Investment Income

What is Investment Income?

Investment Income is the income that is generated through dividends, payment of interest, and capital gains through the sale of any asset or security and profits made by any kind of investment vehicles like bonds, mutual funds, etc. Generally, people earn a large quantity of their total income every year from their salary income but, properly planned savings and the investments in the financial markets can actually convert nominal savings into big portfolios of investment, which will surely yield that investor a good investment income over the time.

Top 3 Types of Investment Income

There are several types of investment incomes out of which major ones are explained below:

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For eg:
Source: Investment Income (wallstreetmojo.com)

#1 – Interest

A person will earn income as an interest in investments that generate interest in the deposition of funds into bonds, certificates of depositsCertificates Of DepositsCertificate of deposit (CD) is a money market instrument issued by a bank to raise funds from the secondary money market. It is issued for a specific period for a fixed amount of money with a fixed rate of interest. It is an arrangement between the depositor of money and the bank.read more, money market instrumentsMoney Market InstrumentsThe money market is a market where institutions and traders trade short-term and open-ended funds. It enables borrowers to readily meet finance requirements through any financial asset that can be readily converted into money, providing an organization with a high level of liquidity and transferability.read more, etc. earlier, the investors who are in need of some cash can withdraw money from their interest income without even disturbing the principal amount invested. But nowadays, the interest rates are very low hence;, it’s really difficult to expect the same return from dividend and interest on a consistent basis.

If a person utilizes the interest income either from cash, taxable bonds, or certificate of deposits, the same is taxed at the regular income tax rate. Additionally, if the investment is long-term, then that person is required to show the interest income earned in the income tax return even if you do not withdraw cash from that investment.

#2 – Dividends

DividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more are paid by the companies on the basis of their earnings to the shareholders or investors on a per-share basis of the stock. If the investment is in mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more that have funds into dividend stocks, then the investor earns a share of that company through dividends on a yearly or quarterly basis.

The taxes are to be paid on dividends as well, and the regular tax rate applies to these Ordinary dividends, whereas there are some dividends labeled as “qualified” are taxed at a capital gains rate that is generally lower.

#3 – Capital Gains

A rise in the asset’s value, like in an investment on real estate or stock, which is more than its purchase price then, that increased value is the capital gain, but the same is realized only when the underlying assetUnderlying AssetUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates.read more is sold. The investor has to pay taxes on the capital gains according to the period of the gain, whether it is short term or long term capital gain. The long term holing of any investment is better than the short term as the tax rates are lower on long term capital gains.

Investment Income Examples

The following are the different examples of investment income:

#1 – Dividend

If an investor holds 100 shares in a corporate and that entity pays 50% of its earnings as dividends and says the earnings are Rs. 10 per share, therefore, the dividend amount is Rs. 5 per share, the investor, earns Rs. 500 per year i.e., 100 shares multiplied by Dividend Per ShareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more Rs. 5.

#2 – Capital Gain

An investor “A” invests an amount of Rs. 1000 to buy 20 shares of a company selling at par i.e., Rs. 50. Next year the price of that share rises to Rs. 70 per share and  “A” decides to sell ten shares from his stock; then, his capital gain will be Rs. 200 [ 10 shares @ Rs. 70/ share = 700 less original price 10 shares @ Rs. 50/ share = Rs. 500 ].

Advantages

The various advantages related to the investment income are as follows:

Disadvantages

The various disadvantages related to the investment income are as follows:

Important Points

The various important points are as follows:

  1. There are several types of investment incomes out of which major ones include interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more, capital gain, and dividend income, etc.
  2. Investment incomes help in saving taxes as there are much tax-free or tax saving investment schemes that attract investors to invest as they save a lot of tax for people.
  3. The investor will be able to face inflation. If a person has invested his funds in fixed income generation investment, then his income is fixed from his investments, and during the inflation, when rates are so high, then also he will be earning the same income and can spend it appropriately.

Conclusion

This is an income that generates from interest, dividend, and capital gains. It is a good practice to keep investing in stocks, bonds or mutual funds, etc. people have at least a generation of income from these investments, which helps them in keeping up with their monetary needs or wants. Some investments help in tax saving also, which is an advantage to the common man. The chosen investments should be a wise choice that generates a wealthy return.

This has been a guide to What is Investment Income, and it’s Definition. Here we discuss the examples of investment income and types along with advantages and disadvantages. You can learn more about investments from the following articles –

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