Kenya Revenue Authority informs the public that the Finance Act, 2025 amended the Income Tax Act to exempt payment of gratuity from income tax. This exemption applies to gratuity earned after 1st July, 2025. The following guidance seeks to provide further clarification on the tax treatment of gratuity earned prior to 1st July, 2025 in light of the exemption -

1. Gratuity earned or relating to periods prior to 1st July, 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.

2. 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. Tax payable shall be the difference between the tax arrived at on the consolidated amount and what was paid earlier on the emoluments already received.

3. Where an employer pays gratuity relating to periods prior to 1st July, 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 deduction for pension contribution in the respective years of income.

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

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

Commissioner, Micro & Small Taxpayers