KRA issues guidelines on tax-free gratuity payments

The Kenya Revenue Authority (KRA) has released detailed guidelines on the tax exemption for gratuity payments, following amendments to the Income Tax Act under the Finance Act, 2025.

Gratuity is a lump-sum payment made by an employer to an employee at the end of their service, usually as a token of appreciation for their contribution over the years. It is common in both the private and public sectors, often paid upon retirement, contract completion or resignation, depending on the terms of employment. In Kenya, gratuity has historically been subject to income tax, but the latest amendments have changed how it is treated.

According to KRA, gratuity earned from July 1, 2025, onwards will be exempt from income tax. However, gratuity relating to service periods before this date, even if paid after July 1, 2025 will still be subject to taxation.

The authority explained that taxable gratuity will be treated as part of employment income and taxed in the year it was earned. Employers are required to apportion such payments to the relevant service periods, for up to four years back. Any balance covering earlier years will be deemed income for the fifth year. The gratuity will then be combined with other earnings for the respective years and taxed at the rates applicable at that time.

The tax payable will be the difference between the total tax calculated on the consolidated amount and any tax already paid on prior earnings.

KRA also clarified that ;

• gratuity paid into a registered pension scheme for service before July 1, 2025, will not be taxed, provided it falls within the allowable pension contribution limits for the relevant years and the employee has not previously claimed a deduction for those contributions.

• Employers must also account for the correct taxes when making gratuity payments upon retirement.
• For public pension schemes already exempted from tax under the Tax Laws (Amendment) Act, 2024, these guidelines will still apply for service periods before December 27, 2024.A public pension scheme refers to one paying benefits from the Consolidated Fund.

The gratuity tax exemption was one of the key provisions in the Finance Bill, 2025, which received Cabinet approval in April and was later signed into law.

The Bill aimed to close tax loopholes, improve efficiency and streamline revenue collection processes, including reforms to the Income Tax Act, VAT Act, Excise Duty Act and Tax Procedures Act.