Secondary (indirect) security
Risk	High, concentrated	Low, diversified
Liquidity	Usually low	Usually high
Cost of search	High	Low
Return to saver	Higher (no spread)	Lower (after spread)
Examples	Shares, bonds, personal loans	Bank deposits, insurance, mutual funds

12Financial Intermediaries and Financial Intermediation

Financial IntermediariesFinancial intermediaries are institutions that stand between savers and borrowers, collecting funds from surplus units and lending them to deficit units (commercial banks, finance companies, insurance companies, pension and provident funds, mutual funds).

Financial IntermediationFinancial intermediation is the process by which intermediaries collect funds from savers by issuing their own liabilities (deposits, policies) and use them to acquire financial assets (loans, securities) of deficit units.

Types of Financial Intermediaries

• Depository intermediaries – banks, finance companies, microfinance, cooperatives.
• Contractual savings intermediaries – insurance companies, EPF, SSF, CIT.
• Investment intermediaries – mutual funds, merchant banks, securities companies.

13Functions and Roles of Financial Intermediaries

Intermediaries exist because direct lending is costly and risky. Their main functions are:

1. Reducing Transaction Cost

• Transaction cost includes search cost, verification cost (checking creditworthiness), monitoring cost and enforcement cost.
• Intermediaries have economies of scale and specialized expertise, so cost per transaction is low.
• Example: A depositor does not need to search for a borrower; the bank does appraisal and recovery.

2. Reducing Risk through Diversification

• Intermediaries pool funds of many savers and lend to many borrowers in different sectors, so loss on one loan is offset by others.
• Small savers who cannot diversify gain a lower-risk pooled portfolio.
• Example: A mutual fund holds shares of many companies; a bank lends to agriculture, hydropower, trade and services.

3. Transforming the Financial Assets

• Intermediaries buy primary securities (loans, bonds) that savers may not want and issue secondary / indirect securities (deposits, policies) that savers prefer.
• They transform size (small deposits into large loans), risk (risky loans into safe deposits), liquidity (illiquid loans into liquid deposits) and maturity.
• Example: Small deposits of Rs. 1,000 each become a Rs. 50 million project loan.

4. Alleviation of Adverse Selection and Moral Hazard

Problem	Meaning	How Intermediaries Reduce It
Adverse selection	Before the transaction: risky borrowers are most eager to borrow, so the lender may select bad borrowers (information asymmetry)	Screening and credit appraisal, credit information bureau, collateral, collecting borrower information
Moral hazard	After the transaction: borrower may misuse funds or take excess risk because someone else bears the loss	Monitoring, loan covenants, collateral and guarantees, staged disbursement, penalties

5. Maturity Intermediation

• Savers prefer short-term, liquid deposits whereas borrowers need long-term funds (home, project loans).
• Intermediaries bridge this gap by converting short-term deposits into long-term loans.
• By the law of large numbers only a small portion of depositors withdraw at once, so banks can lend long term but must hold reserves (CRR / SLR) to manage liquidity risk.

SAVERSwant short-term, liquid assets

Short-term deposits→

BANKMaturity transformer

Long-term loans→

BORROWERSwant long-term funds

6. Providing Payment Mechanism

• Intermediaries provide an efficient system of payments that reduces the need to carry cash and speeds up settlement.
• Instruments and channels: cheques, drafts, ATM / debit and credit cards, mobile and internet banking, QR payments, ConnectIPS, RTGS and remittance.
• This lowers cost of trade, improves safety and supports e-commerce and digital finance in Nepal.

