For tax year 2026-27, do not carry forward the 20% deduction formula
Section 93(2) of the Income-tax Act, 2025, as substituted by Finance Act 2026 with effect from 1 April 2026, allows no deduction in respect of dividend income and the specified income from mutual-fund or specified-company units covered by that subsection. The old rule permitting qualifying interest expense up to 20% is therefore not the tax-year 2026-27 rule. An investment loan signed before April 2026 does not by itself preserve that deduction for the later year.
Read the enacted text and identify the correct period
The official consolidated Income-tax Act, 2025, amended by Finance Act 2026 contains both the operative section 93(2) and footnote 10c recording its substitution from 1 April 2026. The same amendment removes dividends from the realisation-commission provision in section 93(1)(a). This is enacted law in the consolidated Act, rather than merely a Budget proposal. The relevant period here is tax year 2026-27, beginning 1 April 2026. Sources were checked on 22 October 2026.
For FY 2025-26/AY 2026-27, use the 1961 Act and its applicable provisions. The section 57 provisos restrict deductions against ordinary dividend and covered unit income to qualifying interest expense, capped at 20% of the relevant gross income included in total income before the section 57 deduction. The separate restriction for buyback dividend under the then applicable provision must also be considered; ordinary dividends and buyback receipts are not interchangeable. This article’s comparison cases use ordinary investment income chargeable under Income from other sources.
The old ceiling was never a flat 20% allowance
In the legacy working, establish that interest was actually incurred and sufficiently connected with earning the relevant income. The deduction is the lower of qualifying interest and the statutory ceiling, subject to other applicable restrictions. A taxpayer with no qualifying interest cannot claim 20% merely because a dividend was received. Custody, collection, advisory or other costs do not become interest by being included in one broker statement.
Use gross taxable dividend before TDS as the starting income. TDS reduces the cash received and may create a tax credit; it does not reduce gross dividend income for this calculation. Reconcile company or fund statements, the bank, the investment ledger and tax-credit records. Do not infer gross dividend solely from a net bank receipt without confirming the deduction and income details.
Update the computation, not just the section number
A spreadsheet that replaces section 57 with section 93 but retains min(interest, 20% × dividend) can produce an incorrect tax-year 2026-27 result. Keep the legal period as an explicit input, remove the deduction in the current-year working and reconcile the change from the prior-year method. Borrowing interest remains an economic cash cost even when it is not deductible against that income.
Do not automatically move the disallowed amount into capital gains, a business expense or another income source. Each possible treatment has its own statutory conditions and factual requirements. Similarly, excess interest above the legacy ceiling does not create an automatic carry-forward deduction under section 57. Special non-resident regimes, business-income classification, treaty questions and separate inter-corporate dividend deductions require their own review; they are not resolved by this Other sources schedule.
Retain a source-by-source bridge for mixed borrowings
Separate amounts borrowed for investments from personal or unrelated use, and document any supported allocation. For tax year 2026-27, tracing does not restore a deduction prohibited by section 93(2), but it remains important for explaining the accounts and evaluating other uses separately. The illustrations calculate income and deduction differences, not final slab tax, surcharge, cess, rebate or advance-tax interest.
Worked illustrations
The following cases use fictional figures and stated assumptions. Amounts are Indian rupees unless a different unit is expressly shown. They illustrate preparation controls and do not represent real client results.
Illustrative example 1: legacy interest is below the ceiling
For FY 2025-26, assume ordinary gross dividend ₹10,00,000 and otherwise qualifying interest ₹1,50,000. The section 57 ceiling is ₹10,00,000 × 20% = ₹2,00,000. The deduction is ₹1,50,000 and dividend income after that deduction is ₹8,50,000. The ₹50,000 unused ceiling is not an additional allowance.
Illustrative example 2: legacy interest exceeds the ceiling
For FY 2025-26, assume dividend ₹4,00,000 and qualifying interest ₹1,20,000. The ceiling is ₹80,000, so the permitted deduction is ₹80,000 and the resulting dividend income is ₹3,20,000. The remaining ₹40,000 is not automatically carried forward as an unused section 57 deduction.
Illustrative example 3: the later year gives a different result on the same figures
For tax year 2026-27, assume ordinary dividend ₹10,00,000 and related interest ₹1,50,000. Section 93(2) permits no deduction against this income, so the amount from this income stream is ₹10,00,000 before any separately applicable provisions. Compared with the ₹8,50,000 legacy illustration, the computation difference is ₹1,50,000. This is an income difference, not the amount of additional tax.
Illustrative example 4: covered mutual-fund distribution income
Assume ₹2,00,000 distribution income from units within the relevant statutory coverage and qualifying interest ₹30,000. Under the stated FY 2025-26 conditions, the ₹40,000 ceiling permits ₹30,000, leaving ₹1,70,000. With the same facts in tax year 2026-27, section 93(2) allows zero deduction, leaving ₹2,00,000. This illustration concerns distribution income, not the capital-gains computation on redemption.
