FG, State Bonds Income Remains Tax-Free Under New Law

Starting January 1, 2026, investors in Nigerian government bonds will continue to enjoy tax-free coupon payments, despite widespread speculation that the new tax regime might erode their earnings.

The confirmation comes as the Nigeria Tax Act 2025 prepares to take effect, with official bond documents — including the Federal Government’s latest Green Bond and Series IV Bond — clearly stating that income from these instruments will remain exempt.\

Since the unveiling of the Act, confusion has persisted among investors who feared that interest on government-issued bonds would be treated like other taxable investment income. However, Section 163 (1)(n) of the law explicitly preserves the exemption, ensuring that holders of Federal Government Bonds, Sukuk, and State Government Bonds will continue to receive their full coupon payments without deductions.

The legislation also strengthens protections for pension assets. In line with Section 163 (1)(h) of the Tax Act and Section 10(2) of the Pension Reform Act 2014, all investment income accruing to pension funds — including interest, dividends, and profits — remains shielded from taxation. Pension Fund Administrators can therefore maintain their confidence in government securities.

Another relief for investors is the continued exemption of bond transactions from Value Added Tax. The Finance Act had already removed VAT from the sale or transfer of government bonds, and this provision has been carried forward into the new law.

One transition period remains in place: capital gains from bond sales will still be taxed until December 31, 2025, under the existing Capital Gains Tax Act. From January 2026, however, the CGT Act will be repealed, making all gains from the disposal of Federal and State Government bonds fully tax-exempt.

In effect, investors face taxable capital gains only until the end of 2025. From 2026 onward, there will be no capital gains tax, no VAT, and no withholding tax — a complete exemption across the board.

For retail and institutional investors alike, this clarity is significant. Coupon payments remain intact, pension investments stay secure, compliance obligations are simplified, and confidence in the bond market is reinforced. The government’s stance mirrors international best practices, where sovereign debt instruments are typically exempt from taxation to attract investors and reduce borrowing costs.