How Nepal's 753 Local Levels Are Funded: Fiscal Transfers & Grants

After Nepal adopted federalism under the 2015 Constitution (Bikram Sambat 2072), the country was restructured into three tiers of government: the federal (union) government, seven provinces, and 753 local levels. These local levels comprise 6 metropolitan cities (mahanagarpalika), 11 sub-metropolitan cities (upa-mahanagarpalika), 276 municipalities (nagarpalika) and 460 rural municipalities (gaunpalika), each an elected, self-governing unit with its own annual budget.

Because most buoyant taxes (customs, the bulk of value-added tax, corporate income tax) remain federally administered, local levels cannot fund themselves from own-source revenue alone. The Constitution therefore builds in a system of intergovernmental fiscal transfers so that money flows from the centre to sub-national governments to match their spending responsibilities with the resources available to them.

A local level's income comes from four broad channels: (1) intergovernmental fiscal transfers, i.e. the four grants; (2) a constitutionally guaranteed share of federally collected revenue (VAT, excise and natural-resource royalties); (3) its own tax and non-tax revenue; and (4) internal borrowing, which is tightly capped and requires NNRFC approval. The grants and the revenue share are, by far, the largest components for most units.

The legal architecture rests on two 2017 laws (BS 2074): the Intergovernmental Fiscal Arrangement Act, 2074, which defines the grants and revenue-sharing rules, and the National Natural Resources and Fiscal Commission Act, 2074, which sets up the commission that recommends the transfer amounts and formulae. Together with Schedules 8 and 9 of the Constitution, they form the backbone of fiscal federalism in Nepal.

The Intergovernmental Fiscal Arrangement Act, 2074 creates four distinct grants, each with a different purpose and degree of spending freedom. The fiscal equalisation grant (samaniti anudan), governed by Section 8 of the Act and Section 16 of the NNRFC Act, is the workhorse. It is an unconditional, formula-based grant that local levels can spend at their own discretion within their approved budget. Its job is to close the gap between what a local level needs to spend to deliver services and what it can raise on its own.

The conditional grant (sashart anudan), under Section 9, is tied to specific programmes and projects that the federal or provincial government wants delivered locally — for example teacher salaries, health posts, or nationally prioritised schemes. It must be spent strictly on the prescribed purpose and under the terms attached; unspent conditional money is generally returned. In practice, conditional grants are often the single largest transfer by value because they carry sectoral spending such as basic education and health.

The complementary or matching grant (samapurak anudan), under Section 10, co-finances infrastructure projects. The local level puts up part of the cost and the centre matches it, provided the project is appraised as feasible on cost, expected outputs, implementation capacity and priority. The special grant (bishesh anudan), under Section 11, is discretionary funding used to lift basic services such as education, health and drinking water, to reduce imbalances between units, and to uplift communities facing socio-economic discrimination.

The key practical distinction for local officials is spending freedom: the equalisation grant is untied money for local priorities, while conditional, complementary and special grants are earmarked and come with reporting conditions. All four are drawn from the Federal Consolidated Fund and released to local levels' consolidated funds.

The fiscal equalisation grant is not shared out equally or by political bargaining; it is calculated by the National Natural Resources and Fiscal Commission (NNRFC), a constitutional body, using a needs-and-capacity formula. The core idea is simple: estimate each unit's expenditure need, estimate its revenue capacity (the revenue it could reasonably raise), and direct more grant to units with high needs and low capacity. This is the essence of 'equalisation' — narrowing the fiscal gap between rich and poor local governments.

The expenditure-need side of the formula is built from a basket of indicators. Alongside population and geographic area (which drive the raw cost of delivering services), the NNRFC weighs the Human Development Index (HDI) so that units with weaker health, education and income outcomes receive more; the status of balanced development / infrastructure, so that under-served units are prioritised; the requirement of resources for public-service delivery; and the status of socio-economic discrimination, which channels support toward historically marginalised communities. Cost-of-service and geography (remoteness, terrain) also raise the assessed need of Himalayan and remote units.

The revenue-capacity side estimates how much a unit can realistically mobilise from its own taxes, fees and revenue share. A unit's equalisation entitlement rises as assessed need exceeds assessed capacity. The commission publishes indicator weights each year; in its recommendation the formula-based portion carries the dominant weight, with expenditure need and revenue capacity together the heaviest factor and HDI, socio-economic inequality and infrastructure/balanced-development status contributing measurable shares.

The equalisation transfer to local levels is delivered in three tranches: a minimum (floor) grant that every unit receives regardless of the formula, a formula-based grant computed as above, and a smaller performance-based grant rewarding units that score well on the annual Local Government Institutional Self-Assessment (LISA) and similar measures. This structure guarantees a baseline for small units while still rewarding need and performance.

