Tax reliefs on employee lump-sum payouts will be limited to fresh payouts, while gratuity covering periods before July 1, 2025, will be subject to income tax irrespective of the effective date of payment, KRA has said.
This implies that employees qualifying for gratuity payments for periods served before July this year will be taxed even if their former employers are yet to make the payout.
Gratuity refers to the sum of money given to an employee as a reward for their service and is typically paid upon retirement, resignation, or termination from work.
The gratuity payouts were exempted from income tax through the Finance Act, 2025, with the waiver taking effect on July 1. “Gratuity earned or relating to periods prior to July 1, 2025, even where the payment is made after this date, is chargeable to tax. The gratuity is taxed as part of employment income and is taxable in the year it was earned,” KRA said in a statement.
“This means that where gratuity is paid to an employee, it should be spread to the period to which it relates, up to four years back, and any remaining amounts relating to periods beyond four years shall be deemed as income for the fifth year.”
Gratuity relating to periods before July 1, 2025, paid out to a registered pension scheme shall, however, remain exempt from income tax. The Finance Act, 2025, refined the categorisation of exempt retirement benefits, providing a distinction between gratuity and other allowances.
“The amendment seeks to distinguish gratuity from other allowances paid under a public pension scheme to avoid ambiguity. With this amendment, gratuity paid, regardless of source, will be exempted from income tax,” analysts at KPMG said in a previous note.
Lump sum payments or gratuity have been attracting the same rate of tax as employment income.
According to KRA, taxes on the lump sum are computed by taking the total taxable pay for the year and adding the lump sum amount for the same year, with the result yielding the effective total taxable income. Every employer is required to recover the appropriate tax for any lump sum amount before releasing the balance to the employee.
