Compensation System in Nepal

Compensation System in Nepal

1.    Introduction

Nepal, the country of the highest peak of the world, the country of diversified culture, and the country which was once known as the country of peace, is now struggling to have some substantial economic growth. Due to various internal and external factors, the country is not being able to gain the economic growth as per its target. In the current fiscal policy, the government has targeted to attain the economic growth of 6.5% keeping the inflation at 7.5%. But in reality, the economic growth of the country is 0.77% and inflation is above 10%, as per the data of 2015/16. Two major reasons for this scenario in the country are the massive earthquake and the economic blockade by its neighbor country India, with which more than 70% of the trade is being conducted. If the scenario continues, the objective of the country to be marching as one of the developing countries by 2022 will be really hard to achieve, impossible in fact.
In addition to this, the compensation plan in the country is also very unscientific resulting in poor economic growth. The compensation plan hardly covers the living cost of the people here. With high marginal propensity to consume of the people, they have very low saving, and hence very low investment, resulting very low economic activities.  We've tried our best to cover various aspects of the country and the compensation system here in Nepal in this report.

1.1.     Education System in Nepal

Though education is considered as a basic human right, in present context, the education here in Nepal has not been made free for all level in all universities. When rest of the world is working on new theories about space and universe, the people in our country are still fighting with basic things of life. Here, people are struggling to get their basic human rights, including education. They work whole day and yet they can’t have meal as per their body requires. In such context, how could they send their children in expensive schools and colleges. Maybe this is why the gap between rich and poor people seems to be increasing day by day in Nepal. The poor aren’t getting proper education and thus they remain backward in the society and their status is degrading day by day.
The education system of Nepal has been broadly divided into three tiers.
a. Pre-School Education
b. School education
c. Higher Education
Pre-School Education basically involves Kindergarten and Montessori, that are not an integral part of the formal education. The government of Nepal has been providing free education in preschool and school level to the students via government schools. The government schools have been established in each district of the country. But, the quality of education, and other facilities are of very low standard compared to the private schools. So, most of the people here do not prefer government schools in Nepal. There is a popular saying in Nepal that the only government thing people look here are the jobs, and in other aspects they try to avoid government institutions, including schools, colleges, hospitals and so on. So, people always try hard to admit their children in private schools rather than the government ones.
Regarding the higher education, the government of Nepal has not been providing free education to all, instead they have been providing some quota of scholarship as per the need basis and merit basis to the students. Some municipalities have been running colleges under their own management and providing education to students at a very cheaper price. Moreover, different other embassies from various countries too have been providing scholarship seats to the students in different faculties for Bachelor’s, Master’s and Ph.D. programs.

1.2.     Medical System in Nepal

Government’s presence seems to be lacking in the health sector of the country too. They have been providing health facilities through some community health posts, and some district and zonal hospitals, of which the quality is very poor and late. However, in the latest fiscal policy they have come up with a national health insurance policy. The policy has aimed to insure all the people of the country by three years. Thus, in the first phase they have allocated Rs. 2.5 billion this year, and it will be implemented in twenty-five different districts of the country. According to this policy, the medical cost of Rs. 50,000 will be covered annually. So this policy somehow ensures good health facilities to the citizens. However, the government hospitals of the country need a huge reform from the condition what they are in today.
The cost of living of people here is very high in comparison to what compensation they achieve from the companies they work at. Thus whatever they receive as their compensation are spent for their transaction demand. Their marginal propensity to consume is very high, and thus have very less money for their precautionary demand, including the medical health coverage.

1.3.     Taxation Policy in Nepal

Tax is definitely one of the major component of government revenue in any country of the world. Similarly, Nepal also has been implementing fiscal policy, mostly deficit one, backed up by taxation. The country has been collecting tax from its citizens and organizations in various headings. In context of tax, the government of Nepal has been providing tax waive on various headings to promote industries in rural areas and the least developed areas of the country.
Basically, the income tax charged by the government is 1% for first Rs. 350,000 (NRs. 400,000 for married individual), 15% for next NRs. 100,000 and 25% for balance exceeding the figure till NRs. 2,500,000 and 35% beyond that. There is no any provision of number of children people have with respect to the tax rate. Irrespective of all other factors, the individuals of the country need to pay above mentioned tax to the government as per their earnings. Unlike in U.S.A., there is no any provision of tax rebate to the citizens of the country. The amount of tax once you paid is never coming back. The government is never going to give you back your tax paid or any other monetary facility just because your earning is not good enough to raise the total family you’ve got. The taxation policy is same for a couple without any children and for a couple raising ten children with them. Thus the taxation policy is less scientific regarding the welfare of the people.
Though the individual income tax policy is less scientific in Nepal, there are some other taxation policies that are encouraging to the entrepreneurs who are willing to do something in the country. For example, if a new industry is established with a capital more than NRs.10 million and provides direct employment to more than 500 people for a complete year, those industries will have 100% tax exempt for five years and 50% for next 3 years. Moreover, if an industry is established in much undeveloped areas, only 10% of the normal tax rate will be charged for 10 years’ time period. Similarly, 20% and 30% will be charged for undeveloped and underdeveloped areas for 10 years. Furthermore, the government of Nepal has provided 100% tax exempt for 10 years to the industries established in ‘Special Economic Zone’ recognized in mountain areas or hill areas.

