Under the present provisions, dividend income and income from units of mutual funds are taxable under the head “Income from Other Sources”. Section 93 permits deduction of interest expenditure incurred for earning such income, subject to a ceiling of 20% of the gross dividend or such income. This facilitated debt backed investment to absorb cost of capital against dividend income, effectively reducing tax outgo on net dividend income.
The Finance Bill, 2026 proposes to not allow deduction of such interest expenditure or commission expenditure against dividend income or income from mutual funds or UTI units.
The proposed amendment discourages borrowed funds for making investment in dividend yielding assets, thereby affecting exitsing portfolio dominated by dividend generating assets.
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