The government has proposed to withdraw the deduction available on interest expenses incurred for earning dividend income, effective April 1, 2026. The move is set to increase the tax burden on investors who purchase shares using borrowed funds.
Current Tax Treatment (Until March 31, 2026)
Under the existing provisions of the Income-tax Act, dividend income is taxable under the head “Income from Other Sources.” However, shareholders are allowed to claim a deduction for interest expenses incurred on borrowed funds used to purchase shares, subject to a cap of 20% of the total dividend income.
For instance:
- Dividend income: ₹1,00,000
- Interest paid on loan: ₹35,000
- Maximum deduction allowed (20% of dividend): ₹20,000
- Taxable dividend income: ₹80,000
Even if the actual interest paid exceeds 20% of the dividend income, the deduction is restricted to that ceiling.
Proposed Tax Regime (Effective April 1, 2026)
Under the proposed changes, the deduction for interest expenses will be completely withdrawn. As a result, the entire dividend income will be taxable, irrespective of the interest cost incurred for acquiring the shares.
For example:
- Dividend income: ₹1,00,000
- Interest paid on loan: ₹35,000
- Deduction allowed: Nil
- Taxable dividend income: ₹1,00,000
This change effectively increases the taxable base for investors who rely on leveraged investments to earn dividends.
Impact on Investors
The proposal is likely to particularly impact:
- Investors who use loans or margin funding to build dividend-yielding portfolios
- High-net-worth individuals employing debt strategies for investment
- Portfolio structures designed around dividend arbitrage
With the removal of the deduction, the cost of borrowing to invest in shares may become less tax-efficient, potentially influencing investment decisions and portfolio structuring strategies.
Tax experts suggest that investors may need to reassess leveraged dividend strategies ahead of the new regime’s implementation date.
Further clarity is expected once the amendment is formally enacted and detailed guidelines are issued.
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