For fiscal year 2082/83 BS (2025/26 AD), the NNRFC recommended (in its March 2026 recommendation to the Ministry of Finance) a total fiscal equalisation grant of about Rs 151.71 billion for provinces and local levels combined. Of this, roughly Rs 61.50 billion was recommended for the seven provinces and about Rs 90.20 billion for the 753 local levels. These are recommendation figures; the amount finally appropriated through the Red Book can differ from what the commission proposes.

The recommendation set a minimum (floor) equalisation grant for local levels of around Rs 30.83 billion in aggregate — the guaranteed baseline distributed before the formula-based and performance-based portions are added. The minimum per-unit grant is designed so that even the smallest units are not left short: local levels with a population below 10,000 are recommended to receive not less than about Rs 2.75 crore (Rs 27.5 million) each.

These amounts fall from the previous year. The commission itself signalled that the FY 2082/83 equalisation envelope was trimmed (by roughly 8.5 percent for the pool) against the current year, reflecting weaker federal revenue collection and tighter budget ceilings set by the National Planning Commission. For comparison, in the current fiscal year the government appropriated on the order of Rs 88–89 billion in equalisation grant to local levels and about Rs 60 billion to provinces.

Readers should treat all rupee figures here as fiscal-year snapshots that are revised annually; always check the latest NNRFC recommendation and the Ministry of Finance Red Book for the year in question, because both the totals and the minimum per-unit floor are re-set each budget cycle.

Beyond the grants, local levels are constitutionally entitled to a share of certain revenues that the federal government collects. Under the Intergovernmental Fiscal Arrangement Act, 2074, value-added tax (VAT) and excise duty collected on domestic (internal) production are pooled into a Federal Divisible Fund and split 70:15:15 among the federal government, provinces and local levels respectively. This gives every local level an automatic, formula-driven flow of money that grows with the national economy.

Natural-resource royalties are shared on a different basis. Royalties from mountaineering, hydro-electricity, forests, mines and minerals, and water and other natural resources are divided 50:25:25 among the federal government, provinces and local levels. The provincial and local shares are then distributed among individual units, giving communities near a resource a stake in its exploitation.

Revenue sharing differs from equalisation in an important way: it is a rules-based entitlement tied to where and how much revenue is raised, not a needs-based transfer. As a result it tends to favour economically active and resource-rich areas, which is precisely why the equalisation grant exists alongside it — to redistribute toward units that collect little on their own.

The Constitution's Schedule 8 grants local levels their own taxing powers, and the Local Government Operation Act, 2074 spells them out. The mainstays are the integrated property tax (which merges the old separate land and house taxes into a single levy on combined land-and-building value), the house rent tax, and the business tax (a levy on trades, professions and enterprises operating in the unit). The Act caps the aggregate integrated property-tax rate on land-and-building value at a modest ceiling to prevent over-taxation.

Local levels can also levy a land tax / land revenue (malpot), a vehicle tax on smaller vehicles, an entertainment tax, and an advertisement tax, plus service charges, tourism fees, and various registration and administrative fees. Fines and the sale of local services round out non-tax income. These instruments give councils real fiscal autonomy, but for most units — especially rural municipalities — own-source revenue remains a minority of the budget compared with transfers.

Strengthening own-source revenue is a recurring policy theme: better property valuation rolls, digitised billing, and clearer demarcation of overlapping taxes between provinces and local levels (for instance vehicle and entertainment taxes) are seen as the route to more self-reliant local governments. Until that matures, the equalisation and conditional grants will remain the financial foundation of the 753 local levels.

The transfer system is the single biggest determinant of whether a local level can actually deliver the services it is constitutionally responsible for — basic and secondary education, primary health care, local roads, drinking water, sanitation and local economic development. Small, remote and low-income units depend on transfers for the overwhelming majority of their budgets; without equalisation, service standards would diverge sharply across the country.

The design also embeds accountability. Because the NNRFC uses a transparent, published formula and because performance-based grants reward units that plan, spend and report well, the system nudges local governments toward better financial management. At the same time, debates continue over whether the equalisation pool is large enough, whether conditional grants leave enough local discretion, and whether provinces and local levels should get more predictable multi-year figures rather than annually adjusted envelopes.

For students, journalists, civil-service aspirants and local officials, the practical takeaways are: know the four grants and their governing sections; understand that equalisation is needs-and-capacity based while revenue sharing is origin based; and always cite figures with their fiscal year, because the totals and the per-unit floor are revised every budget.