Summary: Nepal has elected its first single-party majority government in over two decades, opened its “automatic route” for foreign investment without any upper ceiling, and presented an openly pro-investor budget for fiscal year 2026/27. Indian investors already hold about one-third of Nepal’s foreign direct investment (FDI) stock. This article explains why Nepal deserves fresh attention from Indian businesses, where the opportunities lie, how the Nepali law works, how to comply with India’s Overseas Investment regime, how income will be taxed in both countries, and the risks to plan for. It examines Nepal’s political reset, liberalised investment entry and pro-investor budget; advantages unique to Indian investors including the rupee peg, investment in Indian rupees, visa-free movement, qualifying duty-free access to India and power trade; and sectoral opportunities in hydropower, IT, manufacturing, tourism, agro-processing, healthcare, education, infrastructure and financial services. It then covers Nepal’s legal framework, negative list, approval routes, technology transfer, incorporation and industry-registration process, taxation and change-in-control rules. On the Indian side, it addresses FEMA Overseas Investment Rules, Regulations and RBI directions, financial commitment limits, prohibited activities, resident-individual investment, layering, reporting and APR requirements. The article also discusses the India-Nepal DTAA, dividends, foreign tax credit, POEM, permanent establishment, transfer pricing and foreign-asset disclosure. Finally, it considers repatriation, land, labour costs, FATF grey-list implications, implementation and policy risks, LDC graduation, tax disputes and contract enforcement, followed by a pre-investment checklist and conclusion.
Nepal Investment Opportunities for Indian Businesses: Legal, Tax and FEMA Guide
- 1. Why Nepal, Why Now
- 2. Advantages Unique to Indian Investors
- 3. Sectoral Opportunities
- 4. Legal Framework in Nepal
- 5. Setting Up: Step by Step
- 6. Taxation in Nepal
- 7. India Side: FEMA Overseas Investment
- 8. India Side: Income Tax
- 9. Repatriation and Exit
- 10. Operating Realities
- 11. Risks and Mitigation
- 12. Pre-Investment Checklist
- 13. Conclusion
1. Why Nepal, Why Now
A political reset. The youth-led protests of September 2025 brought down the government and led to early elections on 5 March 2026. The Rastriya Swatantra Party won 182 of 275 seats in the House of Representatives, and Balendra (Balen) Shah was sworn in as Prime Minister on 27 March 2026. It is the first single-party majority since 1999, and the government has placed anti-corruption, governance reform and job creation at the centre of its agenda. For investors, a stable majority is itself a significant change in a country known for frequent changes of government.
Liberalised entry. On 16 February 2026, the Ministry of Industry, Commerce and Supplies expanded the automatic route to 102 industry types across seven categories (energy, agriculture and forestry, manufacturing, services, infrastructure, IT and tourism) and removed the earlier NPR 500 million ceiling on automatic approvals. The minimum investment of NPR 20 million continues, except for IT-based industries, which now have no minimum.
A pro-investor budget. The budget for fiscal year 2026/27, presented on 29 May 2026, announced a revision of the Foreign Investment and Technology Transfer Act, 2019 (FITTA) to replace Nepal Rastra Bank’s (NRB) prior approval for profit repatriation with a notification, an integrated “Investment Express” clearance system, a dedicated commercial tribunal, fewer customs duty tiers (from 11 to 7), removal of excise duty on 360 goods, and a cut in the top personal income tax rate from 39% to 29%.
India is already the anchor investor. NRB’s survey report on FDI in Nepal for 2024/25, released on 3 September 2026, puts Nepal’s total FDI stock at about NPR 340 billion as of mid-July 2025. India’s share is 32.8% (about NPR 111.6 billion), far ahead of China at 9.3%. The same report carries a caution every investor should note: only about 29.6% of FDI approved over three decades has actually materialised.
2. Advantages Unique to Indian Investors
No currency risk. The Nepali rupee has been pegged to the Indian rupee at NPR 1.60 = INR 1 since 1993. Profits earned in Nepal carry practically no exchange-rate risk for an Indian parent.
Investment in Indian rupees. RBI’s Master Direction on Overseas Investment provides that investment in Nepal is made in the manner prescribed under the FEMA (Manner of Receipt and Payment) Regulations, 2016, which permit settlement in Indian rupees.
No visa for Indian staff. Under the 1950 India-Nepal Treaty of Peace and Friendship, Indian nationals can live and work in Nepal without a visa, so Indian managers and technicians can be deployed without delay.
