The king has been under pressure since fiercely-republican Maoists signed a peace deal with mainstream parties last year and entered Kathmandu's corridors of power.
The latest government move adds to signs that he may soon be removed.
"The government has not allocated any money in this year's budget for the king ... the royal budget has been totally scrapped," said Prem Khanal, a senior business reporter at the English-language Kathmandu Post newspaper.
"If any money had been allocated for the palace, it would have been unlikely to have been approved," he said.
Nepal's Maoists welcomed the scrapping of cash for the palace.
"The tradition of providing an annual allowance to the royal family has been broken and this is a positive sign," Dev Gurung, a Maoist leader and minister, said.
Gyanendra came to the throne in 2001 in tragic circumstances after an apparently drunk and drugged Crown Prince Dipendra killed most of his family, including the king and queen, and then himself.
Although viewed by loyalists as the reincarnation of a Hindu deity, King Gyanendra lost public support in February 2005 when he sacked the government and assumed direct control.
A 14-month period of dictatorial rule ended in April last year after massive protests organised by sidelined political parties and Maoists rocked the country.
Since the peace deal brought the Maoists into Kathmandu, the king has been stripped of most of his powers.
Gyanendra's fate is set to be decided after polls in November that will elect a body to rewrite Nepal's constitution - and decide whether the 238-year-old monarchy should stay or go.