The Finance Bill, 2026 has proposed a significant change in the taxation of dividend income and income from mutual fund units by disallowing interest expenditure as a deductible expense. The amendment impacts investors who fund their investments through borrowings and claim interest as a deduction under the head "Income from Other Sources."
Existing provision under Section 93
Under the current provisions of Section 93 of the Income-tax Act, 2025, dividend income and income from units of mutual funds are taxable as passive income. Taxpayers are allowed to claim a deduction for interest expenditure incurred for earning such income, subject to a cap of 20% of the gross dividend or mutual fund income.
This provision partially recognised the cost of borrowing associated with investment activities.
What is being amended?
It is now 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 means that the existing 20% deduction limit will be completely removed, and interest costs will no longer be deductible against such income.
Key implications for taxpayers
- No interest deduction against dividend or mutual fund income
- Higher effective tax liability for leveraged investors
- Impacts individuals, HUFs, and other investors using borrowed funds
- Simplifies assessment by eliminating expense attribution disputes
Effective date
- Effective from 1st April 2026
- Applicable from Tax Year 2025-26 onwards
- Proposed under Clause 36 of the Finance Bill, 2026
Rationale behind the change
The amendment aligns with the government’s approach of restricting deductions against passive income , ensuring a clearer tax base and reducing litigation over the allowability and quantum of interest expenses. It also brings consistency with the post-DDT dividend taxation framework, where income is fully taxable in the hands of investors.
Official copy of the Clause is as follows
Non-allowability of Interest as a deduction against Dividend Income
Dividend income and income from units of mutual funds constitute passive investment receipts taxable under the head "Income from other sources" under the Incometax Act, 2025. Section 93 of the Act provides for allowing certain deductions against such income, i.e interest expenditure incurred for earning such income, subject to a ceiling of twenty per cent of the gross dividend or income from units of mutual funds.
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.
The amendment will take effect from the 1st day of April, 2026 and shall accordingly apply for tax year 2025-26 onwards.
[Clause 36]
CAclubindia
