The Kenya Revenue Authority (KRA) has issued a public notice to clarify an amendment to the Income Tax Act introduced by the Finance Act, 2025, concerning the taxation of gratuity payments.
The key provisions are as follows:
1. Tax Exemption for Future Payments: All gratuity payments earned on or after July 1, 2025, are fully exempt from income tax. This change is intended to alleviate the financial burden on retirees and other beneficiaries.
2. Taxation of Past Payments: Gratuity earned before July 1, 2025, remains taxable, even if the payment is disbursed after this date. The tax calculation for these payments is a multi-step process:
- The gratuity amount should be treated as part of the employment income for the years in which it was earned.
- Employers should spread the taxable amount over the relevant years, up to a maximum of four years back. Any portion of the gratuity related to periods exceeding four years is considered income for the fifth year.
- The tax on this gratuity is calculated as the difference between the tax on the total consolidated income (gratuity plus other employment income) for each year and the tax already paid on the previous emoluments for that year.
- Employers are responsible for consolidating this income and applying the correct tax rates for each respective year.
3. Exception for Pension Schemes: An exception exists for gratuity payments earned before July 1, 2025. If these payments are channeled into a registered pension scheme, they are not subject to income tax, provided they fall within the prescribed limits. This applies only if the employee has not already claimed a tax deduction for pension contributions.
4. Public Pension Schemes: The notice also references a similar exemption for gratuity from public pension schemes, which came into effect earlier, on December 27, 2024.
KRA emphasizes that both employers and employees must understand and adhere to these regulations to ensure proper tax compliance and avoid penalties.