Income from employment, etc
(1)
For the purposes of section 3(2)(a)(ii), an amount paid to -
- (a) a person who is, or was at the time of the employment or when the services were rendered, a resident person in respect of any employment or services rendered by him in Kenya or outside Kenya; or
- (b) a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident,
shall be deemed to have accrued in or to have been derived from
Kenya.
(2)
For the purposes of section 3(2)(a)(ii), "gains or profits" includes -
(a) wages, salary, leave pay, sick pay, payment in lieu of
leave, fees, commission, bonus, gratuity, or subsistence,
travelling, entertainment or other allowance received in
respect of employment or services rendered and any
amount so received in respect of employment or
services rendered in a year of income other than the
year of income in which it is received shall be deemed
to be income in respect of that other year of income:
Provided that –
- (i) where such an amount is received in respect of a year of income which expired earlier than four years prior to the year of income in which it was received, or prior to the year of income in which the employment or services ceased, if earlier, it shall be deemed to be income of the year of income which expired five years prior to the year of income in which it was received, or prior to the year of income in which the employment or services ceased; and
- (ii) where the Commissioner is satisfied that subsistence, travelling, entertainment or other allowance represents solely the reimbursement to the recipient of an amount expended by him wholly and exclusively in the production of his income from the employment or services rendered then the calculation of the gains or profits of the recipient shall exclude that allowance or expenditure;
- (iii) Notwithstanding the provisions of subparagraph
(ii), where such amount is received by an
employee as payment of subsistence, travelling,
entertainment or other allowance, in respect of
a period spent outside his usual place of work
while on official duties, the first
two*ten thousand shillings per day expended by him for the duration of that period shall be deemed to be reimbursement of the amount so expended and shall be excluded in the calculation of his gains or profits. Amended by (FA 2025-wef 1st July-2025 S3*). - (iv) notwithstanding the provisions of subparagraph (ii), where such an amount is received by an employee as payment of travelling allowance to perform official duties, the standard mileage rate approved by the Automobile Association of Kenya shall be deemed to be reimbursement of the amount so expended and shall be excluded in the calculation of the employee’s gains and profits: (Finance Act 2023 wef 1st-July-2023 s5a)
(b) Save as otherwise expressly provided in this section, the value of a benefit, advantage, or facility of whatsoever nature the aggregate value whereof is not less than thirty six thousand shillings sixty thousand shillings granted in respect of employment or services rendered; (TLAA 2024 wef 27th December, 2024 S3)
(c) an amount received as compensation for the termination
of a contract of employment or service, whether or not
provision is made in the contract for the payment of
that compensation:
Provided that, except in the case of a director, other than a whole time
service director, of a company the directors whereof have a controlling interest
therein -
- (i) where the contact is for a specified term, any amount received as compensation on the termination of the contract shall be deemed to have accrued evenly over the unexpired period of the contract;
- (ii) where the contract is for an unspecified term and provides for compensation on the termination thereof, the compensation shall be deemed to have accrued in the period immediately following the termination at a rate equal to the rate per annum of the gains or profits from the contract received immediately prior to termination;
- (iii) where the contract is for an unspecified term and does not provide for compensation on the termination thereof, any compensation paid on the termination of the contract shall be deemed to have accrued evenly in the three years immediately following such termination.
(d) any balancing charge under Part II of the Second Schedule;
(e) the value of premises provided by an employer for
occupation by his employee for residential purposes;
(f) an amount paid by an employer as a premium for an insurance on the life of his employee and for the benefit of that employee or any of his dependents:
Provided that this paragraph shall not apply where such an amount is paid -
- (i) to a registered or unregistered pension scheme, pension fund, or individual retirement fund; or
- (ii) for group life policy cover, unless such a cover confers a benefit to the employee or any of his dependents
(fa) club entrance and subscription fees allowed against the employer’s income. (Finance Act 2023 wef 1st-July-2023 s5a)
(2A)
(a) Where an individual is a director or an employee or is a
relative of a director or an employee and has received a loan including a loan
from an unregistered pension or provident fund by virtue of his position as
director or his employment or the employment of the person to whom he is
related, he shall be deemed to have received a benefit in that year of income
equal to the greater of -
- (i) the difference between the interest that would have been payable on the loan received if calculated at the prescribed rate of interest and the actual interest paid on the loan; and
- (ii) Zero;
Provided that where the term of the loan extends for a period beyond
the date of termination of employment, the provisions of this subsection shall
continue to apply for as long as the loan remains unpaid;
(b) For the purposes of this subsection -
"employee" means any person who is not a beneficial owner of or able
either directly or indirectly or through the medium of other companies or by
any other means to control more than five per cent of the share capital or
voting power of that company.