14Chapter Summary at a Glance

Topic	Key Points to Remember
Financial system	Institutional arrangement to mobilize resources from surplus to deficit units
Components	Institutions, Assets, Markets, Acts and Regulations, Regulatory authorities
Institutions	Depository (accept public deposits) and Non-depository (do not)
Financial assets	Assets traded in financial markets: money market and capital market instruments
Financial market	Channels funds from surplus to deficit units; primary / secondary, money / capital
Regulators	NRB, SEBON, Nepal Insurance Authority, cooperative regulators, Ministry of Finance
Size (Mid-July 2026)	20 commercial banks, 17 development banks, 16 finance companies, 51 microfinance, 1 infrastructure bank = 105 BFIs
Fund transfer	Direct (no intermediary) and Indirect (through intermediary)
Intermediary functions	Transaction cost, diversification, asset transformation, adverse selection / moral hazard, maturity, payment mechanism

15Short Answers

Q1. What is a financial system?Ans: A set of institutional arrangements (institutions, assets, markets, laws and regulators) that mobilizes funds from surplus units to deficit units.

Q2. Differentiate depository and non-depository institutions.Ans: Depository institutions accept deposits from the public (banks, finance companies, microfinance); non-depository institutions do not (insurance, EPF, CIT, mutual funds).

Q3. What are financial assets?Ans: Assets or claims traded in the financial market, e.g. shares, bonds, treasury bills, deposits.

Q4. What is a financial market?Ans: A market that channels funds from surplus units to deficit units by trading financial assets.

Q5. What is financial intermediation?Ans: The process of collecting funds from savers by issuing deposits or policies and lending / investing them to deficit units.

Q6. Define adverse selection and moral hazard.Ans: Adverse selection is selecting risky borrowers before the deal because of information asymmetry; moral hazard is misuse or excess risk-taking by borrowers after receiving funds.

Q7. What is maturity intermediation?Ans: Converting short-term deposits into long-term loans so both savers and borrowers get their preferred maturity.

Q8. Name the regulators of the Nepalese financial system.Ans: Nepal Rastra Bank, Securities Board of Nepal, Nepal Insurance Authority, cooperative regulators and Ministry of Finance.

16Exam Tips

• Always start with a definition in the exact words of the syllabus, then explain with Nepalese examples.
• Draw the flow diagram of direct and indirect fund transfer; diagrams earn extra marks.
• Use tables for differences (depository vs non-depository, direct vs indirect, money vs capital market).
• For size and structure, quote the latest NRB figures with the date and mention BFI classes A, B, C and D.
• For the six functions of intermediaries, remember T-R-T-A-M-P (Transaction cost, Risk, Transform assets, Adverse selection / moral hazard, Maturity, Payment).
• Link every point to the Nepalese context: NRB, NEPSE, SEBON, BAFIA 2073, EPF, CIT, cooperatives.

Frequently Asked Exam Questions

• Explain the concept and components of the financial system. (Long, 10 marks)
• Describe the size and structure of the Nepalese financial system. (Long)
• Explain the process of fund transfer from surplus to deficit units. (Long)
• Discuss the functions and roles of financial intermediaries. (Long)
• Write short notes: depository institutions, financial assets, financial market, adverse selection and moral hazard. (Short)

⬇ Download PDF Notes

For more free notes, past questions and exam guides visit www.tharusantosh.com.np
Prepared by Santosh Tharu · Learn . Grow . Succeed

TDS Rates in Nepal for FY 2083/84 | Quick reference to Tax Deducted at Source under the Income Tax Act, 2058

TDS Rate in Nepal for FY 2083/84

Quick reference to Tax Deducted at Source under the Income Tax Act, 2058 (Sections 87, 88, 88Ka and 89). Shaded = Final TDS

⬇ Download TDS Rates

Employment income Section 87

Paid by a resident employer to a resident employee: TDS at slab rates.

First Rs. 10,00,000	Next Rs. 5,00,000	Next Rs. 10,00,000	Next Rs. 15,00,000	Balance
1% (SST)	10%	20%	27%	29%

The 1% SST does not apply to: (a) proprietorship firms (business income), (b) pension income, (c) a natural person participating in SSF.
Paid to a non-resident employee: 25%.

