The Kenya Revenue Authority (KRA) has announced that retirement benefits payments earned from July 1, 2025, will be exempt from income tax following amendments in the Finance Act, 2025.

In a public notice, KRA explained that the tax exemption applies to both employees and employers and is intended to ease the financial load on retirees and other beneficiaries.

However, the authority was quick to clarify that the exemption only covers gratuity earned after the effective date. Payments relating to service periods before July 1, 2025, even if paid later, will still attract income tax.

According to KRA, retirement benefits earned before the cut-off date should be treated as part of employment income in the years it was earned, with taxable amounts spread over the relevant years up to four years back. Any sums relating to periods beyond four years will be taxed in the fifth year.

“The retirement benefits will then be taxed at the applicable rates in the respective years,” KRA stated. Employers are required to consolidate the gratuity with other employment income for the same period and calculate tax based on prevailing rates. The tax payable is the difference between the total due on the consolidated income and what was already remitted on earlier earnings.

KRA also clarified that if retirement benefits for pre-July 2025 service is paid into a registered pension scheme, it will not be taxed, provided it falls within the prescribed contribution limits for those years. This applies only if the employee had not already claimed a pension deduction for the respective years.

Employers were reminded that when paying gratuity upon retirement, they must still account for taxes on amounts related to pre-July 2025 service, in line with the guidelines.

For retirement benefits paid from public pension schemes which have been tax-exempt since December 27, 2024 KRA said the same rules apply for any service periods before the exemption took effect. A public pension scheme is defined as one that pays pensions or lump sums from the consolidated fund.

KRA urged both employers and employees to familiarize themselves with the new rules to ensure proper tax compliance and avoid penalties.