Budget 2026: No More Interest Expenditure Deduction on Dividend and Mutual Fund Income

The Government in the Union Budget 2026-27 has announced a change in the Income Tax Act regarding the taxation of dividend income and income from mutual funds. As per this change, the taxpayers will no longer get the tax benefit on both the dividend and mutual fund income.

The dividend income and the mutual fund income are treated as passive investment receipts and are taxed under the head “Income from other sources” under the Income Tax Act, 2025. However, the Income Tax law offers a limited deduction on such income. As per Section 93 of the Income Tax Act, the taxpayers are allowed to deduct interest expenses incurred for earning this income, subject to a limit of 20% of the gross dividend or mutual fund income.

Now the government has proposed to completely remove this deduction by amending section 93(2) of the Income Tax Act. Starting from April 1, 2026 (Tax Year 2025-26) onwards, no deduction under section 93 will be allowed for interest expense incurred to earn dividend income or the income from mutual fund units.