The Kenya Revenue Authority (KRA) has moved to ease the financial burden on retirees and other beneficiaries, announcing that gratuity payments earned after July 1, 2025, will no longer be subject to income tax.
- •Gratuity payments accrued before July 1, 2025, remain taxable, even if they have been disbursed after the exemption takes effect.
- •For these older payments, the taxable amount is calculated as part of employment income for the year it was earned, with the liability spread across a maximum of four prior years.
- •Amounts exceeding this period are treated as income of the fifth year, with tax applied according to the rates that were in effect at the time.
“Employers are required to consolidate gratuity with other employment income for each relevant year and apply the prevailing tax rates to determine the correct tax payable,” the authority said.
Pre-July 2025 gratuity directed into a registered pension scheme within prescribed limits escapes taxation, provided the employee had not already claimed deductions for pension contributions in those years. The same framework applies to public pension schemes, which were partially exempted under the 2024 Tax Laws (Amendment) Act. Public schemes, funded through the consolidated fund, follow these rules for all service periods predating their prior exemption.
KRA has urged employers and employees to familiarize themselves with the updated guidance to ensure accurate compliance and avoid penalties. The change follows amendments under the Finance Act, 2025.
