Editor’s Note: This article was originally written on November 3, 2025 and is being republished here for archival purposes.
The Federal Inland Revenue Service (FIRS) has announced a major change in Nigeria’s tax regime for
investment income. Under a new directive issued in October 2025, banks, stockbrokers, and other
financial institutions are now required to deduct a 10% withholding tax (WHT) on interest earned from
short-term securities.
This development marks a significant departure from previous policy, under which such instruments—
particularly treasury bills (T-bills) and other short-term securities—were exempt from taxation. The
exemption had long been used as an incentive to encourage participation in the Nigerian money market
and support liquidity management by investors and financial institutions.
The new FIRS rule applies to interest on treasury bills, corporate bonds, promissory notes, and bills of
exchange, among other short-term financial instruments. The tax will be deducted at the point of
payment and remitted to the Federal Inland Revenue Services by the paying institution.
LEGAL AND REGULATORY FOUNDATION
The Federal Inland Revenue Services directive is rooted in provisions of the Companies Income Tax Act
(CITA) and the Withholding Tax Regulations, 2024, both of which empower the Service to collect
withholding tax on specified categories of income. Sections 78 and 81 of CITA stipulate that companies
making payments of interest, rent, royalties, or other prescribed sums must deduct tax at source and
remit the amount to the tax authority within a prescribed timeframe.
Under the new circular, the Federal Inland Revenue Services clarified that the tax deduction will apply to
interest earned from all short-term securities, whether issued by the government or private entities,
unless specifically exempt. The remittance deadline is the 21st day of the month following the month of
payment. Failure to deduct or remit attracts the standard penalties and interest applicable under
Nigerian tax law.
SCOPE AND EXEMPTIONS
While the new tax covers a broad range of short-term securities, some important exemptions remain.
According to the FIRS and corroborated by market sources, Federal Government Bonds and certain
Central Bank of Nigeria (CBN) Open Market Operation (OMO) bills remain exempt from withholding
tax.
Previously, most short-term investment instruments such as T-bills were considered tax-free. The new
rule effectively removes that advantage, aligning the tax treatment of such securities with other income
sources like dividends and interest on long-term bonds.
This means that investors who were accustomed to receiving gross interest income will now see a 10%
deduction at source, reducing their net yield.
RATIONALE BEHIND THE POLICY CHANGE
The introduction of the new withholding tax aligns with Nigeria’s broader strategy to increase non-oil tax
revenue and close existing tax loopholes. Key policy drivers include:
- Revenue Mobilization: Nigeria continues to face fiscal challenges, with low non-oil tax collection
relative to GDP. The inclusion of short-term interest income in the tax net expands the
government’s revenue base. - Tax Equity: The exemption for short-term securities had created an uneven playing field,
favouring investors in these instruments over others whose investment income was already
taxed. - Compliance and Transparency: The automatic deduction of tax at source reduces evasion and
strengthens compliance across the financial sector. - Policy Alignment: The measure harmonises Nigeria’s treatment of passive income streams,
ensuring consistency with global standards and domestic reforms introduced under the Nigeria
Tax Administration Act (2025).
From a macroeconomic perspective, the move signals the government’s intent to rationalize incentives
and promote a more sustainable fiscal framework.
IMPLICATIONS FOR INVESTORS
The immediate consequence of the new rule is a reduction in net yields for investors in short-term
securities. For instance, an investor earning a 15% annualized return on a treasury bill will now
effectively receive 13.5% after tax (assuming the 10% WHT is not creditable against other tax
obligations).
However, the treatment of the withheld tax will depend on the investor’s profile:
- For corporate investors, the 10% WHT is creditable, meaning it can be offset against their total
tax liability when filing annual returns. - For individual investors, the withholding tax may serve as a final tax, depending on FIRS
guidance and the specific investment instrument. - Foreign investors covered under double taxation agreements (DTAs) may be eligible for reduced
rates, typically 7.5%, depending on the terms of Nigeria’s treaties with their home countries.
As a result, investors will need to review their portfolio composition, calculate post-tax yields, and
determine whether alternative instruments such as long-term federal government bonds or tax
advantaged deposits offer better after-tax returns.
