How is interest paid treated when used for buying MF

Income Tax
1

I have 4 incomes 1)Salary of 15 lacs 2)HP of 5 lacs 3) IFOS (FD interest) of 1 lac and 4) Dividend 50k

If I take LAP against the property to buy more MF which don’t give dividend, where will the interest be adjusted?

2

Is Interest Paid on Loan for Mutual Funds Tax-Deductible?

Yes, but only in specific situations. The interest is not automatically deductible for all MF investments.

Interest Paid When MF Investment Generates Taxable Income?

If you invest in mutual funds using borrowed money to earn taxable income, the interest paid on that loan can be claimed as a deduction.

Examples:

· Dividend income from mutual funds (taxable)

· Capital gains from mutual funds (taxable)

How it works:

· Interest paid on the loan is treated as an expense

· You can deduct it under Income from Other Sources

· Deduction is limited to the amount of taxable income earned

Interest Paid for Equity Mutual Funds?

· Equity mutual funds mainly generate capital gains

· Interest paid on borrowed money cannot be claimed as a separate deduction

· However, the interest can be added to the cost of acquisition, which reduces capital gains at the time of sale

This helps lower your tax liability indirectly.

Interest Paid for Debt Mutual Funds?

· Interest paid on the loan can be claimed as a deduction against taxable income

· This is allowed only if you clearly link the borrowing to the investment

· Proper documentation is essential

Interest Paid for Tax-Free Mutual Fund Income?

If the mutual fund income is exempt from tax, then:

· Interest paid on the loan is not allowed as a deduction

· The tax law does not permit expenses against exempt income

Important Conditions to Claim Interest Deduction

· Loan must be clearly used for MF investment

· Maintain loan statements and investment proof

· Deduction cannot exceed the income earned

· Claim must be made in the correct income head

Key Takeaway

Interest paid on money borrowed to buy mutual funds may be tax-deductible but only when the investment produces taxable income and proper records are maintained. Otherwise, the interest either adds to the investment cost or is not allowed as a deduction.

3

Great thanks. Another doubt. If I had taken loan from friends and family to buy the property and am taking a LAP to repay those loans, will interest paid on that loan be deductible from the rent received? because banks don’t call this a BT because there was no financial lender in the begining.

4

Hey @tdsqueries,

If you take a loan against property to invest in mutual funds that don’t generate dividend income, the interest paid on that loan cannot be adjusted against dividend income or FD interest under Income from Other Sources.

Also, this interest cannot be added to the cost of investment or claimed while calculating capital gains when you eventually redeem the mutual funds as the law doesn’t allow that.

In practical terms, the only place where this interest can be claimed is under Income from House Property, provided the loan is linked to a let-out property. That’s where the deduction will sit; it won’t spill over into salary, capital gains, or other income heads.

Hope this helps!

5
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6

Interest paid on borrowed funds used to buy mutual funds is generally not deductible, except when claimed as part of capital gains cost in specific cases.

7

Interest paid on borrowed funds used to buy mutual funds is not deductible, except against taxable interest income under tax.

8

Interest paid on borrowed funds used for buying mutual funds may be deductible against taxable income, subject to applicable tax rules.

9

Interest paid on loans used to buy mutual funds may be deductible against income, subject to tax rules and conditions.