"market lending rates" means the average 91-day treasury bill rate of
interest for the previous quarter.
"prescribed rate of interest" means the following -
- (i) in the year of income commencing on the 1st January, 1990, 6 per cent;
- (ii) in the year of income commencing on the 1st January, 1991, 8 per cent;
- (iii) in the year of income commencing on the 1st January, 1992, 10 per cent;
- (iv) in the year of income commencing on the 1st January, 1993, 12 per cent;
- (v) in the year of income commencing on the 1st January, 1994, 15 per cent;
- (vi) in the year of income commencing on or after the 1st January, 1995, 15% or such interest rate based on the market lending rates as the Commissioner may from time to time prescribe, to cover a period of not less than six months but not more than one year, whichever is the lower.
"relative of a director or an employee" means-
- (i) his spouse;
- (ii) his son, daughter, brother, sister, uncle, aunt, nephew, niece, step-father, step-mother, step-child, or in the case of an adopted child his adopter or adopters; or
- (iii) the spouse of any such relative as is mentioned in subparagraph (ii).
(2B)
Where an employee is provided with a motor vehicle by his
employer he shall be deemed to have received a benefit in that year of income
equal to the higher of –
- (a) such value as the Commissioner may from time to time determine; and
- (b) the prescribed rate of benefit.
- (i) Where such vehicle is hired or leased from a third party, the employee shall be deemed to have received a benefit in that year of income equal to the cost of hiring or leasing; or
- (ii) Where an employee has restricted use of such motor vehicle, the Commissioner shall, if satisfied of that fact upon proof by the employee, determine a lower rate of benefit depending on the usage of the motor vehicle.
(2C)
For the purposes of subsection 2(B) -“prescribed rate of benefit" means the following rates in respect of each month -
- (a) in 1996 year of income 1% of the initial capital expenditure on the vehicle by the employer;
- (b) in 1997 year of income 1.5% of the initial capital expenditure on the vehicle by the employer; and
- (c) in 1998 and subsequent years of income, 2% of the initial expenditure on the vehicle by the employer.
(3)
For the purposes of subsection (2)(e), the value of premises,
excluding the value of any furniture or other contents so provided, shall be
deemed to be -- (a) In the case of a director of a company, other than a whole time service director, an amount equal to the higher of fifteen per centum of his total income excluding the value of those premises and income which is chargeable under section 3(2)(f), the market rental value and the rent paid by the employer.
- (b) In the case of a whole time service director, an amount equal to the higher of fifteen per centum of the gains or profits from his employment, excluding the value of those premises and income which is chargeable under section3(2)(f), the market rental value and the rent paid by the employer.
- (c) in the case of an agricultural employee required by the terms of employment to reside on a plantation or farm an amount equal to ten per cent of the gains or profits from his employment:
- Provided that for the purposes of this paragraph-
- (i) "plantation" shall not include a forest or timber plantation: and
- (ii) "agricultural employee" shall not include a director other than a whole time service director:
- (d) In the case of any other employee, an amount equal to fifteen per centum of the gains or profits from his employment, excluding the value of those premises or the rent paid by the employer if paid under an agreement made at arm’s length with a third party, whichever is the higher.
- Provided that-
- (i) where the premises are provided under an agreement with a third party which is not at arm’s length, the value of the premises determined under this subsection shall be the fair market rental value of the premises in that year, or the rent paid by the employer, whichever is the higher; or
- (ii) where the premises are owned by the employer, the fair market value of the premises in that year.
- (i) where a person occupies premises for part only of a year of income, the value ascertained under the foregoing provisions shall be reduced by that proportion which is just and reasonable having regard to the period of occupation and the yearly rate of gains or profits from employment;
- (ii) where the employee pays rent to his employer for premises, the value ascertained under the foregoing provisions shall be reduced by the amount of the rent;
- (iii) where part only of any premises is so provided, the Commissioner may reduce the value;
- (iv) where the gains or profits from a person's employment, excluding the value of the premises provided by the employer, exceed six hundred thousand shillings in the year, the value of the premises determined under this subsection shall be subject to the limit of -
- (a) the rent paid by the employer or the fair market rental value of the premises in that year where the premises are provided under an agreement with a third party which is not at arm’s length, whichever is the higher; or
- (b) the fair market rental value of the premises in that year where the premises are owned by the employer.
