Abstract: This study test optimal seignorage model over the period 1950 to 2003 in SARC countries. Present findings investigate the relationship between inflation rate, tax rate and creation of money rate by The Engle-Granger and Phillips-Ouliaris tests. Present results suggest that the rate of creation of money, tax rate and inflation rate have no cointegration relationship except the tax rate and inflation rate in case of India and the creation of money rate and inflation rate in case of Buhtan. Present results imply that if policy maker wants to increase social welfare and want to see long-run relationship between these parameters then it may be necessary to endow the political, military and social environment with appropriate enforcement devices with respect to the economy’s targets, choices and preferences.