- You can no longer deduct loan interest against dividend or MF earnings.
- Existing 20% ceiling on interest relief vanishes, raising effective tax rates for leveraged investors.
- High‑yield stocks and MF schemes may see reduced inflows as tax efficiency erodes.
- Peers like Tata and Adani could adjust payout policies to keep capital attraction.
- Historical tax reforms show a lagged impact on market valuation and fund flows.
You’re about to lose a tax shield on leveraged dividend income—fast.
The Union Budget 2026 has quietly slipped a game‑changing amendment into Section 93 of the Income‑Tax Act, 2025: no interest expense will be deductible against dividend income or income from mutual‑fund units. For investors who have been borrowing to amplify income‑generating portfolios, this is a direct hit to after‑tax returns.
What the Union Budget 2026 Says About Section 93
The budget documents state, “no deduction shall be allowed in respect of any interest expenditure incurred in relation to dividend income or income from units of mutual funds.” Previously, taxpayers could offset up to 20% of their gross dividend or MF income with interest paid on loans. For a ₹1,00,000 dividend, the maximum allowable deduction was ₹20,000, regardless of actual interest paid. The amendment removes that ceiling and the entire deduction, meaning the full interest cost now stays in the taxable base.
Why the Interest Deduction Removal Hits Leveraged Income Portfolios
Leveraged strategies thrive on the tax arbitrage between cheap loan rates and higher post‑tax dividend yields. By stripping the deduction, the effective after‑tax yield drops dramatically. Assume a 10% loan rate and a 7% dividend yield on a ₹10 lakh position. Previously, the 20% deduction reduced taxable interest to ₹2 lakh, saving roughly ₹30,000 in tax (assuming a 30% slab). Without the deduction, the full ₹1 lakh interest becomes taxable, eroding the net return by more than 1% annually—a material impact over a five‑year horizon.
Sector Ripple Effects: Dividend‑Heavy Stocks and Mutual‑Fund Flows
Companies that have relied on high dividend payouts to attract retail capital—think utility giants and consumer staples—may see a slowdown in demand. Retail investors, who often finance purchases through margin or personal loans, will now face a higher cost of ownership. Mutual‑fund houses that market “income‑focused” schemes could experience outflows as the tax advantage diminishes. The broader sector trend points toward a shift from dividend‑centric allocations to growth‑oriented equities, especially in high‑multiples tech and renewable stocks where capital appreciation outweighs income.
Competitor Landscape: How Tata, Adani, and Others May Adjust
Major conglomerates such as Tata and Adani, known for steady dividend policies, may recalibrate payout ratios. By reducing dividend yields, they can preserve earnings for reinvestment and mitigate the tax‑driven demand shock. Conversely, firms with flexible cash‑flow structures might increase special dividends to retain investor interest, but this could be a short‑term fix. Watch for announcements in the next two quarters as boards react to the new tax environment.
Historical Parallel: The 2019 Tax Reform on Capital Gains
When the 2019 budget raised long‑term capital‑gains tax from 10% to 15% for equity, a similar investor‑behavior shift occurred. Dividend‑yielding stocks underperformed relative to growth stocks for 12‑18 months as high‑net‑return seekers rebalanced. The market eventually absorbed the new tax regime, but the adjustment period saw heightened volatility and a temporary re‑pricing of dividend‑heavy equities. The current amendment may follow a comparable trajectory, with an initial dip followed by a re‑allocation toward assets less dependent on tax‑favored income.
Investor Playbook: Bull and Bear Strategies Post‑Amendment
Bull Case: Identify companies with low payout ratios but strong free cash flow that can sustain share‑price appreciation. Focus on sectors like technology, pharma, and renewable energy where growth outweighs dividend appeal. Consider using unleveraged capital to avoid the tax penalty entirely, and explore tax‑efficient instruments such as equity‑linked savings schemes (ELSS) that offer capital‑gains benefits.
Bear Case: If you remain committed to income, shift to debt instruments that retain tax‑deductible interest, such as corporate bonds or fixed‑deposit schemes. For existing leveraged positions, evaluate early repayment of loans to cut interest costs, or unwind the position to preserve capital. Monitor policy updates—any future amendment that reinstates partial deductions could create a buying opportunity for oversold dividend stocks.
In summary, the Union Budget 2026’s removal of the interest deduction reshapes the risk‑reward calculus for leveraged dividend investors. The immediate effect is a higher effective tax rate, prompting a sector‑wide re‑evaluation of income‑centric strategies. Savvy investors will pivot toward growth‑oriented assets, tighten leverage, and keep a close eye on how major corporates adjust their payout policies. Your next move should align with the new tax reality, not the old one.