Investment income represents a critical component of personal and institutional financial planning. It refers to the earnings generated from various financial instruments, including interest, dividends, and capital gains. For investors, understanding the nature, sources, and tax implications of investment income is essential to making informed financial decisions and optimising returns.
Investment income is the return an individual or entity receives from placing capital in financial or real assets. It generally includes:
Interest Income: Earnings from fixed-income instruments such as bonds, debentures, savings accounts, and fixed deposits.
Dividend Income: Payments made by corporations to shareholders from their profits.
Capital Gains: Profits realised when an investment is sold for more than its purchase price.
Investment income may also include rental income, royalties, and annuities, although these are sometimes categorised separately depending on jurisdiction and tax treatment.
The primary sources of investment income can be classified as follows:
Generated from instruments such as government securities, corporate bonds, treasury bills, and bank deposits. This type of income is generally predictable and lower in risk but may be subject to inflationary erosion.
Paid by companies to equity shareholders, dividends represent a share in corporate profits. They may be paid quarterly, semi-annually, or annually and can be classified as ordinary or qualified dividends depending on holding period and regulatory definitions.
Capital gains arise when an investment is sold at a price higher than its purchase cost. These can be:
Short-Term Capital Gains (STCG): Gains on assets held for less than a prescribed period (e.g., one year for equity in India and the U.S.).
Long-Term Capital Gains (LTCG): Gains on assets held beyond the short-term threshold, often taxed at preferential rates.
In India, short-term refers to equity held for less than 12 months; long-term applies beyond 12 months.
Investment income is subject to taxation, which varies based on the income type, investor’s residency, and jurisdiction. A general overview includes:
Typically taxed as ordinary income.
No preferential tax treatment in most jurisdictions.
In India, dividends are taxed at the investor’s applicable slab rate, and Dividend Distribution Tax (DDT) has been abolished (post FY2020).
Short-term gains are usually taxed at higher rates aligned with regular income.
Long-term gains often enjoy lower tax rates, subject to thresholds and indexation benefits.
In India, taxation of investment income is governed by the Income Tax Act and includes:
Taxed under “Income from Other Sources” at applicable slab rates.
Fixed deposit interest may attract TDS (Tax Deducted at Source) if annual interest exceeds ₹40,000 (₹50,000 for senior citizens).
Equity Investments:
STCG taxed at 15% (Section 111A).
LTCG taxed at 10% on gains exceeding ₹1 lakh (Section 112A), with no indexation benefit.
Non-equity Investments (e.g., debt mutual funds):
LTCG taxed at 20% with indexation.
STCG added to regular income and taxed as per slab.
These are subject to periodic amendments through Finance Acts and updates by the Central Board of Direct Taxes (CBDT).
The Net Investment Income Tax (NIIT) is an additional 3.8% surtax imposed on individuals with significant investment income above certain income thresholds:
Thresholds:
$200,000 for single filers
$250,000 for married filing jointly
Applies to:
Interest
Dividends
Capital gains
Rental and royalty income
NIIT is applicable on the lesser of net investment income or the amount by which modified adjusted gross income exceeds the threshold. The tax is reported using IRS Form 8960.
Investment income is a cornerstone of long-term wealth creation, offering opportunities for passive income and capital appreciation. However, its tax treatment varies significantly across jurisdictions and asset classes. A clear understanding of the sources, structure, and applicable tax rules enables individuals and institutions to understand their tax liabilities and manage investment income efficiently. Given the evolving nature of tax laws, changes in regulations can influence how individuals approach investment income planning and related financial decisions.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.