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Kenya Revenue Authority (KRA) has released new guidance following amendments to the Finance Act, 2025, which exempts payment of gratuity from income tax effective 1st July 2025.
Key Highlights:
- Exemption date: Only gratuity earned after 1st July 2025 is exempt from income tax.
- Gratuity before July 2025: Any gratuity relating to periods before this date remains taxable, even if paid later. It will be spread across the years it relates to (up to 4 years back) and taxed at the applicable rates.
- Employer obligations: Employers must consolidate gratuity with other employment income when computing taxes for the relevant years and remit the difference in tax payable.
- Pension scheme contributions: If gratuity for periods before July 2025 is paid into a registered pension scheme, it will not be taxable, provided the employee had not already claimed deductions for contributions.
- Public pension schemes: Gratuity from public pension schemes remains exempt from 27th December 2024, following the Tax Laws (Amendment) Act, 2024. However, gratuity earned before this date is still taxable.
- Employer responsibility: Even upon retirement, employers must ensure the correct tax treatment of gratuity as per the new guidance.
This clarification ensures employers and employees clearly understand how gratuity taxation will apply both before and after the July 2025 exemption.
Source: Kenya Revenue Authority (KRA)
Link: Guidance on Tax Exemption on Payment of Gratuity
Date: 12/08/2025
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