(4)
Notwithstanding anything to the contrary in subsection (2) "gains
or profits" do not include-(a) the expenditure on passages between Kenya and any
place outside Kenya borne by the employer:
Provided that -
- Provided that this paragraph shall not apply to expenditure other than expenditure on the provision of passages for the benefit of an employee recruited or engaged outside Kenya and who is in Kenya solely for the purpose of serving the employer and is not a citizen of Kenya;
Provided that -
- (i) this paragraph shall cease to apply on the 1 st July, 2015; Finance Act, 2014 effective 13June 2014
- (ii) the period of vacation shall not exceed seven days; andFinance Act, 2014 effective 19September 2014
- (iii) the term “employee” shall include the immediate family members of the employee.Finance Act, 2014 effective 19September 2014
(b) in the case of a full-time employee or his beneficiaries
(which expression includes a whole time service director,
or a director who controls more than five percent of the
share capital or voting power of a company) the value of
any medical services provided by the employer or medical
insurance provided by an insurance provider approved by
the Commissioner of Insurance and paid for by the
employer on behalf of a full-time employee or his
beneficiaries:
(e) fringe benefits subject to tax under Section 12B.
(f)the value of meals served to employees in a
canteen or cafeteria operated or established by the
employer or provided by a third party who is a registered
taxpayer (whether the meals are supplied in the premises
of the employer or the premises of the third party) where
the value of the meal does not exceed the sum of forty eight thousand shillings per year per employee subject to
such conditions as the Commissioner may specify. Deleted by (TLAA 2024 wef 27th December, 2024 S3)
(f) the first sixty thousand shillings on the value of meals served by the employer, whether the meals are supplied by the employer or not, within his premises to employees in a canteen or cafeteria operated or established by the employer or provided by a third party who is a registered taxpayer, whether the meals are supplied in the premises of the employer or the premises of the third party, shall be excluded in the calculation of his gains or profits subject to such conditions as the Commissioner may specify; (TLAA 2024 wef 27th December, 2024 S3)
- Provided that in the case of a director other than a whole time service director, the value of the services shall be subject to such limit as the Minister may, from time to time prescribe. (*LN*)
- Provided that this paragraph shall not apply to any contributions paid by an employer who is not a person chargeable to tax-
- (i) To an unregistered pension scheme, unregistered provident fund or unregistered individual retirement fund; or
- (ii) To a registered pension scheme, a registered provident fund or a registered individual retirement fund in excess of the amount specified in section 22A or 22B
(e) fringe benefits subject to tax under Section 12B.
(f)
(f) the first sixty thousand shillings on the value of meals served by the employer, whether the meals are supplied by the employer or not, within his premises to employees in a canteen or cafeteria operated or established by the employer or provided by a third party who is a registered taxpayer, whether the meals are supplied in the premises of the employer or the premises of the third party, shall be excluded in the calculation of his gains or profits subject to such conditions as the Commissioner may specify; (TLAA 2024 wef 27th December, 2024 S3)
(fa) any amount paid or granted to a public officer pursuant to any written law or statutory instrument, with effect from 27th July, 2022, to reimburse an expenditure incurred for the purpose of performing official duties, notwithstanding the ownership or control of any assets purchased; (TLAA 2024 wef 27th December, 2024 S3)
(g) An amount paid by an employer as a gratuity or similar
payment in respect of employment or services rendered,
which is paid into a registered pension scheme: Provided that -
Provided that:
(a)the benefits chargeable shall accrue where such plan is
registered with the Commissioner as a collective
investment scheme within the meaning of the Capital
Markets Act and shall be deemed to have accrued to the
employee at the end of the vesting period. Amended by (Finance Act 2022-wef-01-July-2022)
- (a) this paragraph shall only apply in respect of
amounts not exceeding
two hundred and forty thousand shillingsthree hundred and sixty thousand shillings for each year of service; (TLAA 2024 wef 27th December, 2024 S3) - (b) this paragraph shall not apply to any person who is eligible for deductions under Section 22A.
