Clause 36 of the Finance Bill, 2026 proposes amendments to section 93 of the Income-tax Act, 2025, which governs deductions while computing dividend income and income from units of mutual funds under the head “Income from other sources.”
The amendment withdraws the allowance of any deduction, including interest expenditure, against such income. This replaces the existing regime that permitted a limited deduction, subject to a statutory ceiling.
The amendment is stated to take effect from 1 April 2026, i.e., tax year 2026-27 onwards.
Existing Legal Position (Before the Amendment)
Under section 93 as it currently stands:
- Dividend income and income from units of mutual funds are taxable under “Income from other sources.”
- Interest expenditure incurred for earning such income is allowable as a deduction, subject to a cap of 20% of the gross dividend or income from units.
The provision thus allowed a restricted set-off of interest costs, within a defined limit.
What Does Clause 36 of the Finance Bill 2026 Propose?
Clause 36 proposes to:
- Amend sub-section (1), and
- Substitute sub-section (2) of section 93,
to provide that:
No deduction shall be allowed in respect of any expenditure against dividend income or income from units of mutual funds.
This language is broad and applies to all expenditure, not only interest.
Meaning of the Proposed Amendment
In practical terms, the amendment means:
- Dividend income and mutual fund income will be computed on a gross basis.
- No expenditure of any nature, including interest, can be claimed as a deduction.
- The earlier 20% cap on interest deduction becomes irrelevant, as the deduction itself is withdrawn.
The provision applies uniformly, without carving out exceptions based on:
- Type of investor, or
- Source of funds.
What the Amendment Does and Does Not Do
What it does
- Disallows all expenditure deductions against dividend and mutual fund income.
- Simplifies computation by removing deduction mechanics under section 93.
What it does not do
- ❌ It does not recharacterise dividend or mutual fund income.
- ❌ It does not affect the tax rate applicable to such income.
- ❌ It does not change the head of income or introduce new charging provisions.
Implications
1. Gross Taxation of Passive Investment Income
Dividend and mutual fund income will be taxable without any expense offset, irrespective of costs incurred to earn such income.
2. Impact on Investors with Borrowed Funds
Investors who finance investments through borrowings will no longer be able to claim any deduction for interest or related costs against such income.
3. Reduced Compliance and Disputes
Removal of the deduction:
- Eliminates tracking and allocation of eligible expenditure, and
- Removes the need to apply statutory caps, potentially reducing interpretational disputes.
Effective Date
✔ Effective from 1 April 2026. Applies to tax year 2026-27 and subsequent years.
Conclusion
Clause 36 of the Finance Bill, 2026 brings a clear structural change to section 93 by moving from a capped deduction regime to complete disallowance of expenditure against dividend and mutual fund income. The amendment simplifies computation and establishes a gross taxation model for these categories of passive income.
The change is scope-defining rather than rate-altering, with its primary impact felt by investors who previously relied on expenditure deductions under section 93.
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