The Kenya Revenue Authority (KRA) has announced that gratuity payments earned from July 1, 2025, will no longer be subject to income tax, following changes introduced by the Finance Act, 2025.
In a public notice, the taxman explained that the amendment to the income tax Act applies to both employees and employers and is aimed at easing the financial burden on retirees and other beneficiaries.
However, KRA emphasised that the exemption only covers gratuity earned after the effective date, not payments related to earlier service periods.
Gratuity earned before July 1, 2025 even if paid after this date, will still attract income tax.
The notice states that such amounts should be treated as part of employment income in the year they were earned, with the taxable amount spread across the relevant years, up to four years back.
Any sums relating to periods beyond four years will be deemed income of the fifth year.
“The gratuity will then be taxed at the applicable tax rates in the respective years,” the notice issued by Commissioner, micro and small taxpayers reads.
Employers are required to consolidate the gratuity for each applicable year with other employment income earned by the employee during that period and apply the prevailing tax rates for those years.
The tax payable will be the difference between the total tax on the consolidated income and what was already remitted on the earlier emoluments.
KRA further clarified that where an employer pays gratuity for pre-July 2025 periods into a registered pension scheme, the amounts will not be taxed, provided they fall within the prescribed limits for the respective years of income.
“This shall apply to the extent that employee had not enjoyed deduction for pension contribution in the respective years of income,” it states.
Employers are also reminded that when paying gratuity upon retirement, they must still account for taxes due on amounts related to pre-July 2025 service in accordance with the guidelines.
For gratuity paid from public pension schemes, which were exempted from tax by the Tax Laws (Amendment) Act, 2024, effective December 27, 2024, the same rules will apply to any service periods before that exemption took effect.
A public pension scheme, KRA said, is defined as a pension scheme that pays pensions or lump sums out of the consolidated fund.
KRA urged employers and employees to familiarise themselves with the rules to ensure correct tax compliance and avoid penalties.