Duty-free access to India. Under the India-Nepal Treaty of Trade, goods manufactured in Nepal that meet the rules of origin can enter India free of customs duty, subject to specified exceptions. A Nepal-based factory can therefore serve both markets if the product and supply chain are designed around these rules.
Assured market for power. Under the long-term arrangement signed in January 2024, India intends to import 10,000 MW of electricity from Nepal over ten years. Nepal earned a record NPR 29.32 billion from electricity exports to India and Bangladesh in fiscal year 2025/26 (mid-July 2025 to mid-July 2026), and power trade with India is settled in Indian rupees.
3. Sectoral Opportunities
Hydropower and clean energy. This is the largest opportunity. Nepal targets 28,500 MW of generation by 2035, with 15,000 MW earmarked for export, of which 10,000 MW is planned for India. Opportunities exist in generation, transmission, solar, EPC contracting, equipment supply and power trading. Hydropower projects enjoy time-bound income tax holidays under Nepal’s Income Tax Act, subject to commissioning deadlines. Export sales depend on project-wise approvals by Indian authorities.
IT and digital services. IT-based industries face no minimum investment. The 2026/27 budget provides a 50% income tax exemption on IT export income and exempts sweat equity granted to IT employees. A young English-speaking workforce, the rupee peg and visa-free movement of Indian staff make Nepal a credible location for software development, BPO/KPO and back-office centres.
Manufacturing. Manufacturing works best where the product meets the Treaty of Trade’s rules of origin or where Nepal’s domestic demand is large, such as cement, steel products, packaging, FMCG, pharmaceuticals and processed food. The budget reduced customs duty on 273 industrial raw materials.
Tourism and wellness. Nepal has announced Wellness Year 2027 and Visit Nepal 2029. Hotels, resorts and wellness centres are open to foreign investment, while small tourism services such as travel agencies, tourist guiding and homestays are restricted.
Agro-processing. Primary agriculture (poultry, fisheries, beekeeping, fruits, vegetables, oilseeds, pulses, dairy) is restricted, except agricultural technology and mechanisation ventures exporting at least 75% of output. Food processing, cold chains, tea, herbs and essential oils remain attractive.
Healthcare, education, infrastructure and financial services. Hospitals, diagnostics, highways, airports under PPP and logistics parks are growing areas. In capital markets, the budget announced partial divestment of Nepal Telecom by mid-January 2027, permission for listed companies to issue Global Depositary Receipts, and a new Limited Liability Partnership law to encourage venture capital and private equity.
4. Legal Framework in Nepal
The key statutes are the Foreign Investment and Technology Transfer Act, 2019; the Industrial Enterprises Act, 2020; the Companies Act, 2006; the Public-Private Partnership and Investment Act, 2019; the Income Tax Act, 2002; the Value Added Tax Act, 1996; and the Labour Act, 2017.
Negative list. Following the March 2025 amendment, foreign investment is permitted in any industry other than those in the FITTA Schedule. The restricted list broadly covers primary agriculture (with the export exception), cottage and small industries, personal services such as hair-cutting and tailoring, arms and explosives, real estate business other than construction, retail trade, internal courier, local catering, money changers, remittance services, travel agencies, tourist guides, homestays, mass media, national-language films, and consultancy services with foreign ownership above 51%. The list is amended periodically and should be checked before planning.
Approval routes. Investments in the 102 listed industry types are approved online through the automatic route. Others are approved by the Department of Industry (DOI), while large projects above the prescribed threshold go through the Investment Board Nepal (IBN). Full foreign ownership is allowed in most open sectors, subject to sectoral caps in areas such as banking, insurance and aviation.
Technology transfer. FITTA also treats licensing, franchise, know-how and management agreements as foreign investment requiring approval, a useful route for Indian brands preferring royalty income over equity.
5. Setting Up: Step by Step
| Stage | Authority | Action |
|---|---|---|
| Name approval | Office of the Company Registrar (OCR) | Reserve company name online |
| Investment approval | DOI (automatic route) or IBN | Submit investor documents, business plan and source of funds |
| Incorporation | OCR | File MoA and AoA; obtain registration certificate |
| Industry registration | DOI or provincial authority | Register under the Industrial Enterprises Act |
| Capital inflow | Nepal Rastra Bank | Remit capital through banking channels and record the investment |
| Tax registration | Inland Revenue Department | Obtain PAN and VAT registration |
| Sector licences | Relevant regulators | Environmental clearances and sectoral permits |
Indian documents generally require notarisation and attestation or apostille. The budget envisaged Investment Express linking OCR, DOI, IRD, NRB and Immigration within three months; check its operational status before filing.
