Introduction

If you are asked to list your income in a financial year, your mind may quickly jump towards listing your monthly salary credit. In most cases, you tend to miss the income earned from your investments. Your total taxable income includes your salary and earnings from your investment. Although both are part of your total income, these earnings are not taxed the same. Your salary credit determines your tax slab; however, the tax treatment for your investment income is a completely different ball game. In some cases, it is taxed as per your slab, while in others, you pay capital gains tax, depending on the investment.

Understanding the intricate details of how different investment incomes are taxed is essential for optimising your returns and reducing tax liabilities. Let’s dive into the details of what counts as investment income and clarify the taxation rules that come into play. Once you are equipped with this information, you can make more informed financial choices.

What is Investment Income?

Investment income is an umbrella term that encompasses earnings generated from different investment sources. In simple terms, it is the money that your investment asset earns for you. It can be considered as a form of passive income, as you don’t work to earn this money like you do for your salary. The income from investment is a result of the returns your assets earn over time. In some cases, the return is market-linked, while in others it is a fixed return.

Types of Investment Income

There are various types of investment incomes, which include the interest you earn from your bank accounts, the dividends that come your way from stocks or mutual funds, and capital gains from selling stocks or other assets. Here are some common investment incomes:

• Saving Account Interest: The interest accrued through financial instruments such as savings accounts, fixed deposits (FDs), recurring deposits (RDs), bonds, and debentures is considered to be saving account interest.

• Dividends: Some companies give dividends to people who own shares of their stock. A dividend is a share of the company's profits given to shareholders.

• Annuity and Pension Plans: This includes the steady income you get after investing in retirement products, such as annuity plans and pension funds.

• Capital Gains on Investment: When you sell capital assets such as stocks, mutual funds, real estate, etc, for more than what you initially paid, the profits you earn are known as capital gains.

Investment Income Calculations with Examples

There is no single investment income formula that can track your earnings on investment. Different investments have different formulae that calculate the returns. To simplify the calculations, you can refer to the investment income examples:

Net Gain

Net Gain = Current Value of Investment - Cost of Investment

You invest ₹10 lakhs in stocks and after two years sell it for ₹11.5 lakhs, then as per the net gain formula:

11,50,000 – 10,00,000 = 1,50,000

Your net gain in this calculation is ₹1.5 lakhs

Return on Investment (ROI)

ROI = (Total Gain of Investment / Initial Cost of Investment) x 100.

Example: You invest ₹10 lakhs in a mutual fund and after 5 years sell it for ₹13.5 lakhs, then as per the investment income formula, your ROI is:

Total gain = 13,50,000 – 10,00,000 = 3,50,000

(3,50,000 / 10,00,000) X 100 = 35%

Thereby, your ROI on the investment is 35%.

Simple Interest

Simple Interest = (Principal x Rate x Time) / 100

Example: You invest ₹1 lakh at 10% simple interest for 5 years, then your simple interest is: (1,00,000 x 10 x 5) / 100 = 50,000

Thereby, your simple interest on that amount is ₹50k.

Taxation for Investment Incomes

Income from investments is taxed based on several factors. Understanding these factors will empower you to strategise your investments effectively to enhance your returns and stay aligned with the tax laws.

Interest Income from Other Sources:

The interest earned from savings accounts, fixed deposits (FDs), and recurring deposits (RDs) falls under this category. The tax treatment for these returns is as follows:

• Interest on savings accounts: You get an exemption of up to ₹10k annually under Section 80TTA, while senior citizens benefit from a higher limit of ₹50k under Section 80TTB. Any income above these amounts is taxed as per your tax slab.

• Interest on FDs and RDs: Profits from these sources are taxed as per your tax slab.

Dividend Income

Dividend income from your stocks or mutual funds is calculated as per your tax slab.

Capital Gains Tax

Profits from certain assets, such as stocks, mutual funds, etc, are subject to capital gains tax. These are taxed based on how long you hold the asset. Based on that, there are two types of capital gains:

• Short-Term Capital Gains (STCG): Equities held less than 12 months are taxed at 15%.

• Long-Term Capital Gains (LTCG): For equities held more than 12 months, any gains exceeding ₹1 lakh are taxed at 10%, without considering indexation.

For debt funds, STCG is taxed according to your tax slab, and LTCG (investments held for more than 36 months) is taxed at a rate of 20% with indexation.

Other Incomes

• Annuities are taxed according to your tax slab.

• Pension plans are taxed according to your tax slab.

• Income from business activities is treated as business income for tax purposes.

• For rental income, a standard deduction of 30% net value is charged.

Conclusion

Any earnings gained from your investments are classified as investment income. This includes the interest you earn from savings accounts, the dividends from stocks, and the capital gains realised after selling an asset or mutual funds. Understanding the tax treatment of investment income is crucial, as it differs significantly from the income you earn through employment. You can maximise your earnings and build long-term wealth by combining sound investing decisions with tax-efficient techniques.

Further reads: Best Investment Plans for Monthly Income in India in 2025 | Understanding Income Funds: Basics and Features