KRA sets 8% interest rate for fringe benefits and employee loans
KRA sets 8% interest rate for fringe benefits and employee loans
The Kenya Revenue Authority (KRA) has announced that it has set the interest rate for fringe benefits and low-interest employee loans at 8 per cent for the first half of 2026, providing guidance for employers on calculating taxable benefits.
In the new directive issued on Thursday January 22, the taxman announced that under Section 12B of the Income Tax Act, the market interest rate of 8 per cent will apply for January, February, and March 2026 when determining fringe benefit tax on employee perks such as company cars, housing, or loans.
“For the purposes of Section 12B of the Income Tax Act, the Market Interest Rate is 8%. This rate shall be applicable for the three months of January, February and March 2026,” the taxman said.
Fringe benefit tax are non-monetary benefits offered by employers to their staff, with the levy assessed using the prevailing market value or applicable interest rate of the benefit, to ensure such perks are taxed alongside ordinary earnings.
For example, if a company gives a loan to an employee at a rate below the market interest, the difference is considered a taxable fringe benefit.
It is essentially the tax on the benefit that an employee enjoys by getting a cheaper loan from their employer. The burden of payment falls on the employer, and it is payable whether or not the employee is exempt from tax.
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For low-interest loans provided to employees, the prescribed interest rate is also 8 per cent for January through June 2026. This will ensure employers calculate the correct taxable benefit under Section 5(2A) of the Income Tax Act.
Nonetheless, KRA requires that a 15 per cent withholding tax on deemed interest from such loans be deducted by employers and remitted to the Commissioner within five working days, as stipulated under the taxation laws.
The announcement means that these rates are part of the regulatory framework that guides compliance for both employers and employees, helping ensure correct reporting and payment of taxes.
Additionally, this means that employers should now update their payroll and accounting systems to reflect these rates and time limits to avoid penalties for non-compliance.
“For purposes of Section 16(2)(ja) of the Income Tax Act, the prescribed rate of interest is 8%. This rate is applicable for the months of January, February and March 2026.”
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