Tax on Bank Deposits Kenya: Rules for Individuals & Businesses

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Post published:September 30, 2025
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Managing tax obligations on bank deposits is a key part of financial compliance for both individuals and businesses in Kenya. The Income Tax Act (Cap. 470, Laws of Kenya) outlines how interest income from deposits is treated, and the rules differ depending on whether the depositor is an individual or a corporate entity.

How Deposit Interest is Taxed

Under Section 3(2)(b) of the Act, income tax is chargeable on interest income, including interest earned on bank deposits.

Withholding Tax on Interest

According to Section 35(3)(b):

Banks must withhold 15% tax on interest paid to resident depositors.
However, this withholding tax does not apply if the recipient of the interest is a financial institution listed in the Fourth Schedule. These exempt institutions include:
- Licensed banks
- Insurance companies
- Co-operative societies
- Registered pension and retirement funds

In practice, this means:

Resident individuals and ordinary companies usually have 15% deducted from their deposit interest.
Exempt institutions (e.g., pension funds) receive their deposit interest without withholding.

Final Tax vs. Advance Tax Credit

The treatment of the 15% withholding tax depends on the depositor’s profile:

For individuals: The 15% withholding tax on deposit interest is considered a final tax. This means that once deducted, no further tax is payable, and the income does not need to be declared again in annual tax returns.
For companies and non-individual depositors: The same 15% withholding applies, but it is treated as an advance tax credit. The company must still declare the interest income in its returns, and the withheld amount is offset against the final tax liability.

Key Takeaways for Taxpayers

Individuals earning interest on bank deposits have their tax obligations settled at source through the final 15% withholding tax.
Companies and non-individual depositors must declare their interest income, treating the withholding as a credit against their corporate tax bill.
Financial institutions listed in the Fourth Schedule enjoy exemption from withholding tax on deposits.

Why This Matters

Understanding how deposit interest is taxed helps avoid compliance issues and ensures proper reporting in line with the Income Tax Act. For businesses, it also highlights opportunities to manage tax efficiently, especially when structuring investments or cash reserves.

📞 Need Expert Tax Guidance?
At UHY Kenya, we provide tailored tax advisory services to individuals, corporates, and financial institutions. Our team helps you stay compliant while optimizing your tax position.