Income tax deductions are expenses that taxpayers can subtract from their total taxable income, thereby reducing the amount of tax they owe. These deductions help lower an individual’s or a business’s tax liability and encourage compliance with tax regulations.
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What is Income Tax?
Income tax is a levy imposed by the government on individuals and businesses based on their taxable incomes. The Kenya Revenue Authority (KRA) administers income tax under various tax laws. The tax revenue is used to fund government operations, infrastructure development, and social programs.
Standard Income Tax Deductions in Kenya
1. Mortgage Interest Deductions – Homeowners can deduct interest paid on mortgage loans.
2. Insurance Relief – Contributions to life insurance policies qualify for tax relief.
3. Pension Contributions – Contributions to registered retirement schemes are deductible.
4. Health Insurance (NHIF) Contributions – Deductions are allowed for contributions to NHIF and other recognised health schemes.
5. Education Fees Relief – Some education-related expenses may be deductible.
6. Disability Exemption – Individuals with disabilities are eligible for tax deductions up to a specific limit.
7. Capital Allowances – Businesses can deduct expenses related to acquiring capital assets.
8. Employment Expenses – Some work-related expenses may qualify for deductions.
9. Donations to Charitable Organizations – Contributions to approved charities can be deducted from taxable income.
10. Business Expenses – Legitimate business expenses such as rent, salaries, and utilities are deductible.
What are Income Tax Benefits?
Income tax benefits are financial advantages provided by the government to taxpayers. They are designed to encourage investments, savings, and economic growth.
Key Income Tax Benefits in Kenya
1. Tax Relief on Insurance Premiums – Individuals receive tax relief on life insurance premiums. The insurance has to be in companies approved by the tax commissioner.
2. Personal Relief – All individual taxpayers are entitled to basic personal tax relief. This is independent of whether they are employed or they own businesses.
3. Pension Tax Benefits – Tax advantages on contributions to pension schemes and withdrawals upon retirement. However, the pensions must be recognised by the tax commissioner.
4. Small Business Tax Incentives – SMEs may qualify for tax exemptions or reduced tax rates. This is in turnover thresholds and tax rates.
5. Agricultural Tax Incentives – Farmers benefit from special deductions and exemptions on agricultural activities. The farmers must provide evidence that they qualify to the tax deductions and benefits.
6. Investment Deductions – Businesses investing in certain sectors receive tax relief. However, they must provide evidence of the expenditure.
7. Export Processing Zone (EPZ) Benefits – Businesses operating in EPZs enjoy tax holidays. After the tax holidays, they will start paying tax.
8. Affordable Housing Relief – Individuals investing in affordable housing projects receive tax benefits. This is about their contributions to the affordable housing program.
Steps to Apply for Income Tax Deductions and Benefits
There are several steps that a taxpayer can take before applying to utilise tax deductions and benefits. The following are some of those steps:
Step 1: Confirm Eligibility
It is important to ensure that you meet all the eligibility criteria set by the KRA before applying for a tax deduction or benefit. If you do not qualify, the application will not be allowed.
Step 2: Gather Necessary Documents
Depending on the type of deduction or benefit that you want to utilise, you may need:
- Payslips or financial records
- Mortgage or insurance payment receipts
- Retirement scheme contribution statements
- Business expense records
Step 3: Log into the KRA iTax Portal
- Visit kra.go.ke
- Enter your KRA PIN and password to access your account.
Step 4: Submit an Application for the Deduction or Benefit
- Navigate to the “Returns” section. This will depend on the tax typse e.g. income tax, VAT, etc.
- Select the appropriate type of deductions or tax relief.
- Enter the required details and attach supporting documents.
- Submit the application for the deductions or benefits.
Step 5: Await Approval
KRA will review your application and verify your documents. The deduction or benefit will be reflected in your tax returns if approved.
Step 6: File Your Tax Returns
When filing your income tax returns, ensure you correctly claim the approved deductions or benefits. The tax deductions and benefits are claimable within a specified timeframe, beyond which you cannot claim.
Common Mistakes to Avoid
1. Failing to File Returns on Time – Late filing can lead to penalties and loss of benefits because they have to be applied for within specified timeframes.
2. Providing Incorrect Information – Errors in tax templates or missing details can lead to the rejection of the applications. It is important to ensure the information you provide is correct and there are no missing details in the tax template.
3. Not Keeping Proper Records and documents – Always maintain relevant records and documents for verification purposes in case the tax commissioner wants to verify the applications.
4. Claiming Ineligible Deductions – Some taxpayers apply for tax deductions and benefits that they do not qualify for. It is important to ensure you only claim deductions for which you qualify.
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Final Thoughts
Income tax deductions and benefits are expected to provide financial relief to all Kenyan taxpayers. Understanding the available deductions and benefits can help individuals and businesses reduce their tax burden. By following the correct application procedures and maintaining compliance with KRA regulations, taxpayers can maximize their savings and ensure smooth tax filing processes.
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