NII — Net Interest Income

A Guide to the Net Investment Income Tax (NIIT)

NII - Net Interest Income

Investing has the potential to earn you great returns – but where money’s being made, you can surely find Uncle Sam nearby. Accordingly, the net investment income tax (NIIT) will take a 3.8% bite a portion of your investment earnings. There are, however, a number of restrictions on what the NIIT does and doesn’t apply to. Take a look through our detailed guide below for more insight.

All About the Net Investment Income Tax

The net investment income tax, or NIIT, is an IRS tax related to the net investment income of certain individuals, estates and trusts.

More specifically, this applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) surpasses the filing status-based thresholds the IRS imposes.

The NIIT is set at 3.8%, and that rate is relevant for both the 2018 and 2019 tax seasons.

To give some background, the net investment income tax is part of the Health Care and Education Reconciliation Act of 2010. While the NIIT might seem place here, it was actually created to help fund the aforementioned healthcare reforms. Ultimately, the law went into effect in 2013, giving birth to the NIIT on Jan. 1 of that year. Since then, millions of Americans have paid the tax.

Who’s Subject to the Net Investment Income Tax?

Individuals are frequent net investment income taxpayers, mostly because they represent a large portion of the investment market. Only U.S.

citizens and resident aliens with net investment income that exceeds the MAGI thresholds in the table below need to pay the NIIT, though. On the other hand, non-resident aliens are not subject to this tax.

The only exception is if they elect to be treated as a resident so they can file jointly with their U.S. citizen or resident spouse. Check out the exact thresholds here:

Net Investment Income Tax (NIIT) Thresholds
Married Filing Jointly$250,000
Married Filing Separately$125,000
Head of Household (With Qualifying Person)$200,000
Qualifying Widow(er) With Dependent Child$250,000

Estates and trusts may also need to pay the NIIT. This pertains to estates and trusts that have both undistributed net investment income and adjusted gross income past the dollar amount at which the highest estate/trust tax bracket begins for the current tax year. The IRS stipulates that there are a few types of trusts not subject to the NIIT, including:

  • Trusts that are exempt from income taxes
  • Grantor trusts
  • Trusts not technically classified as “trusts” for federal income tax purposes
  • Perpetual care trusts
  • Electing Alaska Native Settlement Trusts

What Is Net Investment Income?

In order to turn a profit, investors aim to buy investments at a lower price than they’ll eventually sell them for. But there are many different kinds of investments, and not all of them are included as net investment income. Here’s a rundown of what is and isn’t subject to the NIIT:

Net Investment Income (NII) Inclusions and Exclusions
Included as NII– Interest– Capital gains– Dividends– Income from passive investment activities– Non-qualified annuity distributions– Rental and royalty income
Excluded from NII– Wages– Unemployment payments– Self-employment income– Social Security benefits– Distributions from some qualified retirement plans– Alimony– Tax-exempt interest– Operating income from nonpassive businesses– Excluded capital gains earned from the sale of your primary residence– Alaska Permanent Fund Dividends

The Net Investment Income Tax in Practice

Your modified adjusted gross income (MAGI) determines if you owe the net investment income tax.

You can compute your MAGI by taking your adjusted gross income (AGI) and adding back in a few deductions, IRA contributions, passive loss or income, taxable Social Security payments, student loan interest and more.

You can find your AGI on Form 1040, Line 8b. If your MAGI is higher than the statutory threshold for your filing status, then you must pay the net investment income tax.

Next, you’ll need to figure out your net investment income the included earnings listed above. But before you can calculate your NII, you must know your gross investment income.

Once you have that, subtracting eligible deductions from your gross investment income will provide you your NII.

Some common investment deductions are brokerage fees, investment advisory fees, tax preparation charges, local and state income taxes, fiduciary expenses, investment interest expenses and any costs involved with rental and royalty income.

Earlier we stated that you pay the NIIT the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) surpasses the filing status-based thresholds imposed by the IRS. In simpler terms, the dollar amount that’s subject to this 3.8% tax, will vary as follows:

  • If your net investment income is lower than the amount by which you exceeded the statutory threshold, the tax applies to your NII.
  • If your net investment income is higher than the amount by which you exceeded the statutory threshold, the tax applies to that exceeding value.

Here are a few examples of NIIT:

Examples of Net Investment Income Tax
Single$200K$120K (MAGI) + $40K (NII) = $160K$0$0
Single$200K$170K (MAGI) + $80K (NII) = $250K$50K$1,900
Married Filing Jointly$250K$220K (MAGI) + $45K (NII) = $265K$15K$570
Married Filing Separately$125K$150K (MAGI) + $40K (NII) = $190K$40K$1,520

How to File the NIIT

IRS Form 8960 is devoted to the calculation of the net investment income tax. When you’re ready to report and pay your NIIT, you’ll do so via Form 1040. Estates and trusts looking to file the NIIT should use Form 1041. If you come across issues or specific questions related to this tax, you may want to consult a financial advisor or a certified public accountant (CPA).

