The Kenya Revenue Authority (KRA) has announced that gratuity earned from July 1, 2025, will no longer be subject to income tax, following amendments to the Income Tax Act under the Finance Act, 2025.
In a public notice, KRA explained that the change applies to both employees and employers and aims to ease the financial burden on retirees and beneficiaries. However, the exemption will only cover gratuity for service rendered from the effective date.
Payments for service periods before July 1, 2025, even if disbursed after that date, will still attract income tax. KRA said such amounts will be treated as part of employment income for the years they were earned—up to four years back—with tax calculated at the prevailing rates for those years.
The authority also clarified that gratuity for earlier service periods paid into registered pension schemes will be exempt from tax, provided they meet prescribed limits and no prior pension contribution deductions were claimed.
Employers have been reminded to correctly apportion gratuity payments, account for applicable taxes on pre-July 2025 earnings, and follow the guidelines when processing retirement benefits.
The new rules also align with the Tax Laws (Amendment) Act, 2024, which exempted gratuity from public pension schemes effective December 27, 2024.