Under the Income-tax Act, 2025, dividend income and income from units of mutual funds are taxed under the head “Income from other sources.” Currently, Section 93 allows a limited deduction for interest expenditure incurred to earn such income, capped at 20% of the gross dividend or mutual fund income. The Finance Bill, 2026 proposes a significant change by amending Section 93 to completely disallow any deduction of interest or other expenditure against dividend income and income from units of mutual funds. The amendment substitutes the existing sub-section to provide that, irrespective of any provision, no deduction shall be permitted for expenses incurred in earning such passive investment income. This change reflects a policy decision to tax dividend and mutual fund income on a gross basis, without reducing it by financing or related costs. The amendment will come into effect from 1 April 2026 and will apply from tax year 2026–27 onwards, impacting taxpayers who fund investments through borrowings.
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 1st day of April, 2026 and shall accordingly apply for tax year 2025-26 onwards.
[Clause 36]
Clause 36 seeks to amend section 93 of the Income-tax Act, 2025 relating to deductions.
The said section provides for deduction of interest expenditure, subject to a specified limit, while computing dividend income and income from units of mutual funds.
It is proposed to amend sub-section (1) and substitute sub-section (2) of the said section so as to provide that no deduction shall be allowed in respect of any expenditure against dividend income and income from units of mutual funds.
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
36. Amendment of section 93.
In section 93 of the Income-tax Act,––
(a) in sub-section (1), for clause (a), the following clause shall be substituted, namely:––
“(a) for interest on securities, any reasonable sum paid as commission or remuneration to a banker or any other person for the purpose of realising such interest on behalf of the assessee;”;
(b) for sub-section (2), the following sub-section shall be substituted, namely:––
“(2) Irrespective of anything contained in sub-section (1), in respect of any dividend income or income from units of a Mutual Fund specified under Schedule VII (Table: Sl. No. 20 or 21) or income from units of a specified company as referred to in section 2(h) of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, no deduction shall be allowed.”.
