The Finance Bill, 2026 introduces a targeted rationalisation of deductions available to co-operative societies under the Income-tax Act, 2025 through Clauses 39, 40, 48 and 49. These amendments address two specific policy gaps:
- Narrow coverage of agricultural and allied activities eligible for full deduction; and
- Restricted availability of dividend deductions under the new tax regime for co-operative societies.
The changes are conditional, distribution-linked and time-bound, ensuring relief is aligned with the member-centric structure of co-operatives rather than creating blanket exemptions.
All amendments apply from 1 April 2026 (tax year 2026-27 onwards).
1. Expansion of Deduction for Primary Agricultural Co-operative Societies (Clause 39)
Existing Position – Section 149(2)(b)
Section 149(2)(b) allows 100% deduction of profits and gains of business for a primary co-operative society engaged in supplying produce raised or grown by its members, such as:
- milk
- oilseeds
- fruits
- vegetables
to specified recipients (federal co-operatives, Government, local authorities, Government companies or statutory corporations).
Amendment Introduced
Clause 39 expands the list of eligible activities to also include:
- cotton seeds, and
- cattle feed.
Implications
✔ Deduction continues to be restricted to primary co-operative societies
✔ Activity must still relate to produce raised or grown by members
✔ Only the specified supply chain remains eligible
The amendment does not create a new deduction, but widens the scope of eligible produce under an existing provision to reflect practical agricultural realities.
2. Dividend Deduction Between Co-operative Societies in the New Tax Regime (Clauses 39, 48 & 49)
Earlier Legal Position
- Deduction for dividend received from another co-operative society under section 149(2)(d) was available only in the old tax regime.
- Under the new tax regime (sections 203 and 204), such dividend income was fully taxable, even if distributed to members.
Change Introduced
Clause 39: Section 149(2)(d)
Dividend received by a co-operative society from another co-operative society is now allowed as a deduction even under the new tax regime, but only to the extent “the dividend is further distributed to members”.
Clauses 48 & 49: Sections 203 and 204
Corresponding amendments are made to:
- Section 203 (resident co-operative societies), and
- Section 204 (new manufacturing co-operative societies),
to allow the same deduction subject to distribution to members.
Mandatory Conditions
- Deduction is not automatic.
- Dividend must be:
- actually distributed to members, and
- distributed at least one month before the due date for filing the return under section 263(1).
- Undistributed dividend remains taxable.
Implications
✔ Restores partial pass-through treatment
✔ Maintains tax neutrality between old and new regimes
✔ Encourages timely member distribution
This is not a blanket exemption and does not revive the earlier unrestricted deduction.
3. Special Dividend Deduction for Federal Co-operatives (Clause 40)
Substitution of Section 150
Clause 40 substitutes section 150 to introduce a specific, transitional deduction for federal co-operatives.
Scope of Deduction
Federal co-operatives are allowed deduction for:
- dividend income received from companies,
- arising from investments made on or before 31 January 2026,
- only to the extent such dividend is distributed to members.
Time Limitation
- Deduction is available:
- under both old and new tax regimes,
- only up to tax year 2028-29.
- No deduction for any tax year beginning on or after 1 April 2029.
Clarificatory Aspect
Section 150 now explicitly defines “federal co-operative”, removing ambiguity and limiting the benefit strictly to qualifying entities.
Implications
✔ Transitional relief for existing investments
✔ Prevents cascading taxation during the transition period
✔ Clearly sunset-based, not a permanent concession
4. Harmonisation Across Sections 149, 150, 203 and 204
The amendments collectively ensure that:
- Dividend deductions are aligned across old and new regimes,
- Benefits are linked to member distribution, and
- Federal and primary co-operatives are treated distinctly, based on their functional role.
There is no relaxation of compliance, and the deductions are expressly conditional.
Effective Date
✔ 1 April 2026
✔ Applicable from tax year 2026-27 onwards
Conclusion
Clauses 39, 40, 48 and 49 of the Finance Bill, 2026 refine, rather than overhaul, the taxation of co-operative societies. The amendments:
- expand eligible agricultural activities in a limited and precise manner,
- partially restore dividend deductions under the new tax regime, and
- introduce a time-bound dividend deduction for federal co-operatives.
The legislative intent is clear: tax relief is permitted only where income flows through to members, preserving the foundational principles of the co-operative sector while maintaining revenue safeguards.
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