Higher income tax on dividend income from shares and income from mutual funds if earned via this method; announced in Budget 2026
Feb 2, 2026
Synopsis
Budget 2026 has eliminated the deduction for interest expenses incurred on loans taken to invest in listed equity shares or mutual funds. This change, effective from April 1, 2026, means dividend and mutual fund income will be fully taxed without any interest offset, leading to a higher tax outgo for investors.
Budget 2026 has announced that if you have taken a loan for investing in listed equity shares or mutual funds then the interest paid for this loan which was earlier allowed as deduction, now will not be.
Budget 2026 announcement
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 Income tax 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 April 1, 2026 and shall accordingly apply for tax year 2025-26 onwards.
How tax outgo is increased for this?
Chartered Accountant Nilesh Modi said to ET Wealth Online “This announcement will increase the tax outgo for those investors who invest in equities and mutual funds by taking a loan. Since the deduction for interest on such loan will now not be allowed, tax outgo will be higher for the investor."
According to Modi, going forward, the investor will have to evaluate if such interest can be added to the “cost of acquisition or cost of improvement” of shares / units, and whether such interest can be claimed as a tax deduction while determining “capital gain or loss” on sale of such shares / units.
| Particualrs | Under Existing Law | Budget 2026 change |
| Salary Income | 1,400,000 | 1,400,000 |
| Dividend Income | 600,000 | 600,000 |
| Total Income | 2,000,000 | 2,000,000 |
| Interest expenditure incurred | 100,000 | 100,000 |
| Less : Deduction allowed under section 93 (cap of 20% of dividend income- under existing law ) | 100,000 | |
| not allowed after Budget 2026 | - | |
| Net total Income | 1,900,000 | 2,000,000 |
| Tax liability old | 397,000 | 429,000 |
| 0–2.5 lakh → Nil2.5–5 lakh → 2.5 lakh × 5% = 12,500 5–10 lakh → 5 lakh × 20% = 1,00,000 10–19 lakh → 9 lakh × 30% = 2,70,000 Total Tax = 3,82,500 Add Cess @ 4% = 15,300 Total Liability = ₹3,97,800 |
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| Tax liability New | ||
| 0–2.5 lakh → Nil2.5–5 lakh → 2.5 lakh × 5% = 12,500 5–10 lakh → 5 lakh × 20% = 1,00,000 10–20 lakh → 10 lakh × 30% = 3,00,000 Total Tax = 4,12,500 Add Cess @ 4% = 16,500 Total Liability = ₹4,29,000 |
Source: CA Nilesh Modi
Vishal Hakani, Managing Director and M&A Tax Leader, Alvarez & Marsal India said that the Union Budget 2026 proposes a significant change to taxation on investment income by removing the ability to deduct interest expenses incurred to earn dividends or mutual fund income.”
Hakani says that interest paid on loans taken to invest in shares or mutual funds cannot be offset against dividend income or income from units of mutual funds, rendering the previously allowed 20% deduction ceiling obsolete.”
Hakani says: “ This means gross dividend or mutual fund income will be fully taxed without any interest deduction—resulting in a higher cash tax outflow. The move appears to be part of the government’s broader effort to simplify the tax framework and remove deductions. “The proposed amendment is expected to be effective from tax year 2026–27.”
With inputs from TOI
[The Economic Times]
