No More Interest Deduction On Mutual Funds Units Or Dividend Interest

Overview

Budget 2026 has removed  the deduction for interest expenses incurred on loans taken to invest in listed equity shares or mutual funds. This is applicable from April 1, 2026 which means dividend and mutual fund income will be fully taxable without any interest offset, leading to a higher tax outgo for investors.

Rule About Interest Deduction

Earlier, taxpayers could claim interest paid on loans taken to invest in shares or mutual funds as a deduction against certain incomes like dividends or capital gains.

Now, the law clearly states:

It is proposed to amend section 93(2) to provide that no deduction shall be allowed in respect of any interest expenditure incurred for earning dividend income or income from units of mutual funds.

This change was introduced to prevent double tax benefits and aggressive tax planning.

Interest Deduction on Dividend Income - Current Position

What Is NOT Allowed

• Interest paid on loans taken to invest in equity mutual funds.
• Interest on borrowed money used to earn dividend income.
• Interest on personal or business loans used for long-term investments.

What Is Allowed (Limited)

• Only up to 20% of the dividend income can be claimed as deduction.
• Even this is restricted only to interest expenses.
• No other expenses (brokerage, commission, advisory fees, etc.) are allowed.

Example:

• Dividend received: Rs 50,000
• Maximum interest deduction allowed: ₹Rs 10,000 (20%)

What Is Allowed as a deduction?

• Only cost of acquisition
• Cost of improvement
• Transfer expenses (like STT, brokerage if applicable)

Interest cost is completely ignored while calculating capital gains.

Why Did the Government Remove This Deduction?

The intention behind this amendment was to:

• Stop taxpayers from claiming interest deductions on exempt or lightly taxed income.
• Ensure fair taxation of investment income.
• Align deductions strictly with taxable income.

Earlier, dividends were tax-free in the hands of investors, yet interest deduction was allowed — which created a tax mismatch.

FAQs

Is interest on loan for mutual fund investment tax-deductible?

No. Interest paid on loans used to invest in mutual funds is not deductible while computing capital gains.

Can I claim any deduction against dividend income?

Yes, but only interest expense up to 20% of dividend income is allowed.

Does this rule apply to both equity and debt mutual funds?

Yes. The restriction applies to all mutual fund units, irrespective of type.

Are other expenses like advisory fees, deductible?

No. Only limited interest expense is allowed, nothing else.

Is dividend income taxable now?

Yes. Dividend income is fully taxable in the hands of the investor at applicable slab rates.