On 12th August 2025, the Kenya Revenue Authority (KRA) issued a public notice providing clarity on how gratuity payments will be taxed following amendments to the Income Tax Act through the Finance Act, 2025. Under the new law, gratuity earned after 1st July 2025 will be exempt from income tax. However, gratuity earned or relating to periods before this date, even if paid later, will still be subject to taxation.
These are the key takeaways:
- Any gratuity earned before 1st July 2025 is taxable as part of employment income. Where possible, payments should be spread over the relevant earning periods (up to four years back), and taxed using the rates prevailing then, with the shortfall balance considered income in the fifth year.
- For gratuity paid into registered pension schemes, amounts not chargeable to tax will remain exempt, provided the contributions comply with the pension tax allowable prescribed limits.
- Even with the exemption for post-July 2025 gratuity, employers remain responsible for ensuring correct tax application for earlier periods.
- Public service gratuity schemes exempted under earlier tax laws remain exempt for periods before December 2024, but still taxable for any other non-qualifying lump-sum payments.
This information is critical for employers, payroll managers, and employees to ensure compliance with Kenya’s evolving tax laws while avoiding unnecessary penalties.
Source : https://www.kra.go.ke/news-center/public-notices/2246-guidance-on-tax-exemption-on-payment-of-gratuity