6. Taxation in Nepal
Nepal’s fiscal year runs from mid-July to mid-July. The table below reflects the budget for fiscal year 2026/27, with most provisions effective from 17 July 2026.
| Item | Treatment |
|---|---|
| Standard corporate tax | 25% |
| Banks, financial institutions, insurance, telecom, tobacco, alcohol, petroleum | 30% |
| Special manufacturing industries | 20% |
| IT export income | 50% exemption |
| Dividend withholding tax | 5%, final |
| Interest and royalties paid to non-residents | 15% under domestic law, subject to treaty relief |
| VAT | 13% |
| Personal income tax (residents) | 1% up to NPR 1 million; slabs of 10%, 20% and 27%; top rate 29% above NPR 4 million |
| Tax dispute settlement scheme | Pay principal tax plus 1% by around 14 January 2027, with interest and penalties waived |
Change in control. Nepal’s Income Tax Act treats a change of 50% or more in the underlying ownership of an entity within three years as a deemed disposal of its assets and liabilities. Upstream restructurings of an Indian group can therefore trigger tax in Nepal, and every exit or group reorganisation must be tested against this rule.
7. India Side: FEMA Overseas Investment
Investments in Nepal are governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022, the Foreign Exchange Management (Overseas Investment) Regulations, 2022 and RBI’s Master Direction on Overseas Investment. The TaxGuru-hosted Overseas Investment Directions, 2022 also sets out the operational framework.
Indian entities may invest under the automatic route within a total financial commitment of 400% of net worth as per the last audited balance sheet, with RBI’s prior approval required for commitments above USD 1 billion in a financial year. The current TaxGuru-hosted RBI Master Direction on Overseas Investment specifically records the USD 1 billion prior-approval threshold and the Form FC/reporting framework.
Prohibited activities. ODI is not permitted in a foreign entity engaged in real estate activity (buying and selling of real estate or trading in TDRs, though construction of townships, buildings, roads and bridges is allowed), gambling, or financial products linked to the Indian rupee, without RBI approval. Investment in start-ups must come from internal accruals.
Resident individuals may invest within the Liberalised Remittance Scheme limit of USD 250,000 per financial year, only in an operating entity not engaged in financial services, and not where the entity has subsidiaries or step-down subsidiaries in which the individual has control.
Layering and round-tripping. Structures that route Indian money to Nepal and back to India are closely examined, and the Rules restrict ODI-FDI structures with more than two layers of subsidiaries.
Reporting. Key filings include Form FC at the time of investment, the Annual Performance Report by 31 December every year based on audited accounts, the Annual Return on Foreign Liabilities and Assets where applicable, and reporting of disinvestment. Delays attract late submission fees and block further investment until regularised. The TaxGuru-hosted Overseas Investment Regulations, 2022 specifically addresses Form FC, APR and reporting through the designated AD bank.
8. India Side: Income Tax
The Income-tax Act, 2025 has replaced the Income-tax Act, 1961 with effect from 1 April 2026. The principles below continue, but advisors must map each provision to the new section numbers and forms.
DTAA. India and Nepal have a Double Taxation Avoidance Agreement signed in 2011. Treaty benefits require a Tax Residency Certificate and prescribed declarations, and are subject to anti-abuse tests. Verify the applicable rate for each payment against the notified treaty text. TaxGuru’s DTAA between India & Nepal records that the Agreement was signed on 27 November 2011 and entered into force on 16 March 2012.
Dividends and foreign tax credit. Dividends from a Nepali subsidiary are taxable in India, with credit for the 5% Nepali withholding tax. The mismatch between Nepal’s July-to-July year and India’s April-to-March year is a common reason for disallowed credits, so taxes paid must be mapped carefully to the correct Indian tax year. TaxGuru’s material on taxation of non-residents and foreign tax credit also discusses credit for foreign taxes paid or withheld under applicable DTAA provisions.
