The Federal Inland Revenue Service (FIRS) has issued a directive mandating banks, stockbrokers, and other financial institutions to deduct a 10% withholding tax on interest earned from short-term securities.
This marks a significant shift from previous policy, where such instruments were exempt from taxation to encourage investor participation.
The new rule applies to interest payments on treasury bills, corporate bonds, promissory notes, and bills of exchange. Tax will be deducted at the point of payment, according to the circular released by the agency.
While the directive affects a wide range of short-term instruments, interest earned on federal government bonds remains exempt from the levy.
FIRS clarified that investors will receive tax credits for the amounts withheld unless the deduction is deemed a final tax.
Applicable withholding tax rates include:
- Rents on properties: 10%
- Dividends or profits from companies: 10%
- Interest on bank deposits or securities: 10%
- Royalties: 5%
Last month, the FIRS issued a directive mandating strict compliance with withholding tax regulations on interest earned from short-term securities to avoid the imposition of penalties.
The notice, signed by FIRS Executive Chairman Zacch Adedeji, is addressed to banks, discount houses, stockbrokers, corporate bond issuers, primary dealer market makers (PDMMs), financial institutions, government agencies, tax practitioners, and the general public.
The directive reinforces provisions under Sections 78(1) and 81(1) of the Companies Income Tax Act (CITA), as amended, and the 2024 Withholding Tax Regulations.
It stipulates that tax must be deducted at source from all interest payments on short-term investments at the time of payment.
The FIRS clarified that the individual or entity from whom the tax is withheld is entitled to a tax credit equal to the amount remitted, except in cases where the tax deducted is deemed final. This provision ensures transparency and accountability in the tax
Source: Nairametrics
