Tax season brings out a lot of questions that people spend the rest of the year ignoring. One of the most common: "I paid a lot of interest on loans this year — can I deduct any of it on my KRA returns?"

The short answer is: sometimes yes, often no, and it mostly depends on what the loan was used for. Let's break it down properly so you can file accurately and avoid any unpleasant surprises from KRA.

The Fundamental Rule: Purpose Determines Deductibility

In Kenya's tax framework, the general principle is that you can deduct expenses that are incurred wholly and exclusively in the production of income. Loan interest is an expense — so if a loan was used to generate taxable income, the interest may be deductible. If the loan was used for personal consumption, it generally isn't.

This is the dividing line between most scenarios, so keep it in mind throughout this article.

For Employed Individuals (PAYE Taxpayers)

If you're employed and pay tax through PAYE (Pay As You Earn), your deduction options for loan interest are quite limited. PAYE is calculated on employment income, and KRA's system for employees is relatively straightforward — your employer handles most of it.

There is one notable exception: home loan (mortgage) interest. Under the Income Tax Act, employed individuals can claim a deduction of up to KES 300,000 per year on interest paid on a mortgage for their primary residence. This deduction is applied against your employment income when filing your annual return.

To claim it:

  • The loan must be from a registered financial institution in Kenya
  • The property must be your principal private residence
  • You'll need a certificate from your lender showing how much interest you paid during the tax year
  • You claim it on your iTax annual return (form P9)

Mobile loans, personal loans, and short-term loans used for personal purposes — even if used to cover an emergency at home — do not qualify for this deduction if you're a PAYE employee.

For Business Owners and Self-Employed Individuals

This is where it gets more interesting. If you run a business — whether a registered company, a partnership, or a sole proprietorship — you can generally deduct loan interest as a business expense, provided the loan was used for business purposes.

Qualifying examples:

  • A loan to buy stock or inventory for your shop
  • A loan to purchase business equipment (a laptop, sewing machine, boda boda)
  • Working capital borrowed to pay suppliers or cover business operating costs
  • A loan used to renovate a business premises

Non-qualifying examples:

  • A loan used to pay your personal rent or school fees
  • A loan used to buy personal electronics or furniture
  • A loan borrowed for a personal emergency and repaid from salary

If you took a mobile loan from an app like SwiftCash to restock your business or pay a supplier, and you can demonstrate this with records, the interest and fees paid may be deductible as a business expense when you file your business income tax return.

Need cash fast? Apply on SwiftCash — borrow KES 1,000–40,000, disbursed to M-Pesa in under 2 minutes.

Thin Capitalisation Rules for Companies

If you operate a formal company with shareholders, there is an additional rule to be aware of: thin capitalisation. Kenya's tax law restricts the amount of interest a company can deduct when borrowing from related parties (like a parent company or a major shareholder) exceeds certain thresholds relative to equity.

For small businesses and sole traders using mobile loans, this rule is unlikely to be relevant. But if you're borrowing from a director-controlled fund or a related entity for your company, it's worth discussing with your accountant.

What Documentation Do You Need?

Whether you're claiming a mortgage interest deduction as an employee or business loan interest as a self-employed person, documentation is everything. KRA may ask you to substantiate your claims, and having proper records protects you.

Keep:

  • Loan agreements or offer letters from your lender
  • M-Pesa confirmation messages showing repayments
  • Statements from your lender showing principal and interest breakdown
  • Evidence of how the loan was used (receipts, supplier payments, invoices)

For mobile loans, the loan app's transaction history and any statements you can download serve as your documentation. It's good practice to screenshot your loan offer details (which show the fee/interest amount) at the time of borrowing.

The Processing Fee Question

Many digital lenders in Kenya, including mobile loan apps, charge a processing fee rather than a traditional interest rate. From a tax perspective, this fee is treated similarly to interest — if the loan was for a business purpose and the fee is part of the cost of borrowing for that business, it may be deductible as a business expense.

The important thing is to ensure you have a record of the fee charged and the business purpose of the loan. A KES 500 processing fee on a KES 10,000 business loan is a business cost, just as much as the KES 10,000 itself was a business resource.

Common Mistakes When Filing

  1. Claiming personal loan interest as business expense. This is not only inaccurate — it's the kind of thing KRA audits are designed to catch. Don't mix personal and business finances.
  2. Forgetting to claim the mortgage deduction. The KES 300,000 mortgage interest deduction is widely underutilised. If you have a home loan, check whether you're claiming it.
  3. No documentation. A deduction without supporting documents is a liability, not a benefit. Always keep records.
  4. Overstating the deductible amount. Only the interest/fee portion of your repayment is deductible — not the principal. Make sure you know which is which.

Should You Consult a Tax Professional?

For simple PAYE situations, Kenya's iTax system is reasonably user-friendly and KRA's helpline can answer basic questions. But if you're self-employed, run a business, or have multiple income streams, it's worth spending an hour with a qualified accountant before filing. The cost of professional tax advice is itself a deductible business expense — and it could save you from underpaying (and facing penalties) or overpaying and losing money.

Tax season is also a good time to think about your overall borrowing strategy for the coming year. Short-term mobile loans can be excellent tools for managing cash flow in your business — as long as you're using them strategically and keeping records. SwiftCash offers KES 1,000–40,000 disbursed to M-Pesa in under two minutes, making it a practical working capital option for small business owners who need to move fast.