FIRS Imposes 10% Withholding Tax on Investment Interest

The Federal Inland Revenue Service (FIRS) has directed banks, stockbrokers, and other financial institutions to begin deducting a 10% withholding tax on interest earned from short-term securities – marking a major shift from previous tax exemptions that encouraged investor participation in Nigeria’s financial markets.

In a circular issued by the agency, the new rule covers interest payments on treasury bills, corporate bonds, promissory notes, and bills of exchange, with deductions to be made at the point of payment.

Change in Policy and Investor Implications

Until now, short-term investment instruments were exempted from taxation to attract more investors to the market. The reintroduction of withholding tax, however, is expected to alter investor sentiment and potentially reshape the dynamics of Nigeria’s fixed-income market, long known for its stable returns and low risk profile.

FIRS clarified that while the tax applies to a broad range of short-term instruments, interest earned on Federal Government bonds remains exempt. Investors will also receive tax credits for withheld amounts unless the deductions are deemed final.

Compliance and Enforcement

FIRS Executive Chairman, Dr. Zacch Adedeji, emphasized the need for strict adherence to the new rule, warning that non-compliance would attract penalties and interest as stipulated by law.

“All relevant interest-payers are required to comply with this circular to avoid penalties and interest as stipulated in the tax law,” Dr. Adedeji stated.

Although the FIRS did not provide revenue projections, the directive is viewed as part of the federal government’s broader strategy to enhance tax compliance and strengthen non-oil revenue generation.

Understanding Withholding Tax

Withholding tax (WHT) is an advance payment of income tax deducted at source from specific transactions. Typically, financial institutions remit these deductions directly to the tax authorities on behalf of recipients.

Common WHT rates include:

• 10% on rents, dividends, profits, and interest payments
• 5% on royalties

The FIRS circular draws legal backing from Sections 78(1) and 81(1) of the Companies Income Tax Act (CITA), as amended, and the 2024 Withholding Tax Regulations, which mandate that taxes be deducted at the time of payment for all qualifying short-term investment interest.

Ensuring Transparency and Accountability

The FIRS noted that taxpayers whose income is subject to withholding tax will be entitled to a credit equal to the remitted amount – except in cases where the deduction is final. This measure, the agency said, is designed to enhance transparency, accountability, and the protection of taxpayer rights.

In enforcing this directive, FIRS seeks to broaden Nigeria’s tax base, align with global fiscal standards, and reinforce financial integrity – even as investors reassess their short-term yield and liquidity strategies.