Call Us

Gratuity Tax Exemption

Understanding the New Gratuity Tax Rules in Kenya Under Finance Act, 2025

The Finance Act 2025 introduces an exemption from income tax for gratuity payments earned after July 1, 2025. Following this amendment, the KRA issued instructions for the future tax treatment. We have outlined the major elements below to assist you in understanding how these changes will affect you or your company.

What is Gratuity and Its Tax Treatment?

Gratuity is a lump-sum payment provided by an employer to an employee in appreciation for their service, usually upon retirement, resignation, or termination. It is frequently calculated using the employee’s income and years of service and is found in both the public and private sectors of Kenya. Gratuity differs from pension contributions in that it is not a mandated payment but rather a voluntary benefit provided under some employment contracts or collective bargaining agreements.

Gratuity has long been considered taxable income under the Income Tax Act (Cap 470). Section 3(2) of the Act defines taxable income as “gains or profits from employment,” which includes gratuity payments. Before the Finance Act of 2025, gratuities were liable to income tax at the current tax rates in the year it earned or paid, unless particular exclusions applied, such as contributions to registered pension plans within set limitations.  Notably, the Tax Laws (Amendment) Act of 2024 established an exemption for gratuities received from public pension systems (financed by the Consolidated Fund) beginning December 27, 2024. And now, the Finance Act of 2025 provides exemptions for gratuities paid after July 1, 2025.

Key Points on Gratuity Taxation

  1. Gratuity earned after July 1, 2025.
    • Gratuity payments made on or after July 1, 2025, are exempt from income tax under the amendments of the Finance Act 2025.

Specifically, note that this refers to gratuity earned after July 1, 2025, meaning for work completed after this date.

  1. Gratuity earned before July 1, 2025.
    • Gratuity earned before July 1, 2025, is still taxable, even if it was paid after that date.

The gratuity earned before July 1, 2025, is considered employment income under Section 3(2) for the respective year of employment it was earned and is thus taxable under the respective income tax rate.

Spread for taxation: The gratuity is spread to the relevant period, up to 4 years back. Amounts beyond 4 years shall be income of the fifth year. Meaning that income for the fifth year may include amounts accumulated over four years. The tax due is calculated using the applicable tax rates for the respective years.

Calculating taxable Income

To calculate taxable income, employers must combine an employee’s gratuity with other employment income earned during the year under consideration. The tax payable then, is the difference between the tax payable on the consolidated income and any prior taxes paid on the employee’s earnings.

Gratuity paid to registered pension schemes

Gratuity paid into a registered pension scheme before July 1, 2025, is not taxable if it meets the Income Tax Act’s prescribed limits for the respective period.  This exemption only applies if the employee did not claim deductions for pension contributions in those years.

Public Pension Schemes

Gratuity from public pension plans, which is exempt from the Tax Laws (Amendment) Act, 2024 (effective December 27, 2024), is taxable for periods before December 2024, according to the instructions provided above.

What This Means for You

  • Employees: If you are receiving a gratuity payment, check if it is for work done before or after July 1, 2025. Payments for work completed after this date are tax-free.
  • Employers:  Ensure compliance by making sure that you correctly calculate and report taxes on gratuity payments, especially for periods before the exemption date.
  • Pension Scheme members: If you paid your gratuity into a registered pension scheme before December 2024, you may be eligible for tax exemption; however, you must confirm that you have not previously claimed pension contribution deductions.

 

Stay Informed

For updates and more information about gratuity taxation, you may send us your inquiry by email info@gknahashon.co.ke, or call/WhatsApp 0700 058630/0715 008 008

Leave a Reply

Your email address will not be published. Required fields are marked *

If You Have Any Questions, Feel Free to Call Us +(254) 715 008 008.

We offer effective accounting solutions, and if you are a start-up, you just came to the right place because we have a package deal of business strategies to take you where you envision. 

Let's Get Started
Looking for affordable QuickBooks?

We are Quickbooks Online ProAdvisor

Us On Socials

Facebook Instagram Youtube Linkedin Tiktok

2023 G.K Nahashon & Company. All Rights Reserved.

Jackie.W. Murage

Associate- Corporate Services

As an Associate-Corporate Services, Jackline leads client relations, helping organizations develop strong corporate strategies. She brings relevant experience in the role of helping clients develop and implement corporate goals and objectives, formulate corporate strategies around their capital resources, achieve optimal strategic mix, and sustain a healthy risks-return balance.

Jackline holds a Bachelor’s Degree in Business Management; Finance and Banking from Maasai Mara University

Diana Kiarie

Manager- Accounts and Financial Reporting

Diana serves as the Manager of Accounts and Financial Reporting and holds a Bachelor’s degree in Commerce with a specialization in Accounting from Mount Kenya University. Additionally, she possesses a diploma in Business Management from the University of Nairobi. Currently pursuing CPA
Advanced Level, Diana has over five years of experience in finance, accounting, audit, and taxation for the firm, significantly enhancing strategic financial management activities.

CPA Gitau Nahashon

Senior Managing Partner

CPA Gitau Nahashon is an accomplished finance and accounting professional with over 21 years of experience in the fields of accounting, tax, audit, advisory, corporate governance, and business consultancy. Nahashon is the founding partner of GK Nahashon & Company, a rapidly growing medium-sized audit firm located in Rosslyn, Limuru Road.

He is a member of the Institute of Certified Public Accountants of Kenya (ICPAK), Kenya Institute of Management (KIM), and the Institute of Internal Auditors Kenya Chapter (IIA). CPA Nahashon is a passionate accountant, financial analyst, tax litigant, and advisor as well as corporate finance advisor. All this emerges from his background of Bachelor of Commerce, Finance, and Accounting as well as his professional training as a Certified Public Accountant (CPA-K) coupled with his many years of hands-on experience. He is a licensed practicing auditor and consultant with the Institute of Certified Public Accountants of Kenya. He is an MS Excel enthusiast having trained several high-ranking finance professionals in financial modeling, forecasting, and reporting using sophisticated Excel functions and formulae.

CPA Nahashon is a certified QuickBooks pro advisor, a position he uses to offer support in QuickBooks online as well as advise clients on the usage of QuickBooks for their accounting, payroll, and inventory management. This certification increases the confidence that clients have in our expertise in automated accounting software.

CPA Nahashon is extremely zealous of compliance, he has worked for several employers and private clients shepherding them to remain compliant with the regulations, policies, and guidelines of various regulators. As a risk and compliance professional, CPA Nahashon has brokered many deals and structured compliance highways for many organizations.

CPA Nahashon has enjoyed a thriving career in the private sector where he served in various capacities within the manufacturing, real estate, educational, and banking sectors. His major accomplishments include overseeing effective system migration, automation of MIS, conducting gap analysis for new CBK guidelines, successful acquisition structure, corporate governance training, financial reporting, training advanced MS Excel, successful audit engagements, setting up a successful microfinance company, several successful funding proposals among others.

This professional accountant has held the hands of many start-ups until they are mature with huge turnovers. He has mid-wifed micro enterprises to become medium-sized entities some of them with balance sheet of over Kshs 1B. He has successfully transitioned chamas to birthing enterprises that are current industry and market leaders.

He has served in various boards of academies, schools, SME’s and serves in advisory board of a thriving business in the service industry. He is currently a board chairman in one of the SME’s he serves as an independent director. He is an astute leader with impeccable people leadership skills and serves the community in several leadership positions transforming lives and offering hope to the destitute.