Difference between Capital Gains and Investment Income

Capital Gains

A capital gain is defined as an increase in the total value of a capital asset (it can either be an investment or a real estate property) that helps to give it a higher value when compared to the original purchase price. An investor does not have a capital gain until an investment gets sold for profit. Capital gains is the returns earned in the case of an investment being sold for a greater amount when compared to its purchase price. For example, let us assume that there is an investor who has made a purchase of 1000 shares of the stock of a company XYZ at a price of Rs. 100 per share. The total capital expenditure would therefore be Rs. 100000 (Rs. 100 x 1000). Now, if we assume that the value for each share has increased to Rs. 200, it will make the actual worth of the total investment Rs. 200000 (Rs. 200 x 1000 = Rs. 200000). If the investor decides to sell their shares at a market value, the total income from these shares will also be Rs. 200000. The actual capital gain on the investment will then be the difference between the total income and the initial capital amount (Rs.200000 – Rs. 100000 = Rs. 100000).

Investment Income

Individuals mostly earn their income via methods like employment but they can also earn additional money by investing in financial markets. This additional earning is known as the investment income. In simpler words, the investment income is the profit which comes from the dividends, interest payments, capital gains and other profits that are made through any investment vehicle. Some of the investment income gets attributed to the capital gains. However, the income which is not generated as a result of the capital gains is referring to the unearned dividends or interest amount. Unlike the capital gains, the actual return for the investment is not dependent on the initial amount of capital expenditure. For example, let us assume a company XYZ pays a dividend of Rs. 200 for each of 1000 shares purchased by an investor. If the dividends for all the shares get paid before their sale, then the total investment income generated from the sale will be Rs. 200 x 1000, or Rs. 200000.

Difference between Capital Gains and Investment Income

Both capital gains and investment income are important means to generate earnings for the investors in the stock market. One of the main reasons why individuals and corporations invest in the stock market is because of these two means of income. However, there are some major areas of difference between capital gains and investment income, and we will discuss them below to get a deeper insight into this topic:

Capital Gains

Investment Income

Definition

A capital gain is defined as an increase in the total value of a capital asset (it can either be an investment or a real estate property) that helps to give it a higher value when compared to the original purchase price.

The investment income is defined as the profit which comes from the dividends, interest payments, capital gains and other profits that are made through any investment vehicle.

Scope

Capital Gains has a narrower scope compared to the investment income.

Investment income has a wider scope compared to the capital gains.

Earnings

The earnings within capital gains are based on the opinions of other investors.

The earnings within investment income are not solely based on the opinions of other investors.

Conclusion

Both capital gains and investment income are extremely useful for the investors to generate income from their hard-earned money. It also helps companies get the required working capital to run their business in an efficient manner. Although there are many points of difference between capital gains and investment income, both of them have a very important role in the economy of a country.

Frequently Asked Questions

What kind of income gets charged for the purpose of taxation under capital gain?

If there is any profit or gain that arises from the transfer of a capital asset during a particular year, that income will get charged for the purpose of taxation under capital gain.

What is the meaning of a capital asset?

Capital asset is defined as the following

  • Any kind of property that is held by an assessee regardless of whether it is connected with their business or profession.
  • Any securities that are held by a foreign institutional investor who has made an investment in these securities in accordance with the rules and regulations of the SEBI Act, 1992.

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