Africa-Press – Kenya. Sections of Kenyan employees were handed reprieve on Tuesday after the Kenya Revenue Authority (KRA) announced tax exemptions on gratuity payments earned after July 1.
This change, introduced through the Finance Act, 2025, effectively means that employees will keep more of their end-of-service payments in a policy shift aimed at easing the burden on taxpayers, especially retirees and those leaving long-term jobs.
“Gratuity payments earned after 1st July 2025 are now exempt from income tax. This applies to both employees and employers,” a statement from KRA read.
Gratuity is a lump sum paid to employees by their employer when they retire or leave a job after years of service. Previously, gratuity was treated as part of the employee’s income and taxed accordingly.
The exemption cuts across both public and private sectors and includes employers who pay gratuity directly and those who remit it through pension schemes.
In its statement, KRA explained that while a tax exemption was in place, the tax break did not apply to gratuity earned before July 1. If payment is for work done before July 1, that payment will still be subject to tax, even if it is paid after July 2025.
In such a case, employers will have to calculate how much of the gratuity belongs to each past year (for up to four years) and apply the tax rates that were in effect during those years. If the gratuity covers more than four years, the remainder will be treated as income for the fifth year.
To determine tax liability, KRA directed employers to add the gratuity amount to the employee’s other earnings from the same years and calculate tax based on the total income.
If the employee has been tax compliant and was paying taxes on part of their income during that time, only the difference will be required to be paid.
The KRA also clarified that there is some relief for employers who choose to pay gratuity into a registered pension scheme instead of paying directly to the employee. In such cases, the amount may be tax-free, but only if certain conditions are met.
One of the conditions that needs to be met is that the employee must not have already received a tax benefit for the contribution. The payment must also fall within the limits set by tax laws.
The taxman also reiterated that even when an employee retires, the obligation to correctly account for taxes on gratuity earned before July 1, 2025, still stands.
Additionally, gratuity payments from public pension schemes were granted a separate exemption effective December 27, 2024, under the Tax Laws (Amendment) Act, 2024.
Regardless, any gratuity earned before that date will still be subject to the earlier tax rules, following the same method of allocation and assessment described above.
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