Realised vs. Unrealised Gains

Realised and unrealised gains represent two key aspects of asset performance, especially relevant for investment decisions and taxation. Understanding the distinction helps investors assess the actual profitability and potential tax liability of their portfolios.

A realised gain is the profit earned when an asset is sold for a price higher than its original purchase cost. The gain is considered “realised” because the transaction has been completed and the profit is actually received by the investor or entity. Realised gains are typically subject to taxation, depending on applicable laws—such as capital gains tax in India or other jurisdictions.

For example, if an investor purchases shares for ₹1,00,000 and later sells them for ₹1,50,000, the ₹50,000 profit becomes a realised gain. This gain may be classified as short-term or long-term, depending on the holding period, and taxed accordingly.

Realised gains are recorded in the financial statements and can impact a company’s or investor’s reported earnings, cash flow, and tax liabilities. They are crucial for assessing actual investment performance and liquidity.

An unrealised gain, also known as a paper profit, represents the increase in value of an asset that is still held and has not yet been sold. Since no transaction has taken place, the gain remains “unrealised” and is generally not subject to immediate taxation. However, it reflects potential profit based on the asset’s current market value.

For instance, if an investor buys equity shares for ₹2,00,000 and their market value rises to ₹2,50,000, the ₹50,000 increase is an unrealised gain. If the investor holds the shares without selling, this gain exists only on paper and may fluctuate with market conditions.

Unrealised gains are often used in portfolio valuations and net worth calculations, but they do not directly contribute to cash flow. They may, however, influence investor sentiment and financial reporting under mark-to-market accounting standards.

Realised gains are generally taxable, meaning they may attract capital gains tax in the same financial year the sale occurs. In contrast, unrealised gains are not taxed unless the asset is sold. This distinction is crucial for tax planning, especially for high-net-worth investors or during end-of-year portfolio reviews.

Note: Specific exemptions and tax rates may apply depending on the asset type, duration of holding, and investor category.

Understanding whether a gain is realised or unrealised plays a vital role in multiple areas of personal and corporate finance. The distinction helps in:

• Portfolio Valuation –
  Unrealised gains contribute to the mark-to-market value of your investments. While they show growth in asset value, they can be temporary and subject to market fluctuations. Realised gains, on the other hand, reflect actual profits that impact the liquid value of the portfolio.
  

• Decision-Making –
  Understanding the difference outlines scenarios related to selling assets, booking profits, or portfolio rebalancing. Holding unrealised gains can involve potential further upside, whereas realising gains may correspond to liquidity needs or risk management, depending on market conditions and investor circumstances.
  

• Financial Planning –
  Realised gains often trigger capital gains tax liabilities, while unrealised gains typically do not—unless under special accounting or fund structures. This distinction is relevant for tax calculations, including scenarios such as loss adjustment or deferred taxation.
  

• Performance Measurement –
  It allows for more accurate tracking of investment performance, distinguishing between actual profits and notional increases in value.
  

• Regulatory Reporting and Compliance –
  In corporate finance, realised gains must be reported for auditing and tax purposes, whereas unrealised gains may be disclosed for transparency but have no direct tax implications until realised.

The realised vs. unrealised distinction underpins sound investment and tax strategy. While both indicate asset growth, only realised gains convert into actual profits and potential tax events. Recognising this difference helps investors evaluate the true financial impact of their holdings.

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.