The Kenya Revenue Authority (KRA) has explained how gratuity payments work for a tax exemption under the Finance Act 2026.
The rules took effect as part of the changes introduced by the Finance Act 2026, which became effective on July 1, 2026.
KRA says the exemption is subject to specific conditions and that not every gratuity payment will automatically be tax-free.
What Is Gratuity and Who Qualifies?
Gratuity is a lump-sum payment made to an employee at the end of a period of service where the employment contract or applicable employment terms provide for it. It is separate from the employee’s regular monthly salary.
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Under KRA‘s new guidance, gratuity qualifies for the tax exemption where the contract of service lasts for at least three continuous years. The exemption also applies where the payment arises from an extension of a three-year contract.
This means an employee who has served under a qualifying three-year contract cannot assume that simply receiving gratuity makes the entire payment tax-free. The duration and structure of the employment contract must first satisfy the requirement set out by KRA.
KRA states that the gratuity must not exceed 31% of the emoluments earned during the qualifying period. The two requirements work together, meaning an employee must satisfy both the contract-duration requirement and the 31% limit for the exemption to apply.
How the 31% Gratuity Rule Works
The 31% threshold is calculated against the employee’s emoluments earned during the relevant period, not a single monthly salary.
For example, if an employee earned total emoluments of KSh3 million during the qualifying three-year period, 31% would be KSh930,000.
If the employee’s qualifying gratuity is KSh930,000 or less, it would fall within the 31% threshold, subject to the other requirements of the law.
However, if the gratuity is KSh1 million, it would exceed the 31% threshold based on the same KSh3 million in emoluments.
The key figure is the employee’s total emoluments during the qualifying period, while the relevant contract must also meet the three-year requirement.
KRA has advised employers to note the new conditions when handling gratuity payments and to update payroll records and employee tax information accordingly.
How Workers Can Check If Their Gratuity Qualifies
Employees expecting gratuity can start by checking their employment contract to see whether it covers at least three continuous years or extends a three-year contract.
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They should then establish the total emoluments earned during that qualifying period and calculate 31% of that figure.
For instance:
| Calculation | Amount |
| Total emoluments over qualifying period | KSh3,000,000 |
| 31% threshold | KSh930,000 |
| Gratuity | KSh800,000 |
| Tax-exemption threshold | KSh930,000 |
| Result | Within the 31% limit |
If the gratuity falls within the 31% limit and the contract satisfies the three-year requirement, it can qualify for the exemption.
KRA’s guidance also tells employers to ensure that only gratuity payments meeting the specified conditions receive the exemption. Employees should therefore confirm how their employer has treated the payment in payroll records rather than assuming that all gratuity is automatically exempt.
The changes form part of amendments to Kenya’s tax laws under the Finance Act 2026, which amended the Income Tax Act alongside other tax legislation.
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