Interest Section 88

Rate	Payment
No TDS	Interest paid to resident BFIs; interest on loans between co-operative banks and co-operatives; interest exempt from tax; interest on deposits up to Rs. 25,000 paid by rural municipality-based microfinance, Rural Development Bank, Postal Savings Bank, or co-operatives with agro/forest-based income or operating in rural municipalities (if interest exceeds Rs. 25,000, TDS applies only on the excess) (amendment FY 2083/84).
5%	Interest on deposits of life insurance companies paid by resident BFIs; interest on foreign currency loans from foreign banks/FIs for reservoir/semi-reservoir hydro projects above 200MW completing financial closure by end of Chaitra 2082; interest paid by resident BFIs on foreign currency loans from foreign banks/FIs invested in NRB-prescribed areas.
6%	Final TDS, only if all conditions are met: paid to a natural person; paid by a resident bank, financial institution, co-operative, bond-issuing entity or listed company; on deposits, bonds, debentures or government bonds; not connected to the recipient's business.
15%	Interest paid to tax-exempt organizations (final TDS); to a natural person for business purposes; to entities.

Natural resource payments Section 88

15%	Payment for natural resources.

Rent Section 88

No TDS	House rent paid to a natural person, other than for conducting business (the payer pays Bahal Kar at the Ward).
1.5%	Carriage service and rent of transportation vehicles, or payment to a person in the vehicle-hiring business, where the recipient is VAT registered.
2.5%	Carriage service and rent of transportation vehicles where the recipient is not VAT registered.
10%	All other rental payments.

Royalty Section 88

No TDS	Payment for articles published in a newspaper.
1.5%	Payment to a resident person for literary articles or compositions.
15%	All other royalty payments (fees paid for affiliation to a university are treated as royalty).

Service fee Section 88

No TDS	Inter-regional exchange fee paid to the bank issuing credit cards. If a training venue is not in Nepal, the training is deemed provided outside Nepal, so no TDS on that payment.
1.5%	Services that are VAT exempt, or services paid to a VAT-registered party.
5%	Registration, education and exam fees paid to a foreign school or university.
15%	Final TDS: meeting fee up to NPR 20,000 per meeting; question setting and answer checking; part-time teaching or guest lectures.
15%	Meeting fee above NPR 20,000 per meeting; all other service fees.

Commission and sales bonus Section 88

No TDS	Incentives given to consumers who pay for goods/services through digital instruments (ATM, e-money/wallet, mobile banking).
5%	Payment by a resident employment agency to a non-resident person.
20%	Final TDS: service charges or commission paid to an insurance agent who is a resident natural person (amendment FY 2083/84).
15%	All other commission or sales bonus payments.

Dividend Section 88

5%	Paid by a resident company or partnership, on the gross amount (final TDS).

Investment insurance and mutual funds Section 88

5% of gain	Gains on investment insurance (final TDS).
5%	Gain paid by a mutual fund to a natural person (final TDS).
15%	Gain paid by a mutual fund to any entity other than a natural person.

Retirement payments Section 88

No TDS	PF, CIT, gratuity and accumulated payments relating to the period before 19.12.2058; medical expenses up to NPR 1,80,000 for employees employed before 19.12.2058, received after retirement.
5% of gain	Final TDS on payment by the Government of Nepal or a contribution-based approved retirement fund. Gain = gross payment, less payment accrued till 18.12.2058, less the higher of (a) NPR 5,00,000 or (b) 50% of the retirement payment liable to tax (Sec. 65(1)(b)).
5% of gain	Final TDS on payment by a contribution-based un-approved retirement fund. Gain = gross payment, less payment accrued till 18.12.2058, less retirement contribution paid by the person.
15%	Non-contributory retirement payments (final TDS).

