The Federal Inland Revenue Service (FIRS) has announced the implementation of a 10% Withholding Tax (WHT) on interest income payable to investors across various asset classes. This new directive aims to expand the tax net and ensure that individuals and institutions earning passive income from interest-bearing investments contribute their fair share of taxes.
Under this new rule, financial institutions, fund managers, and other asset managers are now required to deduct 10% of the interest amount before paying investors. The withheld tax is then remitted directly to the FIRS. Importantly, this tax applies only to the interest portion of an investment, not the principal.
The FIRS clarified that the deduction does not affect the investor’s initial capital or loan amount. For instance, if an investor places ₦1 million in a fixed-income instrument and earns ₦100,000 as interest, the 10% WHT is calculated on the ₦100,000 interest, not on the ₦1 million capital. The deduction of ₦10,000 would therefore be made, leaving the investor with a net payment of ₦90,000.
This means investors must now expect a slightly lower net return from interest-yielding investments, including treasury bills, corporate bonds, mutual funds, and other fixed-income instruments. The move follows the FIRS’s broader strategy to increase revenue generation and ensure tax compliance within the financial sector.
Tax experts have explained that this 10% deduction serves as a final tax for individuals, meaning no further tax will be imposed on the same income. However, corporate entities may be able to offset the withheld tax against their final income tax liabilities when filing annual returns.
The policy also clarifies that loans are not taxable. If an individual or company borrows money, the amount received is not considered taxable income. However, if that borrowed money generates interest for the lender, the interest becomes taxable and subject to the 10% WHT.
To illustrate how the new rule works, consider an investor who earns ₦425,000 in interest from a fund manager. The manager will deduct 10% (₦42,500) as WHT and remit it to the FIRS, leaving the investor with ₦382,500 as net payment. This simple example highlights how the policy directly affects cash inflows for investors, especially those relying on passive income from interest-bearing securities.
FIRS has stated that this measure aligns with global best practices in taxation, where interest and dividend incomes are taxed at source to reduce tax evasion. The agency emphasized that the responsibility for withholding and remitting the tax lies with the financial institutions and asset managers, not the investors themselves.
Industry analysts believe that while the move could reduce investors’ short-term returns, it will also promote transparency in Nigeria’s financial markets and help the government capture a more accurate picture of investment-related income. Furthermore, it ensures that taxes are collected efficiently at the point of payment, reducing the burden of manual tax declarations on individuals.
Tax professionals advise investors to ensure that their fund managers or banks issue tax credit certificates after every withholding. These certificates serve as proof that the deducted tax has been remitted to the FIRS, which can be useful for recordkeeping or for offsetting taxes in future filings.
Overall, the 10% WHT directive marks another step in Nigeria’s ongoing efforts to improve fiscal discipline and broaden its tax base. While it may slightly reduce investors’ take-home interest, it also enhances compliance and strengthens public revenue collection. For investors, the key is to understand how the deduction works, keep proper documentation, and ensure transparency in their financial dealings.
Example of Calculation
If the total interest earned on an investment is ₦425,000:
- Withholding Tax (10%) = ₦42,500
- Net Interest Payable = ₦425,000 − ₦42,500 = ₦382,500
This example demonstrates that the principal investment remains untouched while the tax applies strictly to the interest earned.
By ensuring clear understanding and compliance, both investors and financial institutions can navigate this new regulation efficiently while contributing to Nigeria’s broader tax reform objectives.
