The gross return on an investment quantifies the return that an investor receives from an investment without taking any other factors into account. Depending on the type of investment, however, various factors reduce the gross return, so that the ultimate net return is significantly lower. On the other hand, the net return may, under certain circumstances, also exceed the gross return. Investors can influence some factors but not another, taxes.
- Investors who earn income from capital investments must pay tax on them.
- The tax rate in turn depends on the type of income.
- The rental income of a rented property first of all represents the gross return.
- In general, the net return can be better adjusted to the gross return if parents also use exemption orders for their children.
Factors that reduce returns: taxation
Defined by digopaul, investors who earn income from capital investments must pay tax on them. The tax rate in turn depends on the type of income. Rental income is charged with the personal tax rate in the tax return, income from investments such as deposits or securities with the flat tax of 25 percent plus solidarity surcharge and possibly church tax.
Costs in connection with securities accounts
If two investors purchase one and the same security through two different banks at absolutely identical market conditions, and if they also record an identical gross return, the net return will usually be different. Both investors receive the same price gain and pay the same withholding tax. However, one pays custody fees and the other doesn’t. The first pays a brokerage fee, which is a percentage of the order volume, the other a flat rate. Despite the identical gross return, the net return after deducting costs differs significantly.
Investors who prefer to invest in investment funds can bring the net return closer to the gross return if, on the one hand, they make sure that they use a free securities account and, on the other hand, they choose a broker who grants the highest possible discounts on the front-end load.
The gross return on real estate
The rental income of a rented property first of all represents the gross return. However, this rental income must be reduced by possible interest expenses, depreciation and non-apportionable ancillary costs. The net income is now charged with personal income tax. However, if the expenses, including depreciation, exceed the rental income, a loss from renting and leasing is the result. Overall, this loss leads to a reduction in income tax liability. In this case, the net return exceeds the gross return.
In the case of a home loan and savings contract, the contract conclusion fee of between one and 1.6 percent of the home loan and savings amount also reduces the gross return on the home loan and savings account. On the other hand, possible government subsidies such as building society premiums or employee savings allowances increase returns.
Gross equals net for deposits
The establishment, management and also the liquidation of savings accounts, daily and fixed deposit accounts take place at no cost to the investor. If the saver’s interest income is below the tax exemption of 801 euros for single persons and 1,602 euros for married couples, the gross return corresponds to the net return. However, even on deposits, the net return can be higher than the gross return. Some providers of call money accounts offer their new customers a direct credit to the call money account. In this case, the net return no longer corresponds to the nominal interest rate, the gross return, but increases by the interest rate applicable to the bank’s bonus payment. A disposition that is made within 30 days for the amount of 2,000 euros in a classic savings book will, however, result in prepayment interest.
In general, the net return can be better adjusted to the gross return if parents also use exemption orders for their children. Since every citizen in Germany is subject to tax, regardless of age, shares in assets can be transferred to children, thus optimizing the tax exemptions for investment income.
