The Union Budget 2026 brings a big change for investors who borrow money to invest in stocks or mutual funds.
Until now, such investors could claim a tax deduction on the interest paid for loans taken to earn dividend or mutual fund income.
However, this benefit is set to end, meaning loans taken for dividend income will no longer save taxes.
What the Old Rule Allowed
Earlier, Section 93 of the Income Tax Act let investors deduct interest expenses up to 20% of their dividend or mutual fund income.
For example:
If an investor earned a dividend of ₹1 lakh and paid ₹25,000 in interest on a loan, they could deduct ₹20,000 from their taxable income.
This rule encouraged some investors to borrow money to generate long-term income through dividends.
What the Budget 2026 Proposes
The 2026 Budget proposal removes this deduction completely.
Even if a loan is taken directly for investment, the interest paid will no longer be tax-deductible.
This applies to all taxpayers, including individual investors and other categories.
Impact on Investors
This change reduces the tax efficiency of borrowing to invest.
Investors who previously relied on loans for dividend income will need to rethink their strategies.
Experts suggest that this move will:
Discourage high-leverage investing
Encourage more cautious investment decisions
Make tax planning more challenging for those earning from dividends or mutual funds
This means the focus will shift from borrowing to invest toward more prudent, self-funded investment strategies, marking a significant shift in India’s investment landscape.
