What Are the Mandatory Deductions for Bhutanese Employees under DRC Guidelines?

Managing payroll in Bhutan requires employers to correctly identify the deductions that must be made from an employee’s salary and the amounts that must be remitted to the relevant authorities or funds. For 2026, the Department of Revenue and Customs (DRC) administers personal income tax and employer withholding requirements under the Income Tax Act of Bhutan 2025, which came into effect on 1 January 2026.

For payroll purposes, the main statutory items to consider are Personal Income Tax (PIT)/salary TDS and applicable Provident Fund (PF) and Government Insurance Scheme (GIS) contributions. The exact deductions depend on the employee's circumstances and whether the employee is covered by the relevant scheme.

1. Personal Income Tax (PIT) Withholding

Personal Income Tax is one of the key deductions employers need to consider when processing salary.

Under the Income Tax Act of Bhutan 2025, individual taxable income is subject to progressive tax rates beginning at a nil rate up to Nu. 300,000 and increasing through successive income brackets.

For employees, the employer is responsible for applying the applicable salary withholding calculation and deducting the required amount from salary.

The DRC has also published a specific withholding tax schedule for employers for income year 2026, based on monthly salary.

This means payroll teams should not simply apply a single percentage to every employee. The applicable withholding amount needs to be determined using the current DRC salary TDS schedule and the employee's relevant taxable salary information.

2. Provident Fund (PF) Contribution

Provident Fund contributions are another important payroll consideration.

For employees covered by a private provident-fund arrangement, the National Pension and Provident Fund (NPPF) states that the minimum contribution for a private agency is:

• 5% employer contribution
• 5% employee contribution

The contribution is calculated on the employee's monthly basic pay under the applicable private provident-fund arrangement.

The employee's contribution is therefore deducted through payroll, while the employer makes its corresponding contribution.

Example

Suppose an employee's monthly basic pay is Nu. 40,000 and the applicable PF rate is 5% for both employee and employer:

Employee PF contribution:
Nu. 40,000 × 5% = Nu. 2,000

Employer PF contribution:
Nu. 40,000 × 5% = Nu. 2,000

The employee's Nu. 2,000 contribution would be reflected as a payroll deduction, while the employer's Nu. 2,000 is an additional employer contribution rather than a deduction from the employee's salary.

Employers should verify the employee's applicable provident-fund arrangement before applying the rate because contribution requirements can differ by employment category or scheme.

3. Government Insurance Scheme (GIS)

GIS is relevant to employees covered by the applicable Government Insurance Scheme arrangements.

The DRC's salary-tax guidance has historically treated PF and GIS contributions as specific deductions from salary income when calculating adjusted salary income.

Therefore, payroll administrators should distinguish GIS from ordinary income-tax withholding and apply it only where the employee is covered by the relevant scheme.

In other words, GIS should not automatically be treated as a universal deduction for every employee in Bhutan. The employee's employment status and applicable scheme should be checked before processing the deduction.

4. Salary TDS and PF Are Different

A common payroll mistake is treating all deductions as income tax.

PIT/TDS and PF serve different purposes:

Deduction	Purpose	Employee salary deduction?
PIT / Salary TDS	Collection of personal income tax	Yes, where applicable
Employee PF contribution	Retirement/provident-fund savings	Yes, where applicable
Employer PF contribution	Employer-funded retirement contribution	No
GIS contribution	Government insurance/social-security-related coverage	Where applicable

This distinction is important when calculating net salary and preparing payroll reports.

5. Calculate Taxable Salary Correctly

Employers should establish the employee's taxable salary before calculating the applicable withholding amount.

Employment income can include more than basic salary. DRC's PIT information identifies employment income as including items such as basic salary, allowances, fees and remuneration, bonuses, commissions, leave encashment, certain profit shares, consultancy income and benefits.

Therefore, payroll systems should consider the relevant components of compensation rather than assuming that basic salary alone represents taxable employment income.

6. Account for PF and GIS Before Relevant Tax Calculation

For salary income, DRC guidance identifies PF and GIS contributions as specific deductions.

This is particularly important because the amount used for tax purposes may differ from gross salary.

A simplified payroll flow can therefore be represented as:

Gross salary and taxable employment benefits
↓
Identify applicable PF/GIS deductions and other permitted adjustments
↓
Determine taxable salary
↓
Calculate applicable PIT/TDS
↓
Deduct employee contributions and tax
↓
Calculate net salary

The actual calculation should follow the current DRC rules and applicable employee-specific circumstances.

7. Employers Must Maintain Payroll Records

Correct deduction is only one part of compliance. Employers should maintain supporting payroll documentation, including:

• Employee salary records
• Basic salary and allowance details
• PF contribution records
• GIS records, where applicable
• PIT/TDS calculations
• TDS certificates or supporting documents
• Payroll registers
• Evidence of tax and contribution payments
• Annual salary information

DRC guidance also refers to supporting documents such as TDS certificates and payslips when salary income is being adjusted and verified.

8. Use the Current 2026 DRC Rules

Employers should be careful when using older Bhutan payroll tables. The Income Tax Act of Bhutan 2025 applies from 1 January 2026, and DRC has published updated employer withholding information for income year 2026.

The DRC website also provides employer-related resources, including the Withholding Tax Rates for Employers, Revised TDS Schedule for Monthly Salary Income, and salary TDS filing forms.

Payroll software should therefore be configured using the current DRC tables rather than relying on historical salary-tax schedules.

9. What Should Employers Check Each Month?

A practical Bhutan payroll compliance checklist can include:

1. Confirm the employee's employment and tax status.
2. Calculate gross salary and applicable taxable benefits.
3. Identify applicable PF and GIS contributions.
4. Calculate the employee's applicable PIT/TDS.
5. Deduct employee contributions and tax from payroll.
6. Add employer-funded contributions separately where applicable.
7. Reconcile payroll deductions with payment records.
8. Maintain payslips and supporting documents.
9. Submit required TDS information to DRC within the prescribed deadlines.
10. Review DRC updates before processing payroll.

Conclusion

For Bhutanese payroll, the principal statutory deductions to consider are PIT/salary TDS and applicable employee PF and GIS contributions. However, these items should not be treated as identical or automatically applicable to every employee.

PIT/TDS is an income-tax withholding obligation administered by DRC, while PF and GIS relate to applicable retirement or insurance arrangements. The DRC's current 2026 rules and schedules should be used when calculating salary deductions.

For employers, maintaining accurate employee records, applying the correct current rates, separating employee deductions from employer contributions, and reconciling payroll with statutory payments are essential steps for Bhutan payroll compliance.

Note: The applicability and rate of PF/GIS can depend on the employee's employment category and applicable scheme. Employers should verify the latest DRC and NPPF requirements before finalizing payroll calculations.