The Union Budget 2026 has introduced a major change for investors who borrow money to invest in stocks or mutual funds.
Until now, these investors could claim tax relief by deducting a portion of the interest paid on such loans from their taxable income.
However, following the new budget proposal, this benefit will no longer be available.
This means that loans taken to earn dividend income or mutual fund earnings will not provide any tax deduction going forward.
How the Previous Rule Worked
Earlier, Section 93 of the Income Tax Act allowed investors to deduct up to 20% of the interest paid on loans taken for earning dividend or mutual fund income.
For example:
Dividend earned: ₹1,00,000
Interest paid on loan: ₹25,000
Deduction allowed: Up to ₹20,000
This rule was particularly helpful for investors who borrowed money to generate long-term income through dividends, making their investment strategy more tax-efficient.
What the Budget 2026 Proposal Changes
The Budget 2026 proposes to remove this tax deduction entirely.
The Income Tax Department clarified that:
Any interest on loans taken for dividend or mutual fund income will no longer be deductible
The rule applies to all taxpayers, including individual investors and other categories
This change reduces the tax efficiency of borrowing to invest.
Investors who previously relied on this strategy will now need to rethink their approach.
Impact on Investors
Experts say this move is likely to discourage high-leverage investing and encourage investors to make more cautious decisions.
Tax planning for dividend and mutual fund income may become more challenging, and investors may need to explore alternative strategies to manage their taxes effectively.