10% withholding tax on investment income now to be deducted at point of payment
The Federal Inland Revenue Service (FIRS) has issued a new directive instructing banks, stockbrokers, and other financial institutions to begin deducting a 10% withholding tax (WHT) on investment income at the point of payment. The new regulation applies to earnings from short-term securities such as treasury bills, corporate bonds, promissory notes, and bills of exchange. This development marks a significant shift from previous practice, where certain forms of interest income were either exempted or taxed differently. The move forms part of Nigeria’s broader tax reform efforts under the Deduction of Tax at Source (Withholding) Regulations, 2024, aimed at tightening revenue collection and expanding the country’s taxable base.
The directive is contained in a public notice issued by FIRS titled ” Withholding of tax from interest on investment in short term securities” and signed by Dr. Zacch Adedeji, Executive Chairman of the service.
According to the new directive, financial institutions must deduct the withholding tax as soon as income becomes due or is paid, whichever occurs first. The tax withheld will then be remitted to the tax authority within the statutory period. The FIRS clarified that this tax deduction will serve as an advance payment against the taxpayer’s overall income tax liability, meaning that investors may claim credit for the withheld amount when filing their annual tax returns. This approach ensures that taxation occurs at the source, promoting transparency and minimizing revenue leakage.
The legal foundation of this measure lies in the Deduction of Tax at Source (Withholding) Regulations, 2024, which revised the previous framework to make the deduction process clearer and more inclusive. Under the regulation, withholding agents—typically banks or financial institutions—are obligated to deduct the tax either upon payment or once the amount becomes payable. In transactions involving related parties, deduction may also be required when the liability is recognized in the books, even if no cash payment has yet occurred. Additionally, financial institutions must issue tax credit receipts or certificates to investors whose income has been subjected to withholding, enabling them to claim the deducted amount as part of their tax credit.
The directive stipulates that banks and financial institutions must remit the deducted tax promptly. For federal taxes, remittance must be made by the 21st day of the month following the deduction, while state-level remittances are generally due by the 30th of the subsequent month. Failure to deduct or remit the tax on time attracts stiff penalties, including a fine amounting to 10% of the tax due and applicable interest until full payment is made.
Under this new arrangement, the 10% withholding tax applies primarily to returns on short-term investment instruments, particularly those generating interest income. The deduction occurs when the payment is made or when the obligation becomes due, whichever happens first. For Nigerian resident investors, the withholding tax acts as a prepayment that can later be credited against their total tax liability, while for non-resident investors, it is often treated as a final tax. This distinction ensures alignment with international tax practices and provides certainty for cross-border investors.
The new policy carries several implications for investors, banks, and the broader Nigerian economy. For investors, one immediate impact is a potential reduction in the net returns earned from their investments. Because interest income will now be taxed at source, investors may see a decline in overall yields unless their tax credits fully offset the deduction. This could lead some investors to adjust their portfolios, possibly favoring instruments or sectors with lower or exempted withholding tax rates.
For financial institutions, the directive introduces a more rigorous compliance environment. Banks, stockbrokers, and fund managers are now responsible for automatically applying the 10% deduction, maintaining detailed records, issuing tax receipts, and ensuring timely remittance to the FIRS. Institutions will also need to determine whether certain clients qualify for reduced rates under applicable double taxation treaties or investment incentives. This increased administrative responsibility will likely require system upgrades, staff training, and improved reporting procedures.
From the government’s perspective, the new withholding rule is expected to enhance tax compliance and revenue stability. By collecting tax at the point of payment, authorities can minimize underreporting and improve the efficiency of tax collection. The measure will help boost non-oil revenue, which remains critical to Nigeria’s fiscal sustainability and developmental goals. It also supports the country’s efforts to align its tax practices with international standards, increasing transparency and investor confidence.
However, the directive could have broader market effects. As investors adjust to the new withholding regime, issuers of short-term securities might need to offer slightly higher gross yields to compensate for the reduction in net returns. This could marginally increase the cost of borrowing for corporations and government agencies seeking to raise funds through fixed-income instruments. Additionally, investors may favor long-term or tax-exempt securities, such as federal government bonds, depending on how these are treated under the new regulation.
Disputes may also arise regarding the classification of certain investment instruments, timing of deductions, or eligibility for tax credits, particularly for hybrid or complex financial products. Financial institutions may face challenges in interpreting the rules, especially where new products or digital investment platforms are involved. These uncertainties underscore the importance of clear regulatory guidance and continuous stakeholder engagement between FIRS, financial institutions, and investors.
To comply effectively, banks and financial intermediaries must ensure that their systems can accurately deduct and remit the required tax while providing investors with the necessary documentation to claim their tax credits. They must also educate their clients about the implications of the new directive to prevent confusion and build trust. Investors, in turn, are encouraged to review the tax implications of their portfolios, consult tax professionals where necessary, and verify that the tax credits reflected on their certificates align with their actual deductions.
Ultimately, this policy underscores Nigeria’s determination to modernize its tax administration, strengthen fiscal efficiency, and ensure equitable contribution from all income earners. While it may temporarily affect investment yields and increase administrative tasks for financial institutions, the long-term benefits include improved revenue generation, enhanced fiscal transparency, and a more sustainable investment environment.
For more information on tax regulations and compliance, visit the Federal Inland Revenue Service (FIRS) website at https://www.firs.gov.ng. For details and updates from the financial sector, you can also visit First Bank of Nigeria’s official website at https://www.firstbanknigeria.com.
