Net Investment Income (NII)

What is Net Investment Income (NII)?

Net investment income (NII) is the total income before taxes that an investor receives on their portfolio of investment assets. NII is generated from dividends, capital gains, or similar investment-related returns. Below is the formula for net investment income.

Net Investment Income – Components

1. Investment returns

When calculating net investment income on an investment portfolio, one must first calculate the total investment returns from the portfolio assets. Total investment returns can include the following:

• Capital gains: Profits from the sale of stocks, bonds, or other assets.
• Interest: Interest payments from holding bonds, savings accounts, certificates of deposit, and other avenues of money lending.
• Dividends: Payments distributed to shareholders of stocks – can be in the form of cash or shares.
• Other: Including returns from annuities, royalties, rents, etc.

2. Investment expenses

After calculating returns, investment-related expenses need to be tallied and subtracted from investment returns. The result will be net investment income. Investment expenses can include:

• Transaction fees: Brokerage commissions, mutual fund load charges, annuity withdrawal charges, etc.
• Margin interest: Interest charges incurred as a result of margin account loans to purchase/sell a security.
• Ongoing fees: Investment advisor fees, annual investment fund administration charges, registered account fees, among others.
• Other: Tax filing fees, financial planner fees, and additional fees directly attributable to investing.

Tax Implications

Net investment income can be calculated for individuals, trusts, estates, and corporations, and it is used for tax reporting purposes. Each country imposes different tax laws for each entity with net investment income.

In the United States, for example, individuals with investment income are subject to net investment income tax (NIIT), calculated as 3.8% on the lesser of:

• The NII, or
• The surplus of modified adjusted gross income over:
  • $250,000 for a married couple filing jointly
  • $250,000 for a qualifying widow/widower
  • $125,000 for a married individual filing separately from a spouse
  • $200,000 for any other case

In the case of an estate or trust, NIIT is calculated as 3.8% on the lesser of:

• All undistributed net investment income, or
• Any excess of adjusted gross income over the dollar amount threshold, which the highest tax bracket begins for an estate or trust in a given tax year.

Investment Income vs. Earned Income

While investment income is generated passively through investment portfolios, earned income refers to wages received during employment. Earned income can come from full-time work, self-employment, or contract work, and is subject to higher tax rates than investment income in most countries. In the United States, for example, earned income tax can range from 10%-37% depending on the tax bracket.

NII for Investment Companies

Investment companies or those whose primary business is investing and managing securities are usually express net investment income on a per-share basis. To do it, the company’s operating expenses get subtracted from the total investment income and then divided by the number of shares outstanding.

NII is an essential figure for investors in these companies since it determines the amount of capital available to them for dividend payments.

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Taxable Income
• Accounting For Income Taxes
• Investment Methods
• Outstanding Shares
• See all wealth management resources