KRA Clarifies Tax-Free Gratuity Payments for Retirees [Guidelines]

The Kenya Revenue Authority (KRA) has issued guidance on tax exemption on the payment of gratuity. The Finance Act, 2025, amended the Income Tax Act to exempt the payment of gratuity from income tax.

According to KRA, this exemption applies to gratuity earned after July 1, 2025. In a public notice issued on August 12, the authority provided further clarification on the tax treatment of gratuity earned after July 1, 2025, in light of the exemption.

It said that gratuity earned or relating to periods before July 1, 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,” reads part of the statement.

KRA clarifies rules on gratuity tax exemption

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.

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According to KRA, the tax payable shall be the difference between the tax calculated on the consolidated amount and the tax paid earlier on the emoluments already received.

“Where an employer pays gratuity relating to periods prior to July 1, 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 a deduction for pension contributions in the respective years of income,” KRA adds.

“An employer making payment of gratuity upon the retirement of an employee is still required to account for applicable taxes as guided above.”

For gratuity paid out of a public pension scheme—which was exempted from tax by the Tax Laws (Amendment) Act, 2024, effective December 27, 2024— KRA said 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.

Cabinet approves Finance Bill 2025 

The tax exemption on gratuity payments in public or private pension schemes, which was a significant win for retirees, was among the key provisions of the Finance Bill 2025, which was approved by the Cabinet back in April following a meeting chaired by President William Ruto at State House, Nairobi.

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State House Spokesperson Hussein Mohammed, in a Cabinet dispatch on Tuesday, April 29, said that Finance Bill 2025 “focuses primarily on closing loopholes and enhancing efficiency, including addressing loopholes related to tax expenditures that have historically been exploited to siphon funds from public coffers, such as through inflated tax refund claims”.

Other key provisions of the Bill, which were later assented to the Finance Act, 2025, included streamlining tax refund processes, sealing legal gaps that delay revenue collection, and reducing tax disputes by amending the Income Tax Act, VAT Act, Excise Duty Act, and the Tax Procedures Act.

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