Employees nearing the end of a long-term contract may be able to keep more of their gratuity after the Kenya Revenue Authority (KRA) clarified when the payment can be exempt from tax under the Finance Act 2026.
KRA said employees must meet two conditions for their end-of-service payment to qualify for the exemption.
The first requirement is that the employee must have served under a contract lasting at least three continuous years. The exemption also applies where an existing three-year contract is extended.
“Your gratuity can be tax-exempt, but there are two conditions,” KRA said.
Gratuity is a payment made by an employer to an employee at the end of a contract or period of service, depending on the terms of the employment agreement. It is separate from an employee’s regular salary and is normally calculated based on the terms agreed between the employer and employee.
The three-year requirement means workers should look at the actual period covered by their employment contract before assuming that their gratuity will automatically qualify for the tax exemption. Employees on shorter contracts may not meet this particular condition.
The 31 per cent rule
The second requirement concerns the amount of gratuity an employee receives.
KRA said the gratuity must not exceed 31 per cent of the employee’s earnings during the period of service covered by the qualifying contract.
“You have worked for the same employer for 3 years or more and are getting gratuity? You could enjoy it tax-free under the Finance Act 2026, as long as it’s not more than 31% of what you earned during that time,” the authority said.
This means meeting the three-year service requirement on its own is not sufficient. The amount paid must also remain within the 31 per cent threshold for the exemption to apply.
The clarification is important for employees whose fixed-term contracts are ending or being renewed, particularly those expecting a sizeable gratuity payment. Workers should check their employment contracts and how their employers have calculated the payment before assuming that the entire amount will be received without tax.
KRA’s existing PAYE guidance treats service gratuity as an employment-related payment that can be subject to income tax unless a specific exemption applies.
The Finance Act 2026 therefore provides an important distinction for qualifying employees. Rather than gratuity being automatically treated as taxable or tax-free, workers must satisfy the conditions set out in the law.
For employees, the key figures to remember are three years and 31 per cent. The contract must meet the three-year requirement, while the gratuity must not exceed 31 per cent of the employee’s earnings during the qualifying period.
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