)
The Kenya Revenue Authority (KRA) has issued new guidance on how gratuity payments will be taxed following the Finance Act, 2025.
The amendment to the Income Tax Act now exempts gratuity earned after 1st July 2025 from income tax.
This change is set to affect how employees, especially those approaching retirement, will receive their terminal benefits.
In a public notice issued on 12th August 2025, KRA sought to clarify the distinction between gratuity earned before and after the cut-off date.
)
)
)
The tax authority emphasised that the exemption is only applicable to gratuity earned from 1st July 2025 onwards.
How gratuity was taxed before 1st July 2025
Prior to the amendment, all gratuity earned for periods before 1st July 2025 was fully taxable.
A person using KRA app
READ ALSO: Over 15 senior roles open to fill as KRA kicks off recruitment drive
The payment was treated as part of an employee’s income and taxed in the year it was earned, regardless of when the payment was actually made.
KRA explained that where gratuity is paid to an employee, it should be spread to the period to which it relates, up to four years back, and any remaining amounts relating to periods beyond four years shall be deemed income of the fifth year.
This meant that gratuity covering multiple years would be allocated across those years and taxed at the prevailing rates for each respective period.
For example, if an employee retired in August 2025 and their gratuity covered work done from 2020 to 2025, the portion for 2020 to June 2025 would be considered taxable under the old rules. The applicable rates would be those in force for each year.
What has changed after 1st July 2025
Under the new law, gratuity earned from 1st July 2025 onwards is exempt from income tax. This means that any amount calculated for services rendered after this date will be received in full without deductions for tax.
KRA stressed that the exemption is not based on the date of payment but on when the gratuity was earned.
“Gratuity earned or relating to periods prior to 1st July 2025, even where payment is made after this date, is chargeable to tax,” the authority clarified.
Kenya Revenue Authority (KRA) Commissioner General Humphrey Wattanga during a press conference
This distinction is critical for employees who will be receiving lump sum payments covering both pre- and post-July 2025 service periods.
A practical example of the difference
Consider an employee who is entitled to a gratuity of Sh1.2 million upon retirement in December 2026. The payment covers six years of service from January 2021 to December 2026.
The portion earned between January 2021 and June 2025 (4.5 years) will still be taxable under the old rules. If Sh900,000 of the total gratuity falls in this period, it will be spread across those years and taxed at the rates applicable in each respective year.
The portion earned from July 2025 to December 2026 (1.5 years) amounting to Sh300,000 will be exempt from income tax.
This means the employee will only pay tax on KSh 900,000 instead of the full Sh1.2 million.
Employers’ role in tax computation
Employers have the responsibility to calculate and allocate gratuity correctly. For taxable periods, they must consolidate the gratuity with other employment income for that year and apply the prevailing tax rate.
According to KRA, 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.
This ensures employees are not overtaxed but also that correct revenue is collected.
)
A person holding Kenyan currency
Special case: Payments into pension schemes
The rules also make provision for gratuity relating to pre-1st July 2025 periods if the payment is made to a registered pension scheme.
In such cases, the gratuity amount will not be taxable to the extent that the employee has not already enjoyed a deduction for pension contributions in those years.
This presents an opportunity for employees to reduce their tax liability while boosting their retirement savings.
Why the clarification matters
The guidance is particularly significant for employees whose service periods straddle the 1st July 2025 date. Without proper understanding, some may wrongly assume that all gratuity paid after this date is exempt.
KRA’s clarification also helps employers avoid disputes and ensures compliance. It is part of a broader effort to promote transparency and taxpayer education.