Budget tax change weighs on dividend, MF investments made on borrowed money

Withdrawal of interest deductions on borrowed investment funds is set to increase tax costs for leveraged HNIs and corporate treasuries

The Budget on Sunday withdrew tax deductions claimed on stock dividends and mutual funds — a step that experts said simplifies rules but will “shoot up” costs for people who borrow money to make such investments.

 

Investors claimed a limited deduction for interest paid on loans taken to earn dividend income, subject to a cap. Sameer Mathur, managing director and founder of Roinet Solution, said the Budget removes the ability to claim interest expenditure on borrowed funds against dividend or mutual fund income taxed under “income from other sources”.

 

“If you borrowed money — through a loan or margin — to buy dividend-paying stocks or mutual funds, you can no longer reduce your taxable income by the interest cost. The full dividend or mutual fund income becomes taxable without that offset,” Mathur said.

 

 

Experts said the proposal pinches leveraged investors rather than regular long-term mutual fund holders.

 

“The proposal removes the limited interest deduction that was earlier available against dividend income, thereby simplifying the tax treatment of investment income. It largely affects leveraged investment strategies, while unlevered, long-term mutual fund investing remains unchanged,” said Varun Gupta, chief executive officer, Groww Mutual Fund.

 

Kunal Savani, partner at Cyril Amarchand Mangaldas, said the tax burden will rise for certain investor segments. “The Finance Minister’s proposal to completely disallow interest deductions on dividend and mutual fund income, as against the capped deduction under extant laws, will shoot up the tax cost on passive portfolios. In a volatile market, this move will hit retail investors and HNIs the hardest, in addition to forcing corporate taxpayers to rethink treasury strategies,” he said, referring to high-net-worth individuals.

 

Compliance and legal clarity

 

Legal experts say the proposal also tightens the broader framework around interest deductions and transition to the new tax law.

 

Aditya Bhattacharya, partner at King Stubb & Kasiva law firm, said: “The change aligns with the broader intent to rationalise tax benefits and curb mismatch claims, signalling a stricter approach towards leveraging interest deductions against passive investment income.”

 

Some deductions allowed earlier will now be treated as taxable income under the new law, he said.