The new Income Tax Act, 2025 is going to replace the old Income Tax Act, 1961 from April 1, 2026. With this will come some new rules, which may quietly change the tax impact on your investments. The special thing is that now tax-free income can also affect your total tax. The main reason for this change is the new Rule 14 of the Income Tax Rules, 2026, which explains how expenses related to tax-free income will be treated. The most important figure here is 1%.
According to the notification of March 20, 2026, if any of your income is tax free, then the expenses related to it will not be considered in deduction. There are two things involved in this. Direct expenses related to that income and 1% of the average value of investments that provide or may provide tax-free income. But overall, no more deduction will be made than the total expenditure shown by you.
Suppose you get tax-free income from dividends or some investments. Now, even if there is no tax on that income, the tax department can assume that some expenditure must have been incurred in earning it. In such a case, deduction of that part will not be available.
This rule will not attract direct tax, but if any expenditure has been incurred (or is considered) in earning that income, then that expenditure will not be available in deduction. The effect of this will be that your taxable income may increase and ultimately you may have to pay more tax.
This will not automatically apply in every case. This will be applicable only if you have shown the expenses related to that tax-free income or the officer believes that the expenses have been incurred. If you actually did not incur any expenses, there should be no deduction, but the tax authorities may investigate your claim.
Those who get dividend or tax-free income. Those who have large investment portfolios. Those who claim administrative or financial expenses.
Now it is important that you keep correct records of your investments and expenses. Where the money was invested, how much was spent, everything will have to be clearly shown. Keep personal and investment expenses separate and also pay attention to post-tax returns before filing returns.
The new tax system is not just about lower taxes or easier rules, but it is also about eliminating such gray areas. Now even if you earn tax-free income, the expenses related to it will not be ignored, this is the real message of this new rule.