According to the IRS, if you believe that you will pay the NIIT for the current tax year, you must account for it ahead of time. This involves either adjusting your income tax withholding or setting up quarterly estimated payments. Although this requires extra work, it could save you from underpaying the IRS come tax time.

Tips for Managing Your Investments

  • In order to accurately plan your financial future, you should calculate what kind of returns you’ll need from an investment portfolio to reach your goals. There are a few ways to do this, including SmartAsset’s investment calculator or the rule of 72.
  • Taking care of your investments can sometimes fall by the wayside, but this is extremely detrimental over the long-term. If you’re open to the aid of a financial advisor, the SmartAsset financial advisor matching tool can pair you with up to three viable options in your area. These advisors can both manage your portfolio and help you plan your future finances.

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NII in banking vs Economic Value

NII - Net Interest Income
6 mins read time

The two elements used within bank ALM analysis are Economic Value (EVE) and earnings as given by Net Interest Income (NII). Why do we emphasize earnings or NII in banking more than value? What is wrong with value analysis? The following post evaluates this conundrum.

Tools to assess interest rate change impact

In the ALM world, we use two tools to illustrate the impact of interest rate changes.

a) The rate or reset gap focuses on the impact of interest rate changes on earnings. Rate or reset gap buckets assets and liabilities the next rate reset window. A loan with five years to maturity but with a floating interest rate that resets next month will slot in the up to one-month maturity bucket.

b) The price or maturity gap focuses on the impact of interest rate changes on shareholder value. Price gap buckets assets and liabilities the residual contractual maturity. The same loan with 5 years to maturity mentioned above will slot into the 5-year maturity window.

Let’s repeat this once again for emphasis. Rate or reset gap for earnings, price or maturity gap for balance sheet impact. Which one should you use? Which one of the above do the bank’s Board of Directors and executive teams focus on?

Figure 1 – The ALM Earnings vs. Value framework

This is where our discussion begins to get interesting.

NII in Banking – Rate or Reset Gap

The rate or reset gap analysis assumption assumes that with changes in interest rates you will be able to change the applicable reference rate on both your deposits as well as on your loans.

While this may be possible in very liquid markets, in a number of emerging countries the balance of power continues to shift between banks and large depositors. Liquid markets tend to shrug rate re-pricing away as an accepted market norm.

However, in illiquid environments, the balance of power continues to shift between large depositors and borrowers and the banking system.

While the assumption may not hold completely, it is generally taken as relevant and the analysis generated on the basis of this assumption is not questioned heavily in the board room.

The ALM reporting tool we use for analyzing earnings using rate or reset gap is the Net Interest Income at Risk or NII at risk report.

Economic Value – Price or Maturity Gap

The core assumption behind the price and maturity gap is a mark to market (MTM) of both sides of the balance sheet using the new applicable reference rate. MTM is the fair market value of assets and liabilities the most recent changes in the interest rate environment.

Think about that for a second. Can you go to a depositor and tell him that yesterday’s 1,000 dollars deposit is now worth 900? The short answer is no. Even though the opportunity cost argument holds, most bank regulators and depositors will not look kindly upon such a practice.

But that is deposits. On the advances side, a working capital/running finance/overdraft facility that resets rates every month and has a year to maturity is classified in the annual bucket.

In most markets even after you call the loan, the collection process may extend over a few years. From a liquidity point of view, the underlying assumption is that the amount in question will be repaid within a year.

From a real world point of view, it may actually be a few years.

The only part of the bank’s balance sheet that can be truly fair valued are market related assets and liabilities. Publicly traded securities that the bank holds on the asset or liabilities side. Everything else is debatable and fair game.

One could make the argument that in a due diligence situation, fair value analysis becomes important but that too is a function of the franchise of the bank being sold. Some acquisition teams may push aggressively on the MTM of listed and traded securities.

Others may ignore the impact the materiality of the discount.

The ALM reporting tool to analyze economic value, using price or maturity gap, is the Market Value of Equity at Risk or MVE at risk report. The report essentially using the Duration gap analysis to mark to market the balance sheet. For these reasons sometimes we call MVE analysis, the DGAP analysis.

NII in banking (earnings) or economic value (EVE)? Which one would you choose?

Regulatory and investor disclosures may require the bank to share and present both earnings and value impact. However, the primary focus of analysts, executive teams and bank boards are on earnings.

There is certainly a short term bias in the analysis. The earnings presentation gives analysts as well as the management team the information they need to fine tune their forecasts. Compared to earnings sensitivity, Duration gap analysis (DGAP) is a more recent arrival.

More importantly, the set of assumptions behind earnings analysis is less questionable than the assumptions used in the value analysis.

