Budget 2026: No deduction of interest in case of dividend income

 

Amendment:

1.  The Union Budget 2026 has proposed a significant tax change by completely disallowing the deduction of interest expenses on borrowed funds used to earn dividend income or income from mutual fund units.

2.  Effective April 1, 2026, the prior 20% limit on interest deduction is removed, meaning dividends will be taxed in full at slab rates, increasing the tax burden on leveraged investors.

3.  The Budget has proposed an amendment to Section 93(2) of the Income Tax Act 2025 for giving effect to the above.

Key Takeaways from the Proposed Amendment:

1.  No Deduction: Interest paid on loans or overdrafts used to purchase shares or mutual funds cannot be deducted from the dividend income earned.

2.  Full Taxation: The entire amount of dividend/mutual fund income will be added to the taxpayer’s total income and taxed according to their applicable income tax slab rate.

3.  Effective Date: The rule is effective from April 1, 2026.

Impact for investors:

1.  Investors frequently use Margin Funding or Overdrafts to buy high-yield stocks (like PSUs) or REITs/Inv ITs.

2.  Earlier, we could deduct interest costs (up to 20% of the dividend), partially “subsidising” the loan.

3.  Post the amendment, we have to pay tax on the Gross Dividend. If you earn ₹50 Lakh in dividends but pay ₹40 Lakh in interest, you are taxed on the full ₹50 Lakh.