Nepal Budget 2026/27: Rs 2.12 Trillion Highlights

Finance Minister Dr. Swarnim Wagle presented Nepal's largest-ever budget on May 29, 2026 — Rs 2.124 trillion for fiscal year 2026/27, a 25.2 percent jump over the revised estimates of the previous year. The announcement, delivered to a parliament still navigating the aftermath of the March 2026 snap elections, covers everything from doubling the income tax exemption threshold to splitting the Nepal Electricity Authority into three separate entities. Here is what the numbers actually mean.

The Numbers: Rs 2.124 Trillion, Up 25.2 Percent

The total budget of Rs 2,124.34 billion breaks into three broad buckets. Recurrent expenditure — salaries, pensions, day-to-day operations — accounts for the largest share at Rs 1,270.58 billion, or 59.8 percent of the total. Capital expenditure for infrastructure and development comes to Rs 431.10 billion (20.3 percent), and financial management obligations, including principal repayments and borrowings, make up Rs 422.64 billion (19.9 percent).

For comparison, the revised estimates for FY2025/26 stood significantly lower. The 25.2 percent year-on-year increase is the sharpest single-year expansion in recent memory, driven partly by the civil service salary hike (discussed below) and by the government's stated ambition to accelerate public investment after years of budget underspending. Nepal's capital expenditure absorption rate has chronically lagged — the FY2026/27 target of Rs 431.10 billion will require sharply improved project execution from line ministries that have historically spent less than 70 percent of their capital allocations by fiscal year-end.

Revenue targets are anchored to 7 percent GDP growth and an inflation ceiling of 6 percent. Through the 10 months of FY2025/26, total government revenue reached Rs 988.55 billion — tax revenue of Rs 893.56 billion and non-tax of Rs 94.99 billion — suggesting the revenue base is broadly on track, but dependent on continued strong remittance-driven consumption.

Tax Relief for Individuals and Businesses

The most immediately felt change for salaried workers is the doubling of the income tax exemption threshold from Rs 600,000 to Rs 1,000,000 per year. For a government employee or private sector worker earning below Rs 1 million annually, this means paying zero income tax on regular employment income. The Finance Ministry estimates this benefits the majority of formally employed Nepalis, particularly those in the Rs 600,000–1,000,000 income band who were previously taxed at the lowest rate.

Beyond the exemption threshold, the maximum personal income tax rate has been cut by 10 percentage points. The previous top marginal rate applied to higher-bracket taxpayers; the reduction is intended to bring Nepal's personal tax structure closer to regional peers and reduce the incentive to under-declare income.

On the trade side, customs duty tiers have been simplified from 11 to 7 bands. The Department of Customs and tax economists have long noted that a high number of rate tiers creates classification disputes and invites manipulation at the border — fewer tiers with cleaner definitions should reduce misclassification. Capital gains tax has also been adjusted, with changes intended to improve market confidence at a time when NEPSE has shed roughly 8 percent over three months from its earlier peak near 2,940 points, closing at 2,681 on June 23, 2026.

Salary Hike and the Civil Service

The 21 percent net salary increase for civil servants — composed of a 10 percent base scale hike plus a 10 percent performance allowance — is the most consequential single line item for the recurrent budget. Nepal's civil service spans several hundred thousand employees at the federal, provincial, and local government levels, and pension obligations run alongside active salaries.

The budget also introduces a bi-weekly salary payment system for government employees, which Finance Minister Wagle described as a first for South Asia. Currently, government salaries are paid monthly; the shift to fortnightly payments is intended to improve household cash flow management and reduce informal borrowing among lower-paid government workers. Implementation will require upgrades to the financial management information system used by the Office of the Comptroller General.

The sustainability question is straightforward arithmetic. A 21 percent salary increase applied to a large civil service, on top of an already high recurrent expenditure share (59.8 percent of the total budget), leaves limited room for capital spending to grow proportionally. Critics in Kathmandu's economic community note that if capital expenditure absorption remains poor — as it has been historically — the effective fiscal outcome could be a budget that funds salaries well but continues to underperform on infrastructure delivery.