The value analysis is still dissected but it is a thicker, bigger, rougher cut that is dependent on a few questionable assumptions that are difficult to defend in an ALCO session.

The earnings analysis is more fine tuned and is used more commonly. Let’s take a quick look at the reporting template and some of the calculations.

Earnings analysis using the Net Interest Income at Risk reporting template

To introduce the Net Interest Income at Risk reporting template we will use a simplified stylized case study.

Our stylized bank has a simple balance sheet distributed across three maturity buckets.

  1. Up to 3 months maturity
  2. Between 3 months and 6 months maturity
  3. Between 6 months and 1 year maturity.

Here maturity buckets refer to the amounts of time remaining before the relevant reference rates for all items in the bucket reset.

All figures presented in the stylized example are in millions. There is only a single line item for rate sensitive assets and liabilities.

Figure 2 – Stylized template for Net Interest Income at risk (NII) calculations

There is a single reference rate for all assets, irrespective of maturity buckets. Similarly, there is a single reference rate for all liabilities, irrespective of maturity buckets. Expected rates increase is about 2% for all assets and liabilities.

Figure 3 – Projected interest rate environment – rate shock

Net Interest Income – Base Case

the information shared so far we do a simple calculation to determine the interest earned and expensed across maturity buckets for assets and liabilities. The results are below:

Figure 4 – Net interest income results for the base case

For each cell above we take the balance in the maturity bucket and multiply it with the reference rate. Our assumption is that the reference rate is applicable for the remaining part of the year. Whenever the reference rate changes, the underlying assumption would be that it would stay applicable for the next 12 months.

Base Case formula

The formula used for calculating interest is:

The implementation in Excel is as follows:

Figure 5 – Net interest income calculation mechanics for the base case

Revised NII Scenario – Rate Increase

To calculate the revised NII figure after the projected rate rise, change the relevant reference rate and recalculate interest income and expense figures using a slightly different formula.

Figure 6 – Net Interest Income at Risk calculation mechanics for the base case

Because of the change in interest rate, there has been a shift in net interest income. Despite the rate increase, the projection for net interest income is a decline from 159 million to 136.5 million. Why is that?

The explanation is simple. When you look at the structure of the balance sheet you see assets invested in the relatively long term. Hence, they are relatively immune to changes in interest rates. However, liabilities concentration is in the shorter term and they re-price much faster than assets.

This balance sheet structure is a liability sensitive balance sheet. Liability sensitive because liabilities re-price faster than assets. We have a liability sensitive balance sheet.

When rates rise, a liability sensitive balance sheet will generate a declining trend in net interest income.

In our next post, we will spend some more time on the interaction of gaps, asset and liability sensitivity and net interest income at risk trends under rising and declining interest rate environments.

Revised formula

The change in the formula for interest income and expense now accounts for two rates. The old rate applicable to the first part of the year and the new rate applicable for the remaining part of the current year. As our analysis has a one year limit, there is no change in the calculation for the one year bucket.

For the 3 month bucket, the relevant formula for calculating interest income or expense is:

D6 is the cell that links with the amount in the maturity bucket. C11 and C31 are the old and new reference rates.

Similarly for the six month bucket:

E6 is the cell that links with the amount in the maturity bucket. C11 and C31 are the old and new reference rates.

The Excel implementation is as under:

Figure 7 – Net interest income calculations for incorporating the impact of changing rates – calculations

Benefits of the NII at Risk template

The Net Interest Income at risk template quickly gives you a heads up on projected changes in your earnings outlook a change in the interest rate environment.

Given its simplicity and ease of use, the template is relatively simpler to explain to the executive committee and board of directors members and after a few iterations of usage, interpreting results also becomes easier.

In our next post we take a more detailed look at the interaction of gaps, sensitivity and impact on earnings.

(This post is part III of a five part series on better understanding ALM strategies from a board of directors and executive committee members point of view).


Non-Interest Income of Banks (Definition) | Examples and List

NII - Net Interest Income

The non-interest income is the revenue income generated from the non-core activities by the banks and financial institutions (loan processing fee, late payment fees, credit card charges, service charges, penalties, etc.) and play a vital role in its overall profitability.


  1. The core activities of any bank or financial institution is to accept deposit and from the accumulated deposits bank lends money.

    Thus, a bank earns interest income by lending money to the borrowers at a higher rate and pay interest on the deposit accounts at a relatively lower rate. The difference between the interest earned and interest paid is called the net interest income.

    Thus, in the banking business models, the net interest income is the operating revenue generated from the core activities of the business.

  2. However, it is not the only source of income a bank or financial institution may have during the year of operation.

    The total income of any Bank or financial institution is the sum of interest income and non-interest income. It is the other revenue streams which is not directly attributed to lending the money.

