The Finance Bill, 2026 proposes a significant rationalisation of deductions for cooperative societies in respect of dividends, effective from 1 April 2026 (tax year 2026–27 onwards). Inter-cooperative dividends, earlier deductible only under the old tax regime, will now also be allowed under the new tax regime, but only to the extent such dividends are actually distributed to members within the prescribed timeline. Further, notified federal cooperatives will be allowed a time-bound deduction for dividends received from companies under both regimes, limited to dividends arising from investments made on or before 31 January 2026 and distributed to members, with the benefit ceasing from tax year 2029–30. The amendments also expand the scope of business-linked deductions for primary cooperatives by including cotton seed and cattle feed. Sections governing cooperative taxation under the new regime are aligned to permit these deductions, subject to strict distribution conditions and reporting timelines, ensuring parity between regimes while preventing retention-based tax arbitrage.
Deductions in respect of dividends received and distributed by certain cooperative societies
The provisions of section 149(2)(d) of the Act provide for deduction on the income of a cooperative society that is received as interest or dividend from any other co-operative society. This deduction is allowed only in the old tax regime. The dividends received by a cooperative society from a company are taxed in the hands of the cooperative society.
It is proposed to allow deduction on dividends received by cooperative societies from other cooperative societies, to the extent such dividends are distributed to its members, in the new tax regime.
It is also proposed to allow deduction for dividends received by notified federal cooperatives from companies for 3 years, i.e. till tax year 2028-29 under both the old and new tax regimes. This deduction is proposed to be allowed only to the dividends arising out of investments made by the federal cooperative till 31.01.2026 and which are further distributed by it to its members.
This amendment is proposed to take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-27 and subsequent tax years.
[Clauses 39, 40, 48 and 49]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 39 of the Bill seeks to amend section 149 of the Income-tax Act, 2025 relating to deduction in respect of income of co-operative societies.
Clause (b) of sub-section (2) of the said section, inter alia, provides for deduction of whole of the amount of profits and gains of business in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits, or vegetables raised or grown by its members to certain entities.
It is proposed to include cotton seeds and cattle feed also within the ambit of the said clause.
Clause (d) of sub-section (2) of the said section allows for deduction of income by way of dividends received by the co-operative society from any other co-operative society in the old tax regime.
It is further proposed to amend said clause so as to provide that the inter-cooperative societies dividend shall also be allowed as a deduction under the new tax regime under sections 203 and 204 of the Act, for the co-operative societies, to the extent such dividend is distributed by the co-operative society to its members.
It is also proposed to insert a new sub-section (6) to define to certain expressions.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Clause 40 of the Bill seeks to substitute section 150 of the Income-tax Act, 2025 relating to interpretation for purposes of section 149.
The proposed section provides for deduction in respect of federal co-operative.
Sub-section (1) of the proposed section provides that the income by way of dividend by federal co-operative from any company in respect of investments made on or before the 31st January, 2026 is to be allowed as deduction in both the new and the old tax regime.
Sub-section (2) thereof provides that such deduction shall not apply to any tax year beginning on or after the 1st April, 2029.
Sub-section (3) thereof provides for the definition of the expression “federal cooperative”.
This amendment will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Clause 48 of the Bill seeks to amend section 203 of the Income-tax Act, 2025 relating to tax on income of certain resident co-operative societies.
The said section provides for the deduction not to be allowed on dividends received by co-operatives.
It is proposed to amend sub-clause (i) of clause (a) of sub-section (1) of the said section so as to provide that the inter-co-operative societies dividend be allowed as a deduction under the new tax regime provided under the said section for co-operative societies, to the extent such dividend is distributed by the cooperative society to its members.
It is further proposed that the income by way of dividend received by federal cooperative referred to in section 150 from any company in respect of investments made before the 31st January, 2026 be allowed as deduction in the new tax regime. This deduction is proposed to be limited to the amount of dividend distributed by the federal cooperative to its members and which is received on or before 31st March, 2029.
It is also proposed to insert a new sub-section (7) so as to provide that in case of on assessee, being a co-operative societies, which has exercised option under sub-section (5) the requirements contained in sub-section (1) shall be modified to the extent that the deduction under section 149(2)(d)(ii) shall be available to such assessee as does not exceed the amount of dividend distributed by it to its members at least one month before the due date for filing the return of income under section 263(1).
