- Kenyan workers expecting gratuity need to understand two conditions governing the new income-tax exemption.
- Hillary Muhalya explains why completing three years of service does not by itself make gratuity tax-free.
- The amount payable must also fall within the 31 per cent threshold prescribed under the Finance Act 2026.
Worked for three years and expecting gratuity? KRA says you must pass another crucial test before the payment can qualify for the tax exemption.
Kenyan employees expecting gratuity at the end of their contracts have been given a major tax clarification by the Kenya Revenue Authority (KRA) following changes introduced under the Finance Act 2026.
The clarification is particularly important for workers serving under fixed-term contracts where gratuity forms part of their employment terms.
While the new rules could allow qualifying employees to retain more of their end-of-service benefits, KRA has warned that receiving gratuity does not automatically make the payment tax-free.
Employees must pass two tests.
The first test is the length of service.
The contract of service must have run continuously for at least three years. The rules also cover qualifying extensions of three-year contracts where the employment arrangement meets the requirements prescribed by law.
The second test is the amount of gratuity.
The gratuity must not exceed 31 per cent of the employee’s emoluments earned during the contract period.
KRA has emphasised that both conditions must be satisfied.
That means an employee who has completed three years cannot simply assume that the gratuity is automatically exempt from income tax.
The 31 percet test could make the difference
The second condition is where many employees will need to pay close attention.
The employee must establish the relevant emoluments earned during the qualifying contract period and calculate 31 per cent of that amount.
For example, if an employee earned total emoluments of KSh3 million during the qualifying contract period, the calculation would be:
KSh3,000,000 × 31% = KSh930,000
The 31 per cent threshold in this example would therefore be KSh930,000.
For illustration:
Total emoluments — 31% threshold
KSh1 million — KSh310,000
KSh2 million — KSh620,000
KSh3 million — KSh930,000
KSh4 million — KSh1.24 million
KSh5 million — KSh1.55 million
KSh10 million — KSh3.1 million
These examples illustrate the 31 per cent calculation and are not individual tax assessments.
The actual tax treatment depends on whether the employee satisfies the applicable statutory requirements.
Three years alone will not do it
The biggest takeaway from KRA’s clarification is that the three-year requirement and the 31 per cent threshold must be considered together.
An employee may have served continuously for three years or more but still need to establish whether the gratuity falls within the stipulated limit.
Likewise, an employee whose three-year contract has been extended must establish whether the employment arrangement qualifies under the applicable rules.
The tax exemption is therefore conditional, not automatic.
Employees should exercise caution if their gratuity is higher than the applicable 31 per cent threshold.
They should not automatically conclude that the entire payment will be exempt from income tax simply because they have completed three years of service.
The applicable tax treatment should be established before the payment is processed.
This is particularly important for employees receiving substantial end-of-service benefits.
Gratuity is an end-of-service payment an employer may provide to an employee under the terms of employment.
It is separate from ordinary monthly salary and is generally associated with the completion of a contract or a specified period of service where the employment agreement provides for such a benefit.
For workers whose contracts provide for gratuity, understanding the tax rules before leaving employment could help them plan their finances more accurately.
Employees whose original three-year contracts have been extended should carefully examine their employment arrangements.
The existence of an extension does not automatically guarantee tax-free treatment.
The arrangement must still meet the requirements established under the law.
Workers should therefore retain their original employment contracts, extension letters and relevant employment records when determining their qualifying period and emoluments.
Five things to check before your gratuity is paid
First, confirm whether your contract of service has run continuously for at least three years.
Second, if your three-year contract was extended, establish whether the extended arrangement qualifies.
Third, determine the relevant emoluments earned during the qualifying contract period.
Fourth, calculate 31 per cent of the relevant emoluments.
Fifth, compare the gratuity payable with the applicable threshold and establish the correct tax treatment before payment.
For many workers, gratuity is a significant financial lifeline after leaving employment.
The money can help settle debts, pay school fees, start a business, invest or support a family while the employee searches for another job.
Where gratuity qualifies for the exemption, the employee can retain more of the payment because income tax is not deducted from the exempt amount.
That makes the new rules particularly important for employees approaching the end of qualifying contracts.
However, workers should not wait until the final day of employment to establish their tax position.
Understanding the rules beforehand can help employees plan, verify their entitlement and address any questions with their employer before the payment is processed.
The responsibility does not rest entirely with employees.
Employers processing gratuity payments should ensure that the payments are correctly assessed and treated according to the applicable tax requirements.
Proper documentation of contracts, extensions, emoluments and gratuity calculations can help prevent confusion and disputes.
KRA’s message to employees is clear: three years of service is only the first test.
To qualify for the stated tax exemption, the employment arrangement must meet the required duration and the gratuity must satisfy the 31 per cent threshold based on qualifying emoluments.
So, if you are expecting gratuity, do not ask only:
“Have I worked for three years?”
Ask the second and equally important question:
“Does my gratuity pass the 31 per cent test?”
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Those two tests could determine whether your qualifying gratuity receives the stated income-tax exemption.
By Hillary Muhalya
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