Introduction

Making informed decisions with your investment can be challenging, but understanding these two concepts of realised versus unrealised gains is essential. Knowing these two concepts will affect the way you view your portfolio performance, how you approach taxes on your investments, and your planning for financial goals in the future. These realised vs. unrealised gains comparisons will be necessary whether you put money in stocks, mutual funds, or real estate. Knowing and understanding these gains is an essential step in the investment process to ensure you get the best return on investment possible. Let us define realised and unrealised gains, how to account for realised and unrealised gains, and the implications for your investing activities in India.

What are Realised and Unrealised Gains?

A realised gain is the profit when you sell your asset for more than you paid for the asset. For instance, suppose you purchase 100 company shares for ₹500 each, for a total cost of ₹50,000. If you sell the shares at ₹750, you will receive ₹75,000 and a realised gain of ₹25,000. The profit is now (realised gain) liquidated and is a taxable event in Indian tax law, subject to capital gains tax.

Unrealised gains, on the other hand, are profits that exist "only on paper" - you still have not sold those same 100 shares, and they are now at ₹750; your new portfolio value is ₹75,000, which shows that you have an unrealised gain of ₹25,000. Those profits aren't taxed because you still have not cashed out. Therefore, unrealised gains (when there are gains) and unrealised losses (when there are losses) represent your holding value in relation to the market - as values go up, you have gains, and as prices go down, you have losses, until you sell. This gives you the ability to potentially decide when you want to cash out the profits or choose to hold for further growth.

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How Do These Gains Work?

Realised vs unrealised gains will have implications for your overall financial planning. Once you sell an asset, that profit becomes "realised" since the transaction occurred. For example, if you own a property that you bought for ₹50 lakh and sold for ₹70 lakh, you have a realised gain of ₹20 lakh. However, this profit is taxed based upon the period you held the property: short-term (a portion short-term for equities is less than one year; a portion short-term for property is less than three years) is taxed at your income tax slab rate, or long-term is potentially taxed at a lower rate, e.g., 12.5% for equities in 2025.

Unrealised gains show the value of your assets based on current market values. If you buy mutual fund units at ₹100 and the mutual fund grows to a value of ₹150, then you have an unrealised gain of ₹50 per unit. If the value falls to ₹80, you have an unrealised loss, which does not have any tax or cash-flow implications until you sell the asset. This is why you can be sufficiently confident in determining when to sell your asset, depending on market conditions or tax planning strategy.

The Accounting of Gains and Losses

Systematically accounting for realised and unrealised gains and losses is essential to ensuring you are a successful portfolio manager. Realised gains actively increase your overall cash flow and use the word-invoking language of income in your tax returns. For example, if you sell shares and profit from ₹1 lakh, this adds to your taxable income and may mean you cross into a higher tax slab.

In India, tax laws require you to report realised gains annually, regardless of whether you owe tax. Realised losses offset your taxable profits and future capital gains and reduce your income tax the following year; thus, it is worth considering capital losses in subsequent years. Tax rates are up to 30% on short-term gains and 12.5% for long-term capital gains where the investor has held equities for over 12 months.

Unrealised gains and losses will adjust the book value of your portfolio. This impacts your net worth but does not impact taxes or liquidity. For example, your portfolio grows by ₹5 lakh. In that case, (if the number can grow easily and is not just a single market bump, kite-mark timing, etc.), you are incrementally wealthier on paper. Still, you have nothing spendable until that asset is sold. That is why many Indian investors use tools to look at portfolio tracking to see these changes and flows, which affect the paper until it is sold.

Conclusion

By understanding realised vs. unrealised gains, you know how to build wealth more efficiently. Time your sales to bring in your profits, or wait for potential profits before learning they exist. You can build your portfolio along with tax-effective growth. By staying current on the Indian tax rules and market cycles, you will make better decisions. When building wealth, with the right timeframe and focus, you can increase your investments while retaining more earnings and ultimately achieve your financial goals.

Also read: What are unrealized gains and losses?