Windfall gain Section 88Ka

No TDS	Awards up to Rs. 5 lakhs for contributions in literature, art, culture, sports, journalism, science, technology, agriculture or public administration; or national/international awards in those sectors published in the Nepal Gazette.
25%	Final TDS on awards above Rs. 5 lakhs not exempted by Nepal Gazette publication (TDS only on the excess amount) (amendment FY 2083/84); and on all other windfall gains.

Contract payments Section 89

No TDS	Payment to a resident person under a contract where the total of the previous 10 days' payments does not exceed NPR 50,000; work done through a consumer committee (amendment FY 2083/84).
1.5%	Final TDS: premium paid to a non-resident insurance company; commission on reinsurance premium accepted from non-resident insurance companies.
1.5%	Payment to a resident person under a contract where payments exceed Rs. 50,000 (total of the previous 10 days).
5%	Final TDS on payment to a non-resident person under a contract or agreement.

Payments treated as final TDS Section 92

The tax withheld is the recipient's final tax on: dividends paid by resident companies or partnerships; house/land rent paid to a natural person not running a business; gains on investment insurance; benefits from un-approved retirement funds; interest meeting the 6% conditions above; payments to non-residents under Sections 87, 88, 88Ka or 89; all retirement payments (except regular pension); meeting fees up to Rs. 20,000 per meeting, part-time teaching, and question setting or answer checking; windfall gains; mutual fund returns to natural persons; and commission paid to insurance agents.

Want to keep this for offline study?

⬇ Download TDS Rates

Source: compiled from the FY 2083/84 TDS guide by CA Bishal Bhattarai (Accountants' Adda) and the Inland Revenue Department's TDS and advance tax schedule under the Income Tax Act, 2058. This note is a study summary, not tax advice. Check the latest Finance Act and IRD notices before applying any rate.

Santosh Tharu · www.tharusantosh.com.np

Law of Contract - Complete Exam Notes (Business Law, BBS / CA Cap-I)

Based on The Muluki Civil Code Act, 2074 (National Civil Code, 2074)
Prepared By Santosh Tharu | www.tharusantosh.com.np

Download PDF NotesFree PDF • 8 pages • Google Drive

1. Meaning of Contract

• Generally, contract law is the law of promises. It is the oldest commercial law and the foundation of modern business law.
• It applies not only to business but also to our day-to-day life.
• Definition: A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. As per Section 504(1) of the Civil Code, 2074: a contract is an agreement between two or more parties to do or abstain from doing something, which is enforceable by law.
• In juristic concept a contract has two constituent elements: Agreement and Obligation.

Daily-life activity	Type of contract
Buying a television set	Contract of sale
Travelling in a bus	Contract of carriage
Giving a laptop for repair	Contract of bailment

2. Contract Law in Nepal

• Contract law is specified in the Muluki Civil Code Act, 2074 (MCCA-2074) – formally Muluki Devani Samhita, 2074; English title: National Civil Code, 2074. Contract provisions are in Part 5.
• Party autonomy: the Law does not say what contracts parties may make. They are free to make their own bargain, subject to the limits laid down in the Law. Contract law therefore lays down the limits within which parties are free to contract.

Historical development (short)

• Early period: Nepali law was influenced by Hindu philosophy – the Sruties and Smrities of Munies like Narad, Yajnavalkya, Manu. Customs and usages based on Hindu religion governed contractual relations.
• Muluki Ain, 1910 (Rana period) – first time a few provisions on contract were made. Replaced by the new Muluki Ain, 2020.
• Contract Act, 2023 – first separate law on contracts (insufficient and defective in principle).
• Contract Act, 2056 – replaced the 2023 Act with a more complete law.
• Civil Code, 2074 – unified Civil Code; the Contract Act 2056 was repealed. It incorporates modern principles of English and Indian contract law.