IMPACT ON FINANCIAL INSTITUTIONS
For banks, brokers and issuers, the FIRS directive introduces both administrative responsibilities and
compliance risks.
Financial institutions must now:
- Identify all qualifying payments and ensure correct withholding on interest income.
- Deduct and remit the 10% tax to the FIRS by the stipulated deadline (21st of the following
month). - Issue withholding tax credit certificates to investors where applicable.
- Maintain proper records and update IT systems to automate deduction and reporting.
Failure to comply may attract penalties and interest charges. Historically, the penalty for non-remittance
of WHT is 10% of the tax due, plus interest at the prevailing CBN rate until payment is made.
Financial institutions will also need to review product documentation, update investor disclosures, and
possibly reprice securities to reflect the new tax impact on yields.
MARKET REACTIONS AND BROADER ECONOMIC EFFECTS
Market analysts anticipate several short-term and medium-term effects from this policy change:
- Higher Yields: Issuers may need to increase nominal yields on short-term securities to maintain
investor demand, potentially raising the government’s short-term borrowing costs. - Portfolio Shifts: Investors could move funds into instruments that remain exempt (such as long
term government bonds) or into alternative asset classes offering higher post-tax returns. - Reduced Liquidity: The once-attractive short-term instruments might see reduced participation,
impacting liquidity in the money market. - Improved Compliance: The deduction at source enhances transparency and simplifies
monitoring, making tax enforcement easier for FIRS. - Market Adjustment: In the medium term, markets are expected to adjust as investors
recalibrate pricing expectations and yields normalize to account for the tax burden.
PRACTICAL STEPS FOR STAKEHOLDERS
Investors should:
- Review all short-term holdings and confirm whether they fall under the new rule.
- Recalculate expected returns net of withholding tax.
- Collect WHT credit certificates to claim allowable credits during tax filing.
- Consult professional tax advisors to optimize portfolios and ensure compliance.
Financial institutions should: - Update internal systems and client communication templates.
- Train compliance teams on the new deduction and remittance processes.
- Review outstanding contracts or prospectuses that assumed tax-free status.
- Monitor FIRS for further clarification—particularly regarding exemptions, non-resident investor
treatment, and final versus creditable tax classification.
CHALLENGES AND GREY AREAS
Although the directive is clear in its intent, certain practical ambiguities remain:
- Definition of “Short-Term Securities”: The FIRS circular lists examples but does not specify
maturity thresholds, leaving interpretation open for instruments near the one-year mark. - Treatment of Structured Products: Some hybrid instruments may not clearly fit within the
provided categories. - Foreign Investor Implications: The interaction between domestic rules and tax treaty provisions
needs clarification, especially where different rates apply. - Timing of Implementation: Questions persist over whether the rule applies retroactively to
existing instruments or only to those issued after the circular’s date.
Market participants are awaiting additional guidance from FIRS to resolve these uncertainties.
CONCLUSION
The FIRS’s decision to impose a 10% withholding tax on short-term investment interest marks a turning
point in Nigeria’s financial market taxation landscape. While the measure is driven by legitimate fiscal
and compliance objectives, its immediate effect is a reduction in post-tax yields for investors and
additional compliance obligations for financial institutions.
In the longer term, however, the directive could foster greater tax equity, enhanced transparency, and
stronger revenue mobilization—key pillars of Nigeria’s ongoing tax reforms.
For now, investors, issuers, and financial intermediaries should proactively adapt by reassessing
portfolios, ensuring compliance readiness, and seeking professional guidance to navigate this evolving
regulatory environment.
REFERENCES
- BusinessDay – “Nigeria imposes 10% withholding tax on interest on short-term securities” (Oct
2025)
- TheCable – “FIRS directs banks, stockbrokers to deduct withholding tax on short-term securities
interest”
- Nairametrics – “FIRS imposes 10% withholding tax on short-term investment interest”
https://nairametrics.com/2025/10/29/firs-imposes-10-withholding-tax-on-short-terminvestment-interest
- BusinessPost – “FIRS imposes 10% withholding tax on short-term securities”
https://businesspost.ng/economy/firs-imposes-10-withholding-tax-on-short-term-securities
- Reuters – “Nigeria to impose 10% withholding tax on interest on short-term securities”
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