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Clause 49 of the Bill seeks to amend section 204 of the Income-tax Act, 2025 relating to tax on income of certain new manufacturing co-operative societies.
The said section provides for the deduction not to be allowed on dividends received by co-operatives.
It is proposed to amend sub-section (i) of clause (a) of sub-section (1) of the said section to provide that the inter-co-operative societies dividend be allowed as a deduction under the new tax regime provided under section 204 for the cooperative societies, to the extent such dividend is distributed by the cooperative society to its members.
It is further proposed that the income by way of dividend received by federal cooperatives from any company in respect of investments made before 31st January, 2026 be allowed as deduction in the new tax regime. This deduction is proposed to be limited to the amount of dividend distributed by the federal cooperative to its members and which is received on or before 31st March, 2029.
It is also proposed to insert a new sub-section (5) so as to provide that in case of on assessee, being a co-operative societies, which has exercised option under sub-section (2), the requirements contained in sub-section (3), shall be modified to the extent that the deduction under section 149(2)(d)(ii) shall be available to such assessee as does not exceed the amount of dividend distributed by it to its members at least one month before the due date for filing the return of income under section 263(1).
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
39. Amendment of section 149.
In section 149 of the Income-tax Act,––
(a) in sub-section (2),––
(i) in clause (b), after the word “oilseeds,” wherever it occurs, the words “cotton seed, cattle feed,” shall be inserted;
(ii) for clause (d), the following clause shall be substituted, namely:–
“(d) in respect of any income derived by the co-operative society from its investments with any other co-operative society by way of–
(i) interest; or
(ii) dividends,
the whole of such income;”;
(b) after sub-section (5), the following sub-section shall be inserted, namely:––
‘(6) For the purposes of this section,––
(a) “consumers’ co-operative society” means a society for the benefit of the consumers;
(b) “primary agricultural credit society” has the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949; and 10 of 1949.
(c) “primary co-operative agricultural and rural development bank” means a society having an area of operation confined to a taluk, the principal object of which is to provide long-term credit for agricultural and rural development activities.’.
40. Substitution of new section for section 150.
For section 150 of the Income-tax Act, the following section shall be substituted, namely:––
‘150.Deduction in respect of income of federal co-operative.
(1) If the gross total income of an assessee being a federal cooperative, in any tax year, includes any income by way of dividends received from its investment with any company, a deduction shall be allowed from such income, to the extent of the amount which,––
(a) has arisen from such investment as recorded in its books of account on or before the 31st January, 2026; and
(b) has been distributed by it to its members at least one month before the due date for filing the return of income under section 263(1).
(2) The provisions of this section shall not apply to any tax year beginning on or after the 1st April, 2029.
(3) For the purposes of this section, “federal co-operative” means a “federal co-operative” as defined in section 3(k) of the Multi-State Cooperative Societies Act, 2002 and notified as such by the Central Government.’.
48. Amendment of section 203.
In section 203 of the Income-tax Act,––
(a) in sub-section (1), in clause (a), in sub-clause (i), after the word and figures “section 146”, the word and figures “or 150” shall be inserted;
(b) after sub-section (6), the following sub-section shall be inserted, namely:––
“(7) In case of an assessee, being a co-operative society, which has exercised option under sub-section (5), the requirements contained in sub-section (1) shall be modified to the extent that the deduction under section 149(2)(d)(ii) shall be available to such assessee as does not exceed the amount of dividend distributed by it to its members at least one month before the due date for filing the return of income under section 263(1).”.
49. Amendment of section 204.
In section 204 of the Income-tax Act,––
(a) in sub-section (3), in clause (a), in sub-clause (i), after the word and figures “section 146”, the word and figures “or 150” shall be inserted;
(b) after sub-section (4), the following sub-section shall be inserted, namely:––
“(5) In case of an assessee, being a co-operative society, which has exercised option under sub-section (2), the requirements contained in sub-section (3) shall be modified to the extent that the deduction under section 149(2)(d)(ii) shall be available to such assessee as does not exceed the amount of dividend distributed by it to its members at least one month before the due date for filing the return of income under section 263(1).”.