2.    Compensation System in Nepal

2.1.    Government Practices for Minimum Salary/Wages

           The Government of Nepal has recently amended the minimum wages under the Labor Act, 1992 (2048) (“Labor Act”) by publishing a notices in Nepal Gazette Part 5, Volume 63, number 43, dated February 01, 2016 (2071-10-18) (“Gazette Notice”). There have been two categories that have differentiated the minimum salary and wages i.e. under Tea Estate Minimum Wage and Other Enterprise Minimum Wage for fiscal year 2073/74.

a.       Tea Estate Minimum Wage

S. No.

Nature of Payment

Minimum Monthly Salary/Wages


Monthly salary

NPR 7,050


Daily wages

NPR 253 per day


Daily allowance

NPR 30 per day

b.       Other Enterprise Minimum Wage

S. No.

Nature of Payment

Minimum Monthly Salary/Wages

Dearness Allowance per month



Monthly salary

NPR 6,205

NPR 3,495

NPR 9,700


Daily wages

NPR 395 per day


NPR 395 /- day


2.2.    Employee Expectation

               Employee are the asset of the organization. The expectation of employee is always in increasing trend. The organization cannot meet the expectation of every employee. However, they have to mitigate the expectation by any means. None of the organizations are able to meet employee’s expectation as they expect. Either organization sacrifices or employee sacrifices.
Expectation ↑ Salary/Wages = Demotivation, Low employee performance, high turnover
Expectation ↔ Salary/Wages = Motivation*, High performance, less turnover, high retention, high output, high competitive
Expectation ↓ Salary/Wages = Balanced performance, neutral motivation, less creativity, less competitive in market (Company & Employee)

2.3.    Employee Welfare Provisions

An employee being engaged in an organization doesn’t mean he should be treated as a machine there. Even the Machine need regular Repair/Maintenance, Upgrading and regular checkup, humankind also need some measure to let their expertise boosted as well as motivate them. The motivation cannot solely be achieved offering a handsome salary or some monetary benefit but an employee always thinks what they get special from the employer that includes
•    Training and Workshops
•    Personality Development Sessions
•    Recession and outings
•    Letting them work collectively viz. Unionism
•    Running Mutual benefit funds
•    Offering some special provision of having privilege in some institutions e.g. NRB offers employees discount/facilitation in Civil Service Hospital (Theoretically)

2.3.1.    Education

These days many institutions offer scholarship to competent employees for further education in Universities. On the other hand, some Universities offer scholarship to such organizations. For example, there are regular quotas of students from Nepal Government Civil service to study in international/national universities. The facility of education doesn’t limit to the employee but TU have quota for employees’ Children fixed in 20% (approx.) of seats allotted per program. Such factor let the employee feel safeguarded to some extent so that they have less to worry about those matters and let their head concerned on official works.

2.3.2.    Training

An organization can sustain and perform well if and only if the employee is updated to latest market trends and can feel competitors pulse. To make those employees a-one in the market one should manage regular training and let them be updated with recent trend and advancements. Many organizations these days offer training to their staffs either it be out of the office or within the premise inviting some expert to have classes. Training will provide chances of mutual benefit so that the experience and knowledge can be shared.

2.3.3.    Welfare Arrangements

Although the practice of having welfare arrangement in Public Service sector is not new that make this sector the dream job of every graduates many organization are urged to offer similar provision for their employees legally as per Labor Act as well as morally to sustain Brilliant Brains in their organization. The welfare arrangement includes but not limited to:
•    Welfare funds
•    Compensation on Physical Injuries and loss of working ability/even life
•    Bonus, Provident Fund and medical benefits
•    Arrangement for quarter should be made by allocating at least 5% of gross profit from each year (Labor Act, 1992)
•    Special treatment to differently abled person and provision of baby caring mothers

3.    Conclusions

Although the legal provision and theoretical statement in Nepalese employment sector is not bad but what it lags is in the implementation. The employer always wishes to take benefit of employee compulsion or weakness and employee always demand more benefits fulfilling less responsibilities. The mere human nature is to get benefit more and more but that doesn’t mean losing morality. In contest of Nepal the employer tries to skip employee consensus as well as the Unionism in organizations try to challenge management in wrong way. The same person if is in Union will urge management to fulfill legal welfare and employee security but once the same person reach higher management level try to avoid such demand from employees. Nepal being under development as well as under managed country the Employment rate as well as job satisfaction rate both are poor. The government cannot secure employee and employer altogether and the legal provision are ineffective.

Prepared By:

September 10, 2016