No - gratuity at the statutory 25% rate is not taxed in Zambia. You receive the full amount without PAYE, NAPSA, or NHIMA deductions. The Commissioner-General has discretion under Section 21(1) of the Income Tax Act (Cap 323), and in practice gratuity at or below 25% of basic pay is paid gross. Government employees are fully exempt under the Second Schedule. Use our gratuity calculator to see the exact payout for your contract.
The legal position - Income Tax Act Section 21(1)
Section 21(1) of the Income Tax Act (Cap 323) gives the Commissioner-General discretion over how gratuity is taxed. In practice, gratuity at the statutory 25% minimum rate is paid gross without deductions. Here is how the law works:
At or below 25% of basic pay - the Commissioner-General has discretion to apportion the amount across years of service. In practice, employers pay the full gross amount without PAYE, NAPSA, or NHIMA deductions.
Above 25% of basic pay - Proviso (i) of Section 21(1) provides that the excess above 25% is treated as regular employment income and may be taxed at normal PAYE rates.
Government employees - gratuity paid by Government, municipal/township/rural councils, UNZA, or the National Council for Scientific Research is fully exempt under the Second Schedule, paragraph 7(n).
The 25% threshold in the Income Tax Act aligns with the statutory minimum gratuity rate under Section 73 of the Employment Code Act. This means if you receive gratuity at the standard 25% rate, it is paid gross. If your contract specifies a higher rate (30%, 33%, 35%), the portion above 25% could technically be taxed - though many employers still pay the full amount gross.
What IS taxable in your terminal benefits
Other components of your terminal benefits package have different tax treatment:
Component | Tax Treatment | Legal Basis |
|---|---|---|
Gratuity (at 25%) | Paid gross | s.21(1) CG discretion |
Gratuity (above 25%) | Excess may be taxed | s.21(1) Proviso (i) |
Gratuity (govt employee) | Fully exempt | Second Schedule 7(n) |
Notice pay | Fully taxable | Employment income |
Leave pay | Fully taxable | Employment income |
Redundancy pay | First K2M exempt | s.21(5) |
Death in service | First K2M exempt | s.21(5) |
This means if you receive K72,000 in gratuity at 25% plus K20,000 in leave pay and K11,500 in notice pay, only the leave pay and notice pay are taxed. The K72,000 gratuity is paid gross.
Worked example: terminal benefits with gratuity
An employee earning K8,000/month on a 3-year contract at 25%, with 30 days unserved notice and 52 outstanding leave days:
Gratuity = K8,000 x 36 months x 25% = K72,000 (paid gross)
Notice pay = K307.69 x 30 days = K9,230.77 (taxed)
Leave pay = K307.69 x 52 days = K16,000.00 (taxed)
Taxable amount = K9,230.77 + K16,000.00 = K25,230.77
Gratuity received in full = K72,000.00Key point: The gratuity of K72,000 at the 25% rate is paid gross. Tax only applies to the notice pay and leave pay portions of your terminal package.
Check your own figures: the Zamcalc gratuity calculator shows the tax-free payout at the 25% statutory rate and flags any taxable portion if your contract specifies a higher rate.
What if my gratuity rate is above 25%?
If your contract specifies a rate above 25% (e.g. 30% or 35%), Proviso (i) of Section 21(1) provides that the excess above 25% of your total basic pay earned is treated as regular income. In practice, many employers still pay the full amount gross without making this distinction. However, legally, an employer paying gratuity at 35% could deduct PAYE on the 10% excess above 25%.
If your employer has deducted tax from your gratuity at the 25% statutory rate, raise this with them directly. Standard practice is to pay gratuity at 25% without deductions.
Frequently asked questions
Should I check my payslip for gratuity deductions?
Yes, always review your terminal benefits breakdown. Gratuity should appear as a gross amount with no deductions. If you see PAYE, NAPSA, or NHIMA deducted from the gratuity line, raise this with your employer or HR department.
Are other terminal benefits taxed?
Yes. Notice pay and leave pay are treated as employment income and are subject to PAYE, NAPSA, and NHIMA. Redundancy pay and death in service severance have a K2,000,000 tax exemption under Section 21(5) of the Income Tax Act - only the amount above K2,000,000 is taxed.
For the full calculation method, see our guide to calculating gratuity. To understand how gratuity compares to other terminal benefits, read Gratuity vs terminal benefits in Zambia.
Sources
Income Tax Act (Cap 323) (PDF) - Section 21(1) gratuity treatment, Second Schedule 7(n) government exemption