IT 12
Retirement benefits, pensions and exempt income
1Scope and legal basis
Retirement saving is taxed on an exempt-exempt-taxed pattern with growing exemptions on the way out. Contributions to a registered scheme (registered with the Retirement Benefits Authority and the Commissioner) are deductible within limits under section 22A and 22B; the scheme's investment income is exempt under the First Schedule; and benefits are taxed on withdrawal under section 8 and the Third Schedule, except where an exemption applies. The Tax Laws (Amendment) Act 2024 raised the deductible contribution to KES 360,000 a year and made post-retirement medical fund contributions deductible up to KES 15,000 a month; the Finance Act 2025 exempted all pensions and lump sums paid on reaching the scheme's retirement age, on death or on ill health, and gratuity for service from 1 July 2025 under contracts of three years or more; earlier withdrawal rules remain for members who leave before retirement age. The First Schedule also lists the other incomes Parliament has exempted, from interest on infrastructure bonds to the income of registered charities.
2Key definitions
3Charge, computation and rates
Contributions
| Contribution | Treatment in 2026 |
|---|---|
| Employee's own contribution to a registered scheme (including NSSF) | Deductible from employment income up to the lowest of the actual amount, 30% of pensionable pay and KES 360,000 a year (KES 30,000 a month) |
| Employer's contribution for the employee | Deductible to the employer; not a taxable benefit to the employee up to the same KES 360,000 combined limit; the excess is taxed on the employee as a benefit |
| Self-employed person's contribution to an individual retirement fund | Deductible from business income within the same limits |
| Contribution to a post-retirement medical fund | Deductible up to KES 15,000 a month (the earlier 15% relief was replaced by the deduction in December 2024) |
| Employer's NSSF (6% up to the KES 108,000 upper limit, maximum KES 6,480 a month) and Affordable Housing Levy (1.5%) | Deductible to the employer; not taxed on the employee |
| Home ownership savings plan | The KES 8,000 a month deduction was repealed by the Finance Act 2023; mortgage interest up to KES 360,000 a year remains deductible |
Benefits
| Benefit | Tax treatment |
|---|---|
| Monthly pension or annuity from a registered scheme paid after attaining the scheme's retirement age | Exempt (Finance Act 2025); before that the first KES 300,000 a year was exempt and the balance taxed at the graduated rates |
| Lump sum on retirement at the retirement age, on death (to the estate or dependants), or on withdrawal due to ill health | Exempt (Finance Act 2025); the Finance Act 2026 confirms death benefits from registered and public schemes are exempt |
| Lump sum on withdrawal before retirement age (resignation, dismissal) from a registered scheme | Tax-free portion: the member's own contributions since 2005, plus KES 60,000 for each year of membership up to KES 600,000; the balance is taxed at the withdrawal rates for members of 20 years or more (extended from 15 years in 2024): 10% on the first KES 400,000, 15% on the next 400,000, 20% on the next 400,000, 25% on the next 400,000, 30% above KES 1,600,000; a member of under 20 years pays the ordinary graduated rates on the balance. The scheme withholds the tax |
| Pension from an unregistered scheme, or paid by a former employer directly | Taxable as employment income at the graduated rates, with PAYE |
| NSSF benefits | Exempt on retirement (age 60, or 50 early), invalidity, death and emigration; a withdrawal benefit is taxed like other pre-retirement withdrawals |
| Gratuity for a contract of three continuous years or more, service from 1 July 2025 | Exempt; gratuity for earlier service is spread back over the years it relates to (up to five) and taxed at those years' rates, and gratuity paid into a registered scheme within the contribution limit was always exempt |
| Compensation for loss of office, payment in lieu of notice, redundancy pay | Taxable employment income in the year received, subject to PAYE; the Employment Act's severance pay of 15 days' pay per year of service is taxable |
| Pension or lump sum paid to a non-resident | Withholding tax at 5% as a final tax |
Two departures from a registered provident fund in 2026
Achieng retires at 60 after 25 years with a lump sum of KES 9,000,000: exempt in full under the Finance Act 2025 rule for benefits paid on attaining the retirement age. Her monthly annuity purchased with part of it is also exempt.
Kiptoo resigns at 45 after 12 years to start a business, with a lump sum of KES 3,200,000 of which his own contributions since 2005 total 1,100,000: tax-free portion 1,100,000 + 12 × 60,000 = 720,000, total 1,820,000; taxable 1,380,000. With under 20 years' membership the balance is taxed at the ordinary graduated rates (10% on 288,000, 25% on 100,000, 30% on 992,000 = 28,800 + 25,000 + 297,600 = KES 351,400, before personal relief if not used elsewhere), withheld by the fund. Had he been a member for 20 years, the withdrawal rates (10% on the first 400,000, 15% on the next 400,000, 20% on the next 400,000, 25% on the last 180,000) would have applied: 40,000 + 60,000 + 80,000 + 45,000 = KES 225,000.
Exempt income under the First Schedule
- Income of the national and county governments, the Central Bank, local authorities' statutory functions, and listed public bodies; income of a registered charitable organisation applied to its purposes; income of registered retirement benefits schemes, unit trusts, collective investment schemes and REITs at the vehicle level.
- Interest on infrastructure bonds of at least three years and on green bonds, savings interest on the first KES 300,000 of housing bonds, and interest on deposits by non-resident investors in listed bonds where provided.
- Dividends received by a resident company holding 12.5% or more of the paying company; dividends from an SEZ enterprise; income of an EPZ enterprise in its holiday.
- The first KES 150,000 a month (KES 1.8 million a year) of income of a person with a disability holding an exemption certificate; income of members of the disciplined forces specified in the Schedule; the emoluments of certain diplomats and international organisation staff.
- Pensions and lump sums as set out above; death gratuities; compensation for injury; scholarships and bursaries for education.
- Gains on listed securities (capital gains exemption), transfers on death and within families, and the KES 3 million small land transfer exemption.
- Income of a person exempted by a notice of the Cabinet Secretary in the Gazette (project-specific exemptions, aid-funded projects), and interest earned on green bonds and on loans to certain agricultural and renewable energy projects as gazetted.
4Compliance: returns, payment and penalties
The employer applies the contribution deduction through PAYE each month and reports it on the P9; the scheme administrator withholds tax on taxable withdrawals at the applicable rates and issues a withholding certificate, remitting within five working days; a member declares the taxable part of a withdrawal in the annual return and claims the credit. Exempt benefits are reported but not taxed. A scheme must be registered with both the RBA and the Commissioner, file its own annual return (showing exempt investment income), and obtain the Commissioner's approval of its rules for the tax treatment to hold; contributions to an unregistered scheme are not deductible and its benefits are fully taxable. Employers claiming gratuity exemption for staff must show the contract term of three years or more and the service dates, and split any gratuity that straddles 1 July 2025. Charities and other exempt bodies obtain and renew exemption certificates (five years) and still file returns; a charity that trades outside its objects loses the exemption on that income and is assessed with penalties.
5Examinable focus
What KASNEB tests
Two question types: a PAYE-side part on the deductible pension contribution (the lowest of actual, 30% of pensionable pay and KES 360,000, with the employer's excess as a benefit), and a benefits-side computation on a withdrawal before retirement (own contributions since 2005 plus KES 60,000 per year of membership up to KES 600,000 tax free, then the withdrawal rates for 20-year members or the graduated rates for others), contrasted with the full exemption on retirement, death or ill health since July 2025. Gratuity under the three-year rule and the spreading of pre-July-2025 gratuity are current. A theory part asks for the incomes the First Schedule exempts; give a structured list (persons, income types, thresholds) rather than a random one.