Govt Proposes Halving Capital Gains Tax in 21 Point Market Reform Plan

The government has proposed halving capital gains tax rates for individual investors under a 21-point action plan aimed at reviving Nepal’s capital market. The Capital Market Strengthening and Revival Action Plan, 2083, released by the Ministry of Finance on Monday, proposes a 3.75 percent tax on gains from the sale of listed securities held for more than 365 days. Gains on securities held for 365 days or less would be taxed at 5 percent.

The current fiscal year’s Finance Act amended the Income Tax Act to set those rates at 7.5 percent and 10 percent, respectively. The proposed reductions would therefore halve the rates for both categories of individual investors.

Advocate Jyoti Dahal said the proposal comes amid a decline in the stock market. However, he said it remains unclear how the government would implement the changes while the existing Finance Act remains in force.

The plan also proposes allowing investors to offset losses from the sale of listed securities against gains from similar transactions within the same income year. Tax calculations would be revised to account for gains and losses through the trading and settlement systems, with capital gains tax collected as a final tax only on net gains.

Dated September 14, the plan extends beyond taxation to cover public offerings, secondary market operations, institutional investment, participation by nonresident Nepalis, debt markets and new financial instruments.

The ministry cited the economic slowdown of recent years and its effects on banking, industry, trade, infrastructure, investment and capital markets as reasons for the proposed reforms. It said the devastating Bhotekoshi River flood on August 26, which caused loss of life and damaged hydropower projects operated by listed companies as well as other infrastructure, had placed further strain on the economy and the market.

Under the plan, the Securities Board of Nepal (SEBON) is to issue guidelines immediately setting out general eligibility requirements for initial public offerings.

Separate eligibility criteria and price discovery mechanisms would then be developed for companies in hydropower, manufacturing and processing, hotels and tourism, agriculture, and pharmaceuticals to support public offerings based on market pricing. The government aims to introduce the necessary policy and legal changes by mid-January 2027.

The plan also calls for amendments to the Securities Act, 2063 BS, to provide a legal basis for margin lending, intraday trading, securities borrowing and lending, and short selling.

Investors would be able to borrow from brokers licensed by SEBON to buy shares under a margin lending arrangement targeted for launch by mid-January.

The government plans to begin institutional and structural reforms at the Nepal Stock Exchange immediately, alongside measures to strengthen its capacity.

The existing NEPSE index would be retained as an “all equity index”, while a separate benchmark would be developed using criteria that include tradable shares, market capitalisation, companies’ financial condition, trading liquidity, corporate governance and disclosure practices. Testing of the new index is scheduled to begin by mid-December.

To allow nonresident Nepalis to participate in the secondary market, the government intends to submit proposed amendments to the Foreign Investment and Technology Transfer Act, 2075 BS, and the Foreign Exchange Regulation Act, 2019 BS, to the Cabinet by mid-October.

The plan also seeks to increase institutional participation by encouraging the Employees Provident Fund, Citizen Investment Trust, Social Security Fund, insurance companies and mutual funds to rebalance portfolios currently concentrated in bank deposits.

Legal, policy and structural changes to facilitate securities investment by these institutions are due by the end of Mangsir. The government also plans to establish dedicated policies, rules and infrastructure to support their participation in both primary and secondary markets.

The action plan seeks to make existing provisions governing changes in the face value of shares and share splits more practical for listed companies.

It also aims to enable companies to buy back their shares using accumulated profits available for distribution as dividends. Following consultations with stakeholders, the government intends to put the necessary regulatory and policy arrangements in place by mid-February 2027.

To reduce dependence on bank financing, the plan proposes developing the corporate bond market and encouraging specialised instruments, including green bonds, catastrophe bonds, social bonds, bonds for specific projects and environmental bonds. A policy framework is due by mid-October.

Proposed amendments to the Securities Act would also allow private companies to issue bonds and provide for SEBON to conduct inquiries and investigations into securities offences.

The government plans to develop legal and market infrastructure for private equity and venture capital to finance startups, innovative businesses, small and medium enterprises with strong growth prospects, and projects offering potentially high returns alongside high risks.

SEBON and Nepal Rastra Bank would jointly review the limits, risk weights and capital adequacy requirements governing investments by banks and financial institutions in the capital market.

The review, due by mid-November, would assess direct and indirect capital market exposure, links across the financial system, systemic risk, liquidity, returns and investor protection.

Nepal Rastra Bank has also been tasked with arranging for banks and financial institutions to adopt investment policies approved by their boards. These policies would stipulate a minimum holding period of 45 days for secondary market investments to curb speculative risk.

Key points

• Proposed capital gains tax rates would be 5 percent for listed securities held for 365 days or less and 3.75 percent for those held for more than 365 days.

• Losses on listed securities could be offset against gains from similar transactions within the same income year.

• Policy and legal changes to support sector specific IPO eligibility criteria and price discovery mechanisms are targeted for completion by the end of Poush 2083 BS.

• NEPSE restructuring would begin immediately, with testing of a new benchmark index scheduled to start by the end of Mangsir.

• Proposed legal amendments to allow nonresident Nepalis into the secondary market would be submitted to the Cabinet by the end of Asoj.

• Legal provisions would support margin lending, intraday trading, securities borrowing and lending, and short selling.

• Margin lending through licensed brokers is targeted for launch by the end of Poush.

• Regulatory changes would make share splits and company share buybacks easier to implement.

• Regulators would review the investment limits, risk weights and capital requirements governing banks’ and financial institutions’ capital market exposure.