Energy: 1,040 MW Addition and NEA Restructuring

Nepal's electricity sector is the budget's most technically ambitious chapter. The government has targeted an addition of 1,040 megawatts of generating capacity in FY2026/27 — 670 MW from hydropower and 370 MW from solar. The grid budget stands at Rs 85.54 billion, covering transmission line upgrades, substation construction, and rural electrification.

The structural change is the proposed split of the Nepal Electricity Authority into three separate entities handling generation, transmission, and distribution respectively. The NEA has operated as a vertically integrated monopoly since its establishment, and the proposed unbundling mirrors reforms undertaken by utilities in India and Bangladesh over the past two decades. Proponents argue separation will improve accountability and attract private investment into individual segments; critics question whether Nepal's institutional capacity is ready to manage three regulatorily distinct entities simultaneously.

The energy targets carry added significance given that Nepal currently imports electricity from India during the winter deficit months — a fact that bears directly on the Sovereign AI Centre proposal discussed below.

Sovereign AI Centre, 7% Growth Target, and Economist Skepticism

Among the budget's headline announcements, the proposed Sovereign AI Computing Centre in Syuchatar, Kathmandu has attracted the most debate. The budget allocates funds to purchase AI processors and provide subsidised computing access to 10,000 young entrepreneurs and startups. Columbia University professor Dr. Sameer Maskey of Fusemachines is listed as an advisor to the initiative.

Two specific concerns have been raised publicly. First, location: Syuchatar sits in Kathmandu Valley, which carries significant seismic risk — the 2015 earthquake demonstrated the vulnerability of concentrated infrastructure within the valley. Second, power reliability: a data centre running AI workloads requires uninterrupted power supply 24 hours a day, but Nepal is currently a net electricity importer from India during winter months. Until Nepal's own generation surplus is confirmed as year-round and grid-stable, the concept of a hydropower-powered AI centre relies on infrastructure that does not yet fully exist.

The broader growth target of 7 percent GDP has been met with open skepticism from Nepal's economics community. Nepal Rastra Bank and international institutions project FY2025/26 GDP growth at approximately 3.85 percent — less than half the 7 percent target set for the coming year. The fuel crisis triggered by the US-Israel-Iran conflict, which pushed petrol to Rs 202 per litre and prompted the introduction of a two-day weekend from April 5, has weighed on economic activity. Consumer price inflation rose to 5.04 percent in mid-May 2026, up from 2.77 percent a year earlier, and private investment has remained cautious given tight credit conditions — banks held deposits of Rs 8.017 trillion against loans of Rs 5.915 trillion, a credit-deposit ratio of 73 percent that reflects excess liquidity but not active lending.

Economists who have publicly commented on the budget do not dispute the direction of the reforms — tax simplification, salary normalisation, and energy investment are broadly supported. What they contest is whether 7 percent growth is a realistic planning assumption or an aspirational number that will result in revenue shortfalls by the second quarter of implementation.

What Comes Next

The FY2026/27 budget is a statement of intent from a government that came to power on a reform mandate after the March 2026 elections swept the Rastriya Swatantra Party to a near two-thirds majority. Finance Minister Wagle's "low rates, high revenue" framing reflects a supply-side logic: reduce tax friction, raise compliance, grow the base. The income tax threshold doubling and customs simplification fit that framework directly.

Implementation is where past Nepali budgets have faltered. The capital expenditure target of Rs 431.10 billion will not be met without significantly better project readiness and procurement at the ministry level. The NEA restructuring requires legislation. The AI Centre requires a site decision, procurement, and a power guarantee that depends on grid investments still being built. The bi-weekly salary system requires systems upgrades at the Comptroller General's office.

Nepal's foreign exchange reserves stood at Rs 3,704.55 billion (USD 24.19 billion) in mid-May 2026 — sufficient to cover 22.6 months of merchandise imports — and remittance inflows grew 41.2 percent year-on-year through 10 months of FY2025/26. The macroeconomic foundation is, by NRB's own assessment, stable. The FY2026/27 budget now has 12 months to demonstrate whether stability can translate into the structural acceleration that the 7 percent growth target requires.