The Kenya Revenue Authority (KRA) has introduced new restrictions on tax reliefs applied to lump-sum gratuity payments made to employees, a move that is expected to affect both private and public sector workers receiving end-of-service benefits.

The revised guidelines, issued as part of ongoing tax policy adjustments, aim to tighten what the authority describes as misuse of exemptions in cases of substantial one-time payments.

Under the new directive, lump-sum gratuities will now be more strictly assessed for tax liability, and only specific components of the payment that meet defined criteria will qualify for relief.

Previously, many employers and employees had benefited from relatively broad interpretations that allowed substantial portions of the gratuity to be exempt from income tax, especially for long-serving employees or those retiring.

KRA now insists that gratuity payments will be taxed in line with established thresholds, and any claims for relief must be supported by appropriate documentation and adherence to statutory requirements.

This includes proper classification of the payment as part of a retirement benefit or negotiated exit package, rather than a discretionary employer bonus.

The move has stirred concern among employers and human resource professionals, with many warning that the restriction could reduce the net take-home for retirees or employees exiting under voluntary separation schemes.

It may also lead to a reassessment of end-of-service benefit structures, especially in organisations where gratuity forms a significant part of employee compensation.

KRA, however, maintains that the reforms are necessary to plug revenue leakages and promote fairness in the tax system. Officials argue that some entities have been exploiting the tax relief provision to avoid rightful tax obligations under the guise of lump-sum payouts.

Tax experts advise employers to review their gratuity and retirement benefit schemes to ensure compliance with the updated KRA framework.

Employees, particularly those nearing retirement or exiting employment, are encouraged to seek professional advice to understand the tax implications of their final payouts.

The implementation of the new restrictions is already in effect, with KRA expected to intensify audits and compliance checks to ensure that all applicable taxes on lump-sum benefits are duly paid.