Illustrative example 5: reconcile gross income and TDS separately
Assume a statement shows gross ordinary dividend ₹1,00,000, actual TDS ₹10,000 and bank receipt ₹90,000. Otherwise qualifying interest is ₹15,000. The FY 2025-26 ceiling is ₹20,000 and resulting dividend income ₹85,000. For tax year 2026-27, the corresponding income is ₹1,00,000. In both workings, the ₹10,000 TDS remains a separate credit subject to the applicable credit conditions; it is not a dividend expense. The example assumes the actual TDS amount without prescribing a universal withholding rate.
Illustrative example 6: a mixed-use loan does not make all interest eligible
Total loan interest is ₹1,20,000, of which reliable records attribute 75%, or ₹90,000, to investments yielding ₹3,00,000 ordinary dividend. For FY 2025-26, assuming the other conditions are met, the dividend deduction is min(₹90,000, ₹60,000) = ₹60,000, leaving ₹2,40,000 income. For tax year 2026-27 it is zero, leaving ₹3,00,000. The other ₹30,000 of interest needs separate analysis; its existence does not establish deductibility elsewhere.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Identify FY/AY or tax year before selecting the formula. | Period-specific computation sheet. |
| 2 | Classify ordinary dividend, unit distribution and other receipts. | Company/fund statements and transaction descriptions. |
| 3 | Confirm the income head and special-regime scope. | Recorded tax classification. |
| 4 | Reconcile gross income to bank receipts and TDS. | Gross-to-net and tax-credit bridge. |
| 5 | For legacy periods, identify qualifying interest. | Loan agreement and funds trail. |
| 6 | Apply the old ceiling only to the relevant legacy computation. | Section 57 lower-of working. |
| 7 | For tax year 2026-27, remove the section 93(2) deduction. | Current-year formula review. |
| 8 | Separate non-interest costs and unrelated loan use. | Cost classification and supported allocation. |
| 9 | Review other claimed treatment independently. | Separate statutory basis and evidence. |
| 10 | Reconcile the final return and advance-tax working. | Income schedule, credits and change explanation. |
Sixteen practitioner FAQs
1. Does section 93 still permit 20% interest from tax year 2026-27?
No. The substituted subsection (2) permits no deduction in respect of the covered dividend and unit income.
2. Is this only a Finance Bill proposal?
No. The official consolidated Act records the Finance Act 2026 substitution effective 1 April 2026.
3. Which period retains the legacy section 57 comparison?
FY 2025-26/AY 2026-27 remains a 1961 Act computation, applying the relevant conditions and exceptions.
4. Was 20% an automatic standard deduction?
No. It capped otherwise qualifying interest; without such interest there was no corresponding automatic deduction.
5. Does an older loan agreement preserve the later deduction?
Its signing date alone does not override section 93(2) for the later tax year.
6. Does the restriction also cover specified unit income?
Yes. Read the mutual-fund and specified-company coverage expressly stated in section 93(2).
7. Is redemption gain the same as a unit distribution?
No. Identify the transaction and apply the relevant capital-gains or income provisions separately.
8. Should dividend be reported net of TDS?
No. Reconcile gross taxable income and separately assess the tax-credit entitlement.
9. Can collection charges be treated as interest?
A different expense label or bundled statement does not establish interest or deductibility.
10. Can excess legacy interest be carried forward under the ceiling rule?
The section 57 ceiling does not itself provide an automatic carry-forward entitlement.
11. Can denied interest simply be added to share cost?
Do not assume that treatment. A capital-gains claim needs its own applicable statutory and factual basis.
12. Does a mixed-use loan require tracing?
Yes. Source and use must be supported, even though tracing cannot override the current-year prohibition for covered income.
13. Does this decide business-income treatment for a share trader?
No. The article addresses the stated Other sources computation; business classification requires separate analysis.
14. Are buyback receipts ordinary dividends for these examples?
No. Their period-specific tax treatment and restrictions must be examined independently.
15. Is the income increase equal to additional tax?
No. Final tax depends on the taxpayer’s full computation, rates, regime, credits and other applicable provisions.
16. What spreadsheet control best prevents a rollover error?
Keep the statutory period explicit and test the current-year deduction independently instead of merely renaming the old section.
Organising the supporting working
Keep the underlying records, calculation and conclusion linked to the same entity and period. When organising work with assureTax and the assureOffice tools, retain these supporting schedules alongside the final output and use only the features confirmed for the version available to you.
Conclusion
Keep FY 2025-26 and tax year 2026-27 as separate computations. Reconcile gross income and TDS first, then apply the period-specific deduction rule so the former 20% ceiling does not survive in a current-year spreadsheet by accident.