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.
According to a circular issued by the agency on Tuesday, October 28, the new directive covers interest on treasury bills, corporate bonds, promissory notes, and bills of exchange, with the tax to be deducted at the point of payment.
This development represents a major policy shift, as such instruments were previously exempt from taxation to encourage investor participation.
However, income from federal government bonds will remain exempt from the levy.
FIRS explained that investors will be entitled to tax credits for the amounts withheld unless the deduction is classified as a final tax.
Short term securities have traditionally appealed to investors seeking high returns and quick maturity.
The new withholding tax policy may now influence investment decisions and returns in the money market.
The FIRS executive chairman Zacch Adedeji emphasized the importance of compliance, stating, “All relevant interest payers are required to comply with this circular to avoid penalties and interest as stipulated in the tax law.”
The agency did not disclose projections for revenue generation from the new tax measure.
According to the FIRS, withholding tax is an advance tax deducted at source from specific payments made to individuals or companies.
The payer is responsible for remitting the tax directly to the relevant authorities.
Applicable withholding tax rates include:Rents on properties: 10%, Dividends or profits from companies: 10%, Interest on bank deposits or securities: 10%, Royalties: 5%
The FIRS issued a directive in the month of September mandating strict compliance with withholding tax regulations on interest earned from short term securities to avoid the imposition of penalties.
The notice, signed by 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 process, while also safeguarding the rights of taxpayers
