The Kenya Revenue Authority (KRA) has clarified the conditions employees must meet for gratuity payments to qualify for a tax exemption under the Finance Act, 2026. In a public education message issued on Monday, August 31, KRA said gratuity can qualify for the exemption where an employee has served under a contract of service for at least three continuous years, or where the payment follows an extension of a three-year contract. The authority added that the gratuity must not exceed 31% of the employee’s emoluments earned during the relevant period. Both conditions must be met for the payment to qualify for the exemption.

KRA defines gratuity as a payment an employer may make to an employee at the end of a contract or after a period of service, depending on the terms of the employment agreement. The three-year requirement means an employee does not qualify for the exemption simply because they are receiving gratuity. The contract of service must have lasted for the required continuous period, or must be an extension of a three-year contract.

The second requirement concerns the amount of gratuity payable. KRA says the payment must not exceed 31% of emoluments earned during the qualifying period. For instance, if an employee earned total qualifying emoluments of KSh3 million over the relevant period, 31% would amount to KSh930,000. A gratuity payment of KSh930,000 or less would fall within the stated threshold, subject to the other requirements of the law.

Employees expecting gratuity should therefore establish the length of their contract and the amount of emoluments earned during the relevant service period before assuming that the payment will be tax-free. The exemption applies to qualifying gratuity rather than automatically covering every end-of-service payment. KRA has specifically advised that only payments meeting the stated conditions should receive the exemption. Employers are also expected to take the conditions into account when processing gratuity payments and applying the relevant tax treatment.

The clarification follows changes introduced through the Finance Act, 2026, which came into effect on July 1, 2026. KRA has been issuing guidance to explain the changes and how they affect taxpayers.

The latest clarification is also relevant because Kenya’s tax treatment of gratuity changed under the Finance Act, 2025. KRA previously announced that gratuity earned after July 1, 2025 was exempt from income tax, while providing guidance on how payments relating to earlier periods should be treated. Under the 2026 provisions highlighted by KRA, the exemption is now tied to the specific conditions of a three-year contract or its extension and the 31% ceiling. For employees, the practical point is that three years of service alone is not enough. The gratuity must also fall within the 31% limit based on the employee’s emoluments during the relevant period.

Employees who are unsure about the tax treatment of a particular gratuity payment should review their employment contract, service period and payment calculation with their employer before the payment is processed.