Place of Effective Management (POEM). A Nepali company whose key management and commercial decisions are, in substance, taken in India may be treated as an Indian resident and taxed on its global income. Promoters who run their Nepal company from India should ensure board meetings and key decisions genuinely take place in Nepal. TaxGuru’s Place of Effective Management in India (POEM) and CBDT Guiding Principles for determination of POEM provide detailed material on the issue.
Permanent establishment and transfer pricing. Indian staff stationed in Nepal for long periods, or project execution there, may create a permanent establishment. Transactions between the Indian parent and its Nepali subsidiary (goods, machinery, royalties, management fees, loans, guarantees) are international transactions subject to arm’s length requirements in India. TaxGuru’s current Transfer Pricing in India under the New Income Tax Act, 2025 covers international transactions and the arm’s-length framework.
Foreign asset disclosure. Indian residents holding shares in a Nepali company, or with signing authority over a Nepali bank account, must disclose them in the foreign assets schedule of their Indian return. Non-disclosure can attract serious consequences under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. TaxGuru also hosts the Brief on the Black Money Act and the full Act.
9. Repatriation and Exit
FITTA guarantees repatriation of dividends, share sale proceeds, liquidation proceeds, royalties and loan repayments after payment of taxes. The 2025 amendments removed the need for NRB approval for repatriating investment once the prescribed process is completed, and the 2026/27 budget proposes a notification-only system for profit repatriation. Confirm that the enabling amendment has been enacted before relying on it. Record every inward remittance with NRB from day one, obtain tax clearance before remitting, and analyse the change in control rule before any exit.
10. Operating Realities
Land. Foreigners generally cannot own land in their own name, but a Nepali company with foreign investment can acquire or lease land for its industry with approvals. The budget also proposes long-term apartment leases for foreign investors, up to 25% of units in a building in designated locations.
Labour costs. Employers contribute to the Social Security Fund, with a total contribution of 31% of basic remuneration (20% by the employer and 11% by the employee). The Bonus Act requires eligible enterprises to allocate 10% of net profit (before bonus and tax) as employee bonus, which must be built into financial models.
FATF grey list. Nepal was placed on the FATF grey list in February 2025 and remained on it after the June 2026 plenary. The FATF does not call for enhanced due diligence merely because of the listing, but banks may seek more documentation on source of funds and beneficial ownership.
11. Risks and Mitigation
| Risk | Mitigation |
|---|---|
| Implementation gap (only about 30% of approved FDI realised historically) | Phase investment; link capital calls to milestones; use experienced local counsel |
| Policy continuity | Record incentives and terms in approval letters and agreements |
| Weak growth (World Bank projected 2.3% for 2026) | Use conservative demand assumptions; prefer India-linked or export revenue |
| FATF grey list | Maintain clean KYC, beneficial ownership and source-of-funds documentation |
| LDC graduation (due 24 November 2026; Nepal has sought deferral to November 2029) | Exporters to third countries should model the loss of LDC trade preferences |
| Tax disputes and change in control | Structure exits carefully; use the current settlement scheme for legacy issues |
| Contract enforcement | Include robust arbitration clauses in all agreements |
12. Pre-Investment Checklist
| Area | Key question |
|---|---|
| Sector | Is the activity outside the negative list? Is it on the automatic route? |
| Size | Does it meet the NPR 20 million minimum (unless IT)? |
| Structure | Subsidiary, joint venture or licence? Is there genuine commercial substance? |
| FEMA | Eligible under the automatic route? Within 400% of net worth? Any prohibited activity? |
| Tax | Nepali tax, 10% bonus, 5% dividend tax, Indian tax and credit timing, transfer pricing |
| Residence | Where are real management decisions taken (POEM)? Any PE exposure? |
| Compliance | Form FC, APR, FLA, foreign asset disclosure, Nepali annual filings |
| Exit | Change in control exposure; repatriation path |
13. Conclusion
For Indian businesses, Nepal offers a combination found nowhere else: a currency pegged to the rupee, investment in rupees, no visa barriers for Indian staff, duty-free access to India for qualifying goods, a growing market for hydropower in India, and a government with a clear mandate that is removing old procedural barriers. The risks are equally real, and Nepal’s challenge has historically been execution rather than policy. Investors who phase their commitments, keep FEMA and tax compliance clean on both sides of the border, manage their Nepali entity from Nepal, and build genuine local partnerships are best placed to benefit.
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About the Author: Tej Prakash Dixit, a Chartered Accountant practicing in Nepal. Email: [email protected]