- (i) “beneficiaries” means the full time employee’s spouse and not more than four children whose age shall not exceed twenty-one years;
(5)
Notwithstanding any other provision of this Act, the value of the benefit
(excluding the value of premises as determined under subsection (3)) and
the value of benefit determined under subsection (2B) for the purposes
of this section, shall be the higher of the cost to the employer or the fair
market value of the benefit.Provided that:
- (a)
in the case of an employee share ownership plan, the value of the benefit shall be the difference between the market value, per share, and the offer price, per share, at the date of the option is granted by the employer; andAmended by (Finance Act 2022-wef-01-July-2022) - (a) in the case of an employee share ownership plan, the value of the benefit shall be the difference between the offer price per share at the date the option is granted by the employer and the market value per share on the date when the employee exercises the option; (Finance Act 2022-wef-01-July-2022)
- (b) the Commissioner may, from time to time, prescribe the value where the cost or the fair market value of a benefit cannot be determined.
(6)
For the purposes of paragraph (a) of the proviso to subsection (5):-(a)
(a) the benefits chargeable shall be deemed to have accrued on the date the employee exercises the option. (Finance Act 2022-wef-01-July-2022)
(b) “offer price” means the price at which an employer’s shares are initially offered to an employee under an employee share ownership plan;
(c) “market value”, in relation to a share, means:-
(e) “vesting period” means a fixed period of time between the date of offer by the employer and the date after which the option to purchase can be exercised by the employee.
(b) “offer price” means the price at which an employer’s shares are initially offered to an employee under an employee share ownership plan;
(c) “market value”, in relation to a share, means:-
- (i) where the ‘shares’ are fully listed on any
securities exchange operating in Kenya, the midmarket value on the date the
shares were granted by the employer*option was exercised by the employee; or (Finance Act 2023 wef 1st-July-2023 s5b*) - (ii) where the shares are not fully listed, the price
which the shares might reasonably be expected
to fetch on sale in the open market,
which shall be agreed upon with the Commissioner before the grant of the options*when the option is exercised ; (Finance Act 2023 wef 1st-July-2023 s5b*)
(e) “vesting period” means a fixed period of time between the date of offer by the employer and the date after which the option to purchase can be exercised by the employee.
(7*)
Where an employee is offered company shares in lieu of cash emoluments by an eligible start-up, the taxation of the benefit from the shares allocated to that person by virtue of employment shall be deferred and taxed within thirty days of the earlier of—
(a) the expiry of five years from the end of the year of the award of the shares;
(b) the disposal of the shares by the employee; or
(c) the date the employee ceases to be an employee of the eligible start-up:
Provided that—
- (i) this subsection shall not apply to any cash emoluments or other benefits in kind offered to an employee by virtue of the employment;
- (ii) the benefit shall be deemed to accrue at the earlier of the occurrence of the events contemplated in paragraphs (a), (b) or (c);
- (iii) the value of the taxable benefit shall be the fair market value of the shares at the earlier of the occurrence of the events contemplated in paragraphs (a), (b) or (c); or
- (iv) where the fair market value is not available, the Commissioner shall determine the value of the shares based on the last issued financial statements. (Finance Act 2023 wef 1st-January-2024 s5c*)
(8*) For the purposes of subsection (7), “eligible start-up company” means a business incorporated in Kenya that—
- (a) has an annual turnover of not more than one hundred million shillings;
- (b) does not carry on management, professional or training business;
- (c) has not been formed as a result of splitting or restructuring of an existing entity; and
- (d) has been in existence for a period of not more than five years. (Finance Act 2023 wef 1st-January-2024 s5c*)
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OTHER PRESCRIBED RATES AS PER KRA PAYE GUIDE 2017 (effective from 12th June 2003),
A - SERVICES
- (i) Electricity – (communal or from a generator):
- Kshs-1,500pm or Kshs-18,000pa
- (ii) Water – (communal or from a borehole):
- Kshs-500pm or Kshs-6,000pa
- (iii) Provision of furniture:
- 1% of cost to employer.
- If hired the cost of hire should be brought to charge.
- (iv) Telephone (Landline and Mobile Phones):
- 30% of bills.
B - AGRICULTURAL EMPLOYEES: REDUCED RATES OF BENEFITS
- (i) Water:
- Kshs-200pm or Kshs-2,400pa.
- (ii) Electricity:
- Kshs-900pm or Kshs-10,800pa.
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