Examples of Non-Interest Income

  • For example, assume XYZ Bank lent the US $ 1000,000 to ABC Inc. at the rate of 6% p.a. for 10 years equated repayment. Let us assume the bank earned a total interest income of US $ 60,000 from ABC Inc. However, at the time of sanction of the loan, XYZ bank charged 0.5% of loan amount towards Loan origination fee, an upfront payment of US $ 500 towards the other service charges.
  • Now, the amount of US $ 5000 (as Loan origination fee) and the US $ 500 (as other service charges) is also income for the bank, but this US $5,500 is not coming from interest charges. Thus this income is classified in the books of XYZ Bank as Non-Interest Income.

List of Non-Interest Income for Banks

List of Non-interest income includes income earned from the non-core activities of the banking business, such as:

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  1. Loan processing fee
  2. Loan origination fee
  3. Late payment charges,
  4. Foreclosure charges
  5. Over limit charges,
  6. Credit card annual charges,
  7. Cheque book issue charge
  8. Insufficient funds charges,
  9. Service charges
  10. Dishonor charges
  11. Penalties


  1. Generally, for any business who manufacture or trade goods, or provide any kind of service the non-interest income is considered the revenue generated from the core activities of business such as the sale of goods or services.

    However, only in the case of banking and the financial institution, the interest income is considered revenue generated from core activities. It is because the critical operational activity for any bank or financial institution is accepting money deposits and lending money. This is considered income from non-operating activities of the business.

  2. However, it becomes significantly important during the economic slowdown or financial crisis when the banks face difficulties in lending money or when the bank lends money at lower interest rates. Due to any of these, banks struggle to maintain their margins.

    In such scenarios, the earning inflow from other non-interest income becomes significantly crucial for the banks to offset the loss due to the lower rate of interest.

  3. The following table shows the last ten-year trend of interest income and non-interest income of all the US commercial banks.

    One can observe clearly the when the interest income of the banks decreased due in 2009 due to financial crisis, when banks were not ready to lend any further money, the % of non-interest income increased significantly.

Non-Interest Income as a % of Interest Income

Drivers of Non-Interest Income

  • The extent of non-interest income variation is counted on economic scenarios. The interest income largely depends on the minimum rate of interest charged on the sanctioned loan value. The rate of interest is decided the benchmark rate decided by Federal Bank. Now, when the economy faces challenges of deflation, as a preventive measure Federal Bank lower the interest rates.
  • In such a case, the banks are supposed to pass down the credit of reduction in interest rates to the consumers. It is done by revising the rate of interest charged on the loans. This leads to a fall in the interest income of the bank. To offset the revenue fall the banks, slightly increase the charges levied on transactions which constitute the non-interest income.
  • wise, when the economy goes through inflation, in order to control the price hikes, the Federal bank raises the interest rate in order to increase the cost of borrowing. This results in an increase in the interest income.
  • However, non-interest income falls because the consumer avoids borrowing the money at the higher cost of funds, which results in a decrease in loan origination changes, loan service charges, late payment charges, etc.


The non-interest income is generated from non-core activities of banking and financial institutions. It plays a vital role in the overall total income of the banks. Mostly, the non-interest income is affected by the extent of interest income.

This has been a guide to What is Non-Interest Income & its Definition. Here we discuss the list of non-interest income in Banks, its significance along with example and drivers. You can learn more about from the following articles –


Net Interest Income — Overview and How to Calculate It

NII - Net Interest Income

Net interest income is defined to the difference between interest revenues and interest expenses.

For financial institutions, interest revenues represent the interest payments the bank receives on their interest-bearing assets, while interest expenses are the cost of servicing interest payments to customers on their deposits.


  • Net interest income is defined as the difference between interest revenues and interest expenses.

  • Interest revenues are payments that the bank receives from their interest-bearing assets, and interest expenses are the cost of servicing interest payments to customers on their deposits.

  • When interest rates are increasing in the economy, net interest margins become larger. When interest rates are decreasing in the economy, net interest margins become smaller.

Treasury Bills

Interest is defined as the difference between the purchase price and sale price.

If interest rates in the economy drop and Treasury bills are sold before maturity, a capital gainCapital GainA capital gain is an increase in the value of an asset or investment resulting from the price appreciation of the asset or investment. In other words, the gain occurs when the current or sale price of an asset or investment exceeds its purchase price. will arise.

Indexed Securities

Indexed securities offer an interest rate at a discount to the market rate, and the payable balance is adjusted at maturity for inflationInflationInflation is an economic concept that refers to increases in the price level of goods over a set period of time. The rise in the price level signifies that the currency in a given economy loses purchasing power (i.e., less can be bought with the same amount of money)..

At maturity, if the adjustment is positive, it is included in interest income. If the adjustment is negative, it will be deductible, given the satisfaction of the criterion for interest rate deductibility.

Hybