The Kenyan Finance Act 2025 introduces a significant change to mortgage interest deductions by expanding tax relief to encompass construction loans. Under Section 15(3) (b) of the Income Tax Act (ITA), taxpayers can now claim an annual deduction of up to KES 360,000 on interest paid for building, purchasing, or improving a residential property. This benefit applies when the loan is obtained from one of Kenya’s top six financial institutions listed in the Fourth Schedule, as detailed below:

1. A bank or a financial institution licensed under the Banking Act
2. An insurance company licensed under the Insurance Act
3. A building society registered under the Building Societies Act.
4. A co-operative society registered under the Co-operative Societies Act
5. The Kenya Post Office Savings Bank was established by the Kenya Post Office Savings Bank Act.
6. Mortgage refinance companies licensed under the Central Bank of Kenya Act.

Previously, the deduction only applied to home purchases or renovations, excluding those constructing houses from scratch. The new provision aims to promote homeownership and real estate investment by allowing Kenyans to reduce their taxable income through mortgage interest deductions, including for newly built homes.

However, there are key restrictions to note:

• The deduction applies to only one residential property.
• If the homeowner occupies the property for less than a year, the annual deduction is proportionally reduced.
• The loan must be obtained for constructing, buying, or improving a property intended for personal residence, not for rental purposes.
• The KES 360,000 cap remains in place, limiting deductions for high-value mortgages.

This amendment is a positive development, as it encourages home construction and stimulates growth in the residential sector. Taxpayers can now build houses from the ground up and claim interest deductions, thereby fostering investment and homeownership.