Year	Law
1910	Muluki Ain (first contract provisions)
2020	New Muluki Ain
2023	Contract Act, 2023
2056	Contract Act, 2056 (replaced 2023 Act)
2074	Muluki Civil Code – Contract Act 2056 repealed

3. Major Provisions of the Civil Code, 2074

S.N.	Subject	Section	Key point
1	Definition	504 (1)	Contract = agreement between two or more parties enforceable by law. Offer = proposal made by one to another to obtain assent. Acceptance = assent given in the same sense as the offeror intended.
2	Contractual capacity	506	Minors, persons of unsound mind and persons disqualified by law cannot contract. Sec 32 defines minor; Sec 33 defines unsound mind.
3	Autonomy of parties	507	Parties can choose subject matter, fix nature and amount of consideration, terms and conditions, remedies for breach, and procedure to settle disputes.
4	Offer and acceptance	508 – 512	Communication, revocation, when offer/acceptance is treated as revoked, general offer, place of contract.
5	Contingent contract	513	Rules on performance of contingent contracts.
6	Void and voidable contracts	517, 518	Sec 517: list of void contracts (restraint of trade/profession, restraint of marriage, against public policy and welfare of state, unlawful object or consideration). Sec 518: cases where a contract becomes voidable.
7	Specific contracts	Chapters 6 – 14	Indemnity and guarantee, bailment and pledge, sale of goods, agency, carriage of goods, lease, hire-purchase, contract labour, etc.
8	Performance of contract	521 – 534	Ways, manner, time, date and place of performance; who can demand it; who is bound; when performance is not needed.
9	Breach and remedies	535 – 544	Remedies: rescission, damages, specific performance, quantum meruit and injunction.
10	Limitations	Each chapter	Time limit within which the injured party must go to court; otherwise no remedy.

4. Contract vs Agreement

Contract = Agreement + Enforceability (legal recognition).

Agreement	Enforceability of agreement
An offer when accepted becomes an agreement.	Legal obligation arising from the agreement. (Obligations arising without agreement cannot be contractual.) Parties must be legally bound to perform their promises.

Case law – Balfour v. Balfour: A husband promised to pay his wife a monthly allowance of 30 pounds for her maintenance. They later separated and he stopped paying. The wife sued. The court held that such arrangements are not contracts because the parties did not intend to create legal relations. Suit dismissed.

Legal obligations without agreement

Some legal obligations arise even without any agreement and are enforceable by courts – e.g. the duty to maintain wife and children, or obligations from tort (civil wrong). There is enforceability but no agreement, hence not a contract.

Conclusion

• A contract is an agreement enforceable by law; the agreement must create a legal obligation.
• All agreements cannot be enforced, so not all agreements are contracts. Hence: "All contracts are agreements but all agreements are not contracts."
• Not all legal obligations are contractual (they may arise without agreement).
• The law of contract is neither the whole law of agreements nor the whole law of obligations. It is the law of (i) those agreements which create legal obligations, and (ii) those obligations which arise from agreements.

Distinction between Contract and Agreement

Basis	Contract	Agreement
Definition	An agreement enforceable by law.	An offer when accepted becomes an agreement.
Enforceability	Every contract is enforceable.	May not be enforceable.
Inter-relationship	A contract includes an agreement.	An agreement does not include a contract.
Scope	Limited – includes only commercial agreements (legal assumption).	Wider – includes both social and commercial agreements (legal assumption).
Validity	Only legal agreements are contracts.	May be legal or illegal.
Legal obligation	Every contract contains a legal obligation.	Not necessary for every agreement.

5. Essential Elements of a Valid Contract

Section 10 of the Indian Contract Act (a model for the Nepali provisions): All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared void. Textbook summary lists 12 elements: two parties; offer and acceptance; intention to create legal relationship; consensus-ad-idem; consideration; free consent; capacity; lawful object; not expressly void; possibility; certainty; legal formalities.

1. Proper offer and acceptance (agreement)

• At least two parties; one makes the offer/proposal, the other accepts.
• Offer and acceptance must be legal.

