The Kenya Revenue Authority (KRA) has clarified the conditions employees must meet to receive gratuity without paying income tax under the Finance Act 2026.Under the law, the employment contract must run for at least three continuous years or be an extension of a three-year contract.The gratuity must also not exceed 31 per cent of the employee's emoluments earned during the contract period.Employees who satisfy both conditions can receive qualifying gratuity without income tax.“Both conditions must be satisfied for the gratuity to qualify for the exemption. This means that not every employee receiving an end-of-service payment will automatically benefit from the tax relief,” KRA said.Gratuity is a payment an employer may provide to an employee at the end of a contract or period of service, depending on the terms of employment. It is separate from the employee's regular monthly salary.The Finance Act 2026 therefore provides a specific framework for determining when gratuity paid under qualifying employment arrangements can enjoy the tax exemption.For example, an employee whose contract has run continuously for at least three years would need to establish whether the gratuity payable falls within the 31 per cent threshold based on their emoluments during that period.For eligible employees, the benefit provides financial support when they leave employment, particularly after several years of service. Where the gratuity qualifies for the tax exemption under the applicable rules, the employee can keep more of the payment because no income tax is deducted from the exempt amount. The rules also cover employees whose three-year contracts have been extended, provided the employment arrangement meets the conditions set by the law. The clarification comes as taxpayers seek to understand how changes contained in the Finance Act 2026 affect employment income and end-of-service benefits.KRA's explanation provides employees and employers with a basis for determining whether a particular gratuity payment qualifies for the tax exemption before the payment is made.Employees expecting gratuity are therefore required to consider both the length of their qualifying contract and the amount of gratuity against their emoluments to establish whether they meet the conditions for the tax relief.
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