The Federal Inland Revenue Service (FIRS) has announced the introduction of a 10 percent withholding tax on interest income derived from short-term investment instruments, marking a major shift in Nigeria’s tax policy and signaling renewed efforts to widen the government’s non-oil revenue base.
Under the new directive, banks, stockbrokers, discount houses, and other financial institutions are now mandated to deduct the tax at the point of payment on interest earned from treasury bills, corporate bonds, promissory notes, and bills of exchange.
This policy reverses Nigeria’s long-standing tax exemption on such instruments—a measure that had been introduced to encourage investment inflows and deepen participation in the local fixed-income market.
“All relevant interest-payers are required to comply with this circular to avoid penalties and interest as stipulated in the tax law,” said FIRS Executive Chairman, Zacch Adedeji, in the official circular announcing the measure.
Scope and exemptions
While the directive extends across most short-term securities, interest income from federal government bonds remains exempt, maintaining their attractiveness to institutional and retail investors seeking stable long-term returns.
The circular clarified that the withholding tax will be deducted at source, and investors will be entitled to a tax credit equivalent to the amount withheld—unless the deduction is deemed final. This ensures transparency and accountability in the tax process while protecting the rights of taxpayers.
Legal basis and enforcement
According to the FIRS, the directive aligns with the provisions of Sections 78(1) and 81(1) of the Companies Income Tax Act (CITA), as amended, and is consistent with the 2024 Withholding Tax Regulations.
The notice was distributed to all banks, primary dealer market makers (PDMMs), stockbrokers, financial institutions, corporate bond issuers, government agencies, and tax practitioners.
FIRS also emphasized that any entity that fails to deduct and remit the tax as required will be subject to statutory penalties and accrued interest.
Market impact and investor implications
The new policy introduces a potential shift in Nigeria’s financial markets, particularly in the short-term debt segment, which has historically attracted investors due to its competitive yields and quick maturity.
Market analysts note that the 10 percent levy could reduce net returns, prompting investors to rebalance their portfolios in favor of longer-term government bonds, which remain exempt from taxation.
“This will likely affect short-term liquidity in the fixed-income market,” said one Lagos-based financial analyst. “However, it reinforces the government’s broader fiscal reform strategy and demonstrates its commitment to improving non-oil revenue collection.”
The development comes at a time when Nigeria is intensifying efforts to diversify its revenue sources amid fiscal constraints and global oil market volatility.
While FIRS has not disclosed projected earnings from the policy, experts believe it could significantly enhance revenue from the financial sector, particularly as short-term instruments account for a large portion of domestic debt investments.
Understanding withholding tax
Withholding tax is an advance payment of income tax deducted at source from specified payments such as rents, dividends, interest, and royalties. The payer is responsible for remitting the deducted amount to the FIRS.
Current withholding tax rates include:
- Rents on properties – 10 percent
- Dividends and profits – 10 percent
- Interest on deposits and securities – 10 percent
- Royalties – 5 percent
By enforcing this measure on short-term securities, the FIRS aims to ensure equitable taxation across all income-generating financial activities and close long-standing compliance gaps in the investment ecosystem.
Broader fiscal context
Nigeria’s renewed focus on domestic revenue mobilization is a central part of the federal government’s fiscal consolidation strategy. The FIRS has in recent years intensified its digital compliance initiatives, which helped the agency exceed its ₦12 trillion revenue target in 2024.
Analysts say the new withholding tax policy reflects the FIRS’s evolving approach under Zacch Adedeji’s leadership, combining stricter enforcement with modernization to ensure tax fairness and sustainability.
“This is a strategic move to balance fiscal needs with market realities,” said a senior tax consultant in Abuja. “The government is gradually phasing out exemptions that no longer align with Nigeria’s current revenue priorities.”
Outlook
Although the short-term impact may include reduced investor appetite for short-duration assets, the long-term implications could favor market stability and fiscal transparency. The measure also brings Nigeria’s tax treatment of investment income more in line with global standards.
As implementation begins, financial institutions are expected to update their internal systems for automated deduction and remittance. The FIRS has warned that it will closely monitor compliance and conduct routine audits to ensure strict adherence.
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FIRS introduces 10% withholding tax on short-term investment income
ShareThe Federal Inland Revenue Service (FIRS) has announced the introduction of a 10 percent withholding tax on interest income derived from short-term investment instruments, marking a major shift in Nigeria’s tax policy and signaling renewed efforts to widen the government’s non-oil revenue base. Under the new directive, banks, stockbrokers, discount houses, and other financial institutions…
