The Kenya Revenue Authority (KRA) has issued guidelines on how gratuity payments will be taxed following amendments introduced by the Finance Act, 2025.
In a notice on Tuesday, August 12, KRA explained that the Act, which came into effect on July 1, 2025, amended the Income Tax Act to exempt gratuity earned from that date onwards from income tax.
However, the KRA has clarified that gratuity relating to periods before the new law took effect will still be taxable, even if the payment is made after July 1.
"Gratuity earned or relating to periods prior to 1st July, 2025, even where payment is made after this date, is chargeable to tax. The gratuity is taxed as part of employment income and is taxable in the year it was earned.
"This means that where gratuity is paid to an employee, it should be spread to the period to which it relates, up to four (4) years back, and any remaining amounts relating to periods beyond four (4) years shall be deemed income of the fifth year. The gratuity will then be taxed at the applicable tax rates in the respective years," the notice read.
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The agency explained that employers will be required to factor in gratuity alongside other income received by the employee during the relevant period to determine the total tax owed.
"In computing the taxable income for the periods outlined above, the employer shall consolidate the gratuity payable for each year with other employment income earned by the employee during the respective period and subject the consolidated income to tax at the prevailing tax rate for that year.
"Tax payable shall be the difference between the tax arrived at on the consolidated amount and what was paid earlier on the emoluments already received," the notice added.
KRA also took the opportunity to clarify the treatment of gratuity paid into pension schemes.
"Where an employer pays gratuity relating to periods prior to 1st July, 2025, to a registered pension scheme, the gratuity amounts paid into the scheme shall not be chargeable to tax, subject to prescribed limits in the respective years of income.
"This shall apply to the extent that the employee had not enjoyed deduction for pension contribution in the respective years of income," the notice further read.
The tax agency also noted that employers must still meet their tax obligations even when paying gratuity upon retirement.
"An employer making payment of gratuity upon retirement of an employee is still required to account for applicable taxes as guided above," the notice added.
On the other hand, KRA pointed out that the rules differ slightly for gratuity from public pension schemes due to earlier exemptions introduced in December 2024.
"For gratuity paid out of a public pension scheme, which were exempted from tax by the Tax Laws (Amendment) Act, 2024, effective 27 December 2024, the guidance above shall apply with respect to periods prior to December 2024 before the exemption came into force.
"A public pension scheme is defined as a pension scheme that pays pensions or lump sums out of the Consolidated Fund," the notice concluded.
