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Portfolio income is earned from investments. Dividends, capital gains, interest are all portfolio income. It is one of the three types of income – the other two being active income and passive income. It is similar to passive income, however it is earned from investments. Portfolio income is taxable in India.

Understanding Portfolio Income

Let us understand the types of portfolio income with examples. Minal has a fixed deposit of Rs 200,000 in a bank. The interest she earns on this deposit is ‘portfolio income’.

Priyanka has bought stocks of ‘John Black Limited’. The company pays dividend of Rs 5,000 to Priyanka. This dividend income is ‘portfolio income’.

Nitin bought 100 shares of ‘XYZ Limited’ for Rs 500 per share. The share price increased to Rs 1,200 after a year. Nitin sold the 100 shares at Rs 1,200 per share and booked a profit of Rs 70,000 [(1200-500)*100]. This profit is a capital gain on investment. It is portfolio income.

Why is portfolio income important?

• Portfolio income is important for long term wealth creation. Value of money reduces with time, so it is important to invest idle funds and let them grow.
• It can lead to financial freedom. If invested wisely, over time portfolio income can become so huge that it would remove the dependency on other income sources.
• It helps to plan and prepare for personal financial goals like – buying a house, saving for retirement, child education etc.

How to increase portfolio income?

• Buy high dividend paying stocks.
• Invest in mutual funds through monthly systematic investment plan (SIP).
• Buy and hold blue chip stocks.
• Invest in bonds and exchange traded funds.
• Put your money in fixed deposits.
• Re-invest dividend, interest into your portfolio.
• Invest new capital, excess funds into SIP, fixed deposits, blue chip stocks at regular intervals.

How is portfolio income taxed in India?

Tax on portfolio income depends on the type of portfolio income. If the income is in the nature of capital gains then it is taxed at different tax rates depending on whether the gain is short term or long term. If it is dividend income or interest income, it is taxed at the investors income tax slab rate.

Who should create portfolio income?

Anyone having surplus cash or funds should invest it to generate portfolio income. It is an effective tool of growing money. For most people, passive income is difficult to come by. However, portfolio income can be generated with little capital as well. Also, portfolio income sources can be created at your own pace.

Advantages and Disadvantages of Portfolio Income