The Kenya Revenue Authority (KRA) has issued a significant public notice on August 12, 2025, outlining updated guidelines on tax exemptions for gratuity payments.
This follows amendments to the Income Tax Act introduced under the Finance Act, 2025, which took effect on July 1, 2025. The move aims to provide clarity for employers and employees regarding the taxation of gratuity, a critical component of retirement benefits in Kenya.
The new regulations stipulate that gratuity earned on or after July 1, 2025, will be fully exempt from income tax.
This exemption marks a notable shift in policy, offering relief to workers receiving these payments as part of their retirement packages.
However, the notice specifies that gratuity earned prior to this date will not enjoy the same privilege and will be treated as part of taxable employment income.
For gratuity earned before the effective date, KRA has introduced a structured approach to taxation. The amount will be spread across the year it was earned, covering up to four years retrospectively. Any remaining balance will be deemed income in the fifth year and taxed at the applicable rates. This phased approach aims to ensure a fair distribution of the tax burden over time.
Employers play a pivotal role in implementing these new rules. The notice requires them to consolidate gratuity payments for each relevant year and apply the prevailing tax rate.
To avoid double taxation, employers must account for any tax already paid on emoluments, with the difference between the consolidated amount and prior payments being the taxable portion. This process is designed to streamline compliance for businesses.
Another key provision addresses gratuity paid into registered pension schemes. Such amounts will not be subject to tax, provided they fall within prescribed limits for the respective years of income.
This exemption applies particularly to employees who did not previously claim deductions for pension contributions, offering a potential tax saving opportunity for those enrolled in such schemes.
The guidelines also reinforce the responsibilities of employers regarding tax accountability. Even with the new exemptions, employers are still required to account for applicable taxes on gratuity payments made upon an employee’s retirement. This ensures that the tax system remains robust while accommodating the updated exemptions.
A significant exemption was highlighted for gratuity paid out of public pension schemes. Thanks to the Tax Laws (Amendment) Act, 2024, effective from December 27, 2024, these payments are exempt from tax. The new guidance will apply retroactively to periods prior to this amendment, providing further relief to public sector retirees.
The KRA has encouraged the public to access additional details by logging into the itax.kra.go.ke portal using their ID numbers. This online platform will serve as a key resource for employers and employees seeking to understand and comply with the new regulations. The authority emphasized the importance of staying informed to avoid potential tax disputes.
As the implementation of these guidelines begins, the notice underscores KRA’s commitment to modernizing tax policies to support Kenya’s workforce. This development is expected to have a lasting impact on retirement planning across the country.