2. Intention to create legal relationship

• A relationship enforceable by law is a legal relationship.
• Social/domestic agreements: presumed no intention to create legal relations (Balfour v. Balfour).
• Commercial agreements: presumed intention exists.

3. Lawful consideration

• Consideration = something in return, "Quid pro quo".
• It must not be unlawful, immoral or opposed to public policy.

4. Capacity of parties

• Every person is competent to contract if he/she is a major (adult; minor is defined in Sec 32), of sound mind (Sec 33) and not disqualified by law.
• A person of unsound mind may contract during a lucid interval.
• Not competent: alien enemy, foreign sovereigns and accredited representatives of a foreign state, insolvents, convicts.

5. Free consent

• Parties must agree upon the same thing in the same sense – consensus-ad-idem (identity of mind).
• Consent is free when not caused by coercion, undue influence, fraud or misrepresentation.

Example: A threatens to shoot B unless B sells his house to A for Rs. 20,000, and B agrees. This is coercion, so consent is not free – the agreement is voidable at the option of B.

6. Lawful object

• Object = purpose or design. It must not be illegal, immoral or opposed to public policy.

Example: A and B agree to smuggle goods out of Nepal. The object is unlawful, so the agreement cannot be enforced in court.

7. Possibility of performance

• An agreement to do an act impossible in itself is void.

Example: An agreement to discover treasure by magic is void.

8. Certainty

• An agreement whose meaning is unclear or vague is void, unless the terms can be made certain from the circumstances.

Example: A deals in kerosene and coconut oil; B agrees to buy 10 litres of "oil" – meaning is uncertain, so it cannot be enforced. If A deals only in kerosene, the meaning is clear from the circumstances and the agreement is valid.

9. Not expressly declared void

• Agreements in restraint of trade, marriage or legal proceedings are expressly void (Sec 517).

10. Legal formalities

• A contract may be oral or written. Where the law requires writing, registration or attestation, these must be complied with; otherwise it is not enforceable.

Example: A promise to pay a time-barred debt must be in writing.

6. Interpretation of Contract

• Interpret according to the collective desire (intention) of the parties, taking into account their views, conduct and the circumstances.
• If intention cannot be determined, interpret as a person of common prudence would in ordinary circumstances.
• Interpret so as to give effect to the entire contract – no phrase may be set aside, and no single phrase given effect in isolation.

7. Classification of Contracts

Five bases: (A) Enforceability, (B) Formation, (C) Execution/Performance, (D) Liability (existing duty), (E) Creation of obligation (future contingency).

A. On the basis of Enforceability

Type	Meaning and key points
1. Valid contract	Satisfies all essential elements; enforceable by law; both parties have rights and obligations (A can enforce against B and B against A).
2. Void agreement	Not enforceable by law; creates no rights or obligations; not a contract at all; void ab initio (void from the beginning).
3. Void contract	Valid when made but later ceases to be enforceable due to supervening impossibility, change of law, destruction of subject matter, death or unsoundness of mind of a party – circumstances beyond both parties' control. English law: doctrine of frustration.
4. Voidable contract	Enforceable at the option of one party only (the party whose consent was not free). Binding until that party rescinds it – within a reasonable time or before a third party acquires title to the goods. (If both parties can set it aside it is void; if only one can, it is voidable.)
5. Illegal agreement	Object is unlawful; cannot be enforced; void ab initio; even collateral agreements become void.
6. Unenforceable contract	Cannot be enforced in court because of a technical defect – absence of writing, barred by limitation, lacking signature, stamping or registration.

B. On the basis of Formation

Type	Meaning and key points
7. Express contract	Made by words spoken or written.
8. Implied contract	Offer and acceptance made otherwise than in words – by acts of parties or circumstances.
9. Tacit contract	Part of implied contract; inferred from conduct. E.g. cash withdrawal from an ATM; sale by fall of the hammer (auction).
10. Quasi contract	A contract created by law, based on equity and the principle of unjust enrichment.

