The Union Budget 2026 has proposed a significant change that directly affects investors who borrow funds to invest in dividend-paying stocks or mutual funds. The proposal removes the existing tax benefit that allowed investors to claim a deduction on interest paid for such borrowings.
Currently, taxpayers are permitted to deduct a portion of the interest expense incurred for earning dividend income or income from mutual fund units, subject to a prescribed limit. This relief has been particularly relevant for investors who use borrowed money to build income-generating portfolios.
However, this is set to change.
“It is proposed to provide that no deduction shall be allowed in respect of any interest expenditure incurred in relation to dividend income or income from units of mutual funds, and to omit the existing provision permitting such deduction subject to a specified ceiling,” the Budget documents say.
What is the rule now?
Under the existing provisions of Section 93 of the Income-tax Act, 2025, investors are allowed to claim interest expenses as a deduction, but only up to 20% of the gross dividend or mutual fund income earned.
For instance, if an investor earns ₹1,00,000 as dividend income and has paid ₹25,000 as interest on borrowed funds, the allowable deduction is restricted to ₹20,000, which is 20% of the dividend income.
This mechanism provided partial tax relief to investors who leveraged borrowings to generate income from equities and mutual funds.
What changes after Budget 2026?
The Budget proposes to amend Section 93 of the Income-tax Act, 2025, effectively withdrawing this benefit altogether.
“It is proposed to amend section 93 of the Income-tax Act, 2025 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 taxable under the head “Income from other sources”, ” the Income-tax Department said.
As per the proposed amendment, no interest expense will be allowed as a deduction against dividend income or income from mutual fund units. This applies regardless of whether the borrowing can be directly linked to the income earned.
The Income Tax Department has further clarified that once the amendment takes effect, dividend income and income from mutual fund units will be computed without allowing any reduction for interest expenses.
Importantly, this restriction will apply to all taxpayers, including individual investors.
After the amendment, even if an investor has taken a loan specifically for investing in dividend-yielding stocks or mutual fund schemes, the interest paid on that loan will not be eligible for any tax deduction.
This change alters the tax efficiency of leveraged investment strategies and is likely to impact how investors approach dividends and mutual fund income going forward.
