Mutual Fund taxation rule change in Budget 2026: New rule for offset of interest against dividend income

Union Budget 2026 has proposed not to allow deduction in respect of any interest expenditure incurred in relation to dividend income or income from units of mutual funds.

"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.

The following an explainer on the proposed change based on FAQs issued by the Income-tax Department:

At present, if any interest expenditure is incurred for earning income from dividends, the expenditure is allowed as a deduction subject to a certain threshold.

Under section 93 of the Income-tax Act, 2025, the interest expenditure is allowed to the extent of 20% of the gross dividend or mutual fund income.

For example: If the total income on account of dividend is ₹1,00,000 and the interest expense is ₹25,000, the deduction will be allowed to the extent of ₹20,000.

What's changing?

Budget 2026 has proposed to amend section 93 of the Income-tax Act, 2025.

As per the proposed rule, no deduction will 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”.

"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.

So under the proposed rule, no expenditure can be claimed as a deduction against dividend income and income from units of mutual funds.

What will be the impact of the proposed change?

After the amendment, dividend income and income from units of mutual funds will be calculated without allowing any deduction for interest expenditure, irrespective of any borrowing whether or not claimed to be attributable to such income, according to the Income Tax Department.

Moreover, after the proposed amendment, no deduction will be allowed to any assessee, including individuals in respect of such income, the department says.