Treasury Cabinet Secretary John Mbadi has clarified that public officers retiring on or after December 27, 2024, will not pay income tax on their monthly pensions or commuted lump sum gratuities, following amendments to the Income Tax Act.
The changes, aimed at improving retirees’ welfare, come through the Tax Laws (Amendment) Act, 2024, which was assented to in December 2024.
Speaking to journalists on Wednesday, Mbadi explained that the amendments cover pension benefits from public schemes, registered pension funds, provident funds, and the National Social Security Fund.
“This amendment effectively exempts from tax pension benefits, including gratuity paid out of our public pension scheme, payments from registered pension funds and provident funds, and payments from the National Social Security Fund. All these payments after this amendment are now exempt from taxation,” he said.
He emphasized that anyone retiring on or after the effective date will enjoy full tax exemption on both monthly pension and lump sum gratuity, regardless of the amount.
However, transitional challenges affect around 7,000 retirees who either retired before December 27, 2024, or whose pension claims were still pending when the law came into force.
These retirees are currently being paid under the old tax system while awaiting legal guidance.
Mbadi said the Pensions Department initially argued that payments made after the effective date should qualify for exemption since pensions are accounted for on a cash basis.
But the Kenya Revenue Authority insists that tax rules apply to income based on when it was earned or accrued.
“KRA insists that a delay in the disbursement of pension gratuity does not constitute grounds for tax exemption if the officer retired under a previous tax regime,” he explained.
To resolve the impasse, the Pensions Department has sought a legal opinion from the Office of the Attorney General. Meanwhile, the government will continue to pay affected retirees under the previous tax rules.
“We’ve decided to pay them their pension and withhold the taxes. Once this is resolved, then we will act accordingly,” Mbadi said, adding that refunds will be issued if the Attorney General rules in favor of the exemption.
Under the old tax system, the first Sh600,000 of a lump sum was exempt, and monthly pensions below Sh25,000 were not taxed.
Mbadi reaffirmed the government’s commitment to timely pension payments and announced plans to launch an integrated IT system to speed up processing, stressing that the changes aim to “maximize the take-home benefits of our senior citizens.”