C. On the basis of Execution / Performance

Type	Meaning
11. Executed contract	Both parties have fulfilled their obligations; nothing remains to be done.
12. Executory contract	Both parties still have to perform their obligations.
13. Partly executed and partly executory	One party has performed; the other has still to perform.

D. On the basis of Liability (existing duty)

Type	Meaning and key points
14. Unilateral contract (MCQ)	Only one party makes a promise; one-sided – the other party has already performed by doing the desired act. Promise on one side is exchanged for an act on the other. E.g. reward announced for whoever finds a lost passport – if found, the announcer must pay.
15. Bilateral contract	Two-sided; both parties must fulfil obligations. Reciprocal promises – each promise is the consideration for the other.

E. On the basis of creation of obligation (future contingency)

Type	Meaning
16. General (simple) contract	Not subject to any future contingency; obligation arises immediately.
17. Contingent contract	Arises only when something happens or does not happen in the future (Sec 513).

8. Important Comparisons

Void agreement vs Illegal agreement

Matter	Void agreement	Illegal agreement
What	Not prohibited by law.	Prohibited by law.
Collateral transaction	Enforced.	Not enforced.
Punishment	No.	Yes.
Void ab initio	May not be void ab initio.	Always void ab initio.

Void contract vs Voidable contract

Basis	Void contract	Voidable contract
Meaning	Contract that ceases to be enforceable (valid when made, later becomes void).	Contract enforceable at the option of one party, not the other.
Cause	Supervening impossibility, change of law, etc. (doctrine of frustration).	Consent not free – coercion, undue influence, fraud, misrepresentation.
Option	Neither party can enforce it; either may ignore it.	Only the aggrieved party may rescind or affirm.
Status until avoided	Void from the date it becomes impossible/illegal.	Valid and binding until the aggrieved party rescinds it.
Rights of parties	No rights or obligations after it becomes void.	Rights remain unless and until it is avoided; third parties acquiring title in good faith are protected.
Example	Contract to deliver a particular painting; painting destroyed by fire.	A threatens B to sell a house for Rs. 20,000; B may avoid it.

Note: The void-vs-voidable table is added from standard contract-law principles for the exam question "Distinguish between void and voidable contract". Match it with your teacher's own points if they differ.

9. Nature and Functions of Contract

Nature

• An agreement between two or more persons on a particular matter.
• Creates legal and binding obligations between the parties.
• Establishes a course of action to be performed by them.
• Provides remedies to the affected party if things go wrong.
• Recognised and enforced by law, i.e. contract law.

Functions

• Establishes the value of the exchange or transaction.
• Lays down the respective responsibilities of parties and the standard of performance expected.
• Enables the economic risks involved in transactions to be managed.
• Provides remedies if a promise is not fulfilled.
• Is the instrument by which separate and conflicting interests of participants are reconciled and brought to a common goal.

10. Short Answers (Brief Questions)

Q1. What is contract?
An agreement between two or more parties to do or abstain from doing something, which is enforceable by law (Sec 504(1)). Contract = Agreement + Enforceability.

Q2. What is consideration?
Something in return – "quid pro quo". It must be lawful (not illegal, immoral or against public policy).

Q3. Persons suffering from incapacity to contract?
Minors, persons of unsound mind, and persons disqualified by law (e.g. alien enemy, insolvents, convicts).

Q4. When is consent free?
When it is not caused by coercion, undue influence, fraud or misrepresentation, and parties agree on the same thing in the same sense.

Q5. Define unlawful agreement.
An agreement whose object is illegal, immoral or opposed to public policy; it is void ab initio and cannot be enforced, and collateral agreements also become void.

Q6. What is void agreement?
An agreement not enforceable by law; it creates no rights or obligations and is void ab initio.

Q7. When is a contract voidable?
When it is enforceable at the option of one party only – generally where consent was not free. The aggrieved party may rescind within a reasonable time or before a third party acquires title.

