KRA Explains 31% Limit for Tax-Free Gratuity for Employees

The Kenya Revenue Authority (KRA) has explained how employees can qualify for a tax exemption on gratuity payments under the Finance Act 2026.

In a statement on Monday, August 31, the authority said employees who have worked for the same employer for at least three years may receive their gratuity tax-free, provided the payment does not exceed 31% of their earnings during the period of service.

KRA explained that gratuity is a payment an employer may give an employee at the end of a contract or after a period of service, depending on the terms of the employment agreement.

The authority said employees can qualify for the tax exemption if their contract of service has lasted for at least three continuous years or if they are serving under an extension of a three-year contract.

KRA further explained that the gratuity must not exceed 31% of the employee's earnings during the relevant period for it to qualify for the tax exemption.

"You have worked for the same employer for 3 years or more and getting gratuity? You could enjoy it tax-free under the Finance Act 2026, as long as it's not more than 31% of what you earned during that time," the statement read.

KRA clarified that gratuity is separate from an employee's regular monthly salary and is tied to the terms governing the employee's contract or period of service.

Elsewhere, taxpayers who disagree with a tax assessment or decision by KRA do not necessarily have to resort to lengthy court battles to resolve the matter.

In an update on Friday, August 14, the authority highlighted Alternative Dispute Resolution (ADR) as an option that allows taxpayers and the tax authority to settle disputes through dialogue and collaboration, potentially saving time, money and business relationships.

KRA explained that ADR provides an alternative to the conventional judicial process, allowing both parties to engage in facilitated discussions outside the Tax Appeals Tribunal or courts.

"Alternative Dispute Resolution (ADR) offers taxpayers and the Kenya Revenue Authority (KRA) an opportunity to resolve tax disputes through open dialogue, collaboration, and mutual understanding outside of the courts," the authority said.

KRA said the process is intended to help taxpayers and KRA arrive at practical solutions while avoiding some of the financial and operational burdens associated with litigation.

According to KRA, under ADR, a taxpayer, the Commissioner and an independent facilitator participate in discussions aimed at resolving the dispute. 

The facilitator does not determine which party is right or wrong but guides the discussions and encourages constructive engagement.

The process is voluntary and is designed as mediation rather than arbitration. 

Parties are expected to participate in good faith, maintain confidentiality, provide relevant information, attend scheduled meetings and observe agreed timelines.

KRA said ADR can help taxpayers resolve disputes faster than court proceedings while reducing legal and administrative costs. 

It also provides an opportunity for parties to discuss issues confidentially, work together on practical solutions and preserve their working relationship.

Taxpayers can apply for ADR by completing the prescribed ADR Application Form and submitting it, together with relevant supporting documents, to the Tax Dispute Resolution Office.

While most tax disputes may qualify, KRA noted that ADR may not be applicable where a settlement would conflict with the Constitution or tax laws, where judicial interpretation of the law is required, or where a court ruling is necessary in the public interest. 

It may also not apply where there is already an undisputed court judgment or either party is unwilling to participate.

KRA said the process is intended to provide timely resolution, with Section 55 of the Tax Procedures Act providing for ADR to be concluded within 120 days, while court-referred ADR follows timelines set by the court.