Q8. Distinguish void and illegal agreement.
See Section 8 – void is not prohibited by law, collateral enforced, no punishment; illegal is prohibited, collateral not enforced, punishable, always void ab initio.

Q9. Distinguish void and voidable contract.
See Section 8 – void is unenforceable by both parties; voidable is valid until the aggrieved party avoids it.

Q10. When is an agreement enforceable by law?
When it has all essentials: offer and acceptance, intention to create legal relations, lawful consideration, competent parties, free consent, lawful object, possibility, certainty, formalities, and is not declared void.

11. Exam Question Map and Answer-Writing Guide

Exam question	Use these sections
Define contract; nature and functions	1, 9
"All contracts are agreements but all agreements are not contracts" (and reverse form)	4 (conclusion), Contract vs Agreement table, 5
Law of contract is not the whole law of agreement nor obligation	4 (last conclusion point + Balfour v. Balfour)
Essential elements of a valid contract; when does an agreement become void	5, 7A, 8
Types of contracts; short notes (unenforceable, executed/executory, contingent, quasi)	7
Void vs voidable; void vs illegal	8
Contract vs agreement; factors essential for valid contract	4 table + 5
Law of contract in Nepal / Civil Code provisions	2, 3

How to write a descriptive answer (10 marks)

• Introduction: definition of contract (Sec 504(1)) in 2 – 3 lines.
• Body: headings with 1 – 2 lines each; add a small example for consent, object, possibility and certainty.
• Table or case: use a comparison table when the question says "distinguish"; quote Balfour v. Balfour for intention to create legal relations.
• Conclusion: one-line summary, e.g. "Thus, a contract is an agreement enforceable by law."

Quick memory trick: O-I-C-C-F-L-P-C-F = Offer and acceptance, Intention, Consideration, Capacity, Free consent, Lawful object, Possibility, Certainty, Formalities (plus: not expressly void).

Download PDF NotesFree PDF • 8 pages • Google Drive

For more free notes visit www.tharusantosh.com.np
Learn . Grow . Succeed

Chapter 1 Candlestick | Technical Analysis Basic

Candlestick

A candlestick is a graphical representation used in technical analysis that shows the price movement of a financial asset (like stocks or crypto) within a specific time period, including its opening, closing, highest, and lowest prices.

Bullish Candle

Technical Analysis: A Simple Explanation

ICAN Guidelines on Marketing Professional Services 2023 PDF | Professional Accountants in Public Practice (Including Second Amendment 2026)

This official publication issued by the Institute of Chartered Accountants of Nepal (ICAN) provides comprehensive guidance on how Professional Accountants in Public Practice should market their services while maintaining compliance with professional ethics and the Code of Ethics. The guideline aims to ensure that accountants communicate their services responsibly without engaging in misleading, deceptive, coercive, or unethical advertising practices.

Key Topics Covered

• Objectives of marketing professional services
• Ethical principles governing publicity and advertisements
• General rules regarding marketing and client solicitation
• Website design, content, and permitted disclosures
• Social media marketing guidelines (Facebook, LinkedIn, YouTube, TikTok, etc.)
• Rules regarding firm profiles, brochures, and promotional materials
• Signboards, letterheads, business cards, logos, and professional documents
• Participation in seminars, webinars, fairs, and public events
• Restrictions on advertising audit and attestation services
• Prohibited activities and disciplinary consequences for violations
• Guidelines on the use of logos by professional accounting firms
• First Amendment 2025 and Second Amendment 2026 updates

This PDF is an essential reference for Chartered Accountants (CA), Registered Auditors (RA), accounting firms, audit practitioners, accounting students, compliance professionals, and anyone interested in understanding the regulatory framework governing professional service marketing in Nepal. It helps practitioners ensure that their promotional activities remain compliant with ICAN regulations and professional ethics standards.  

📄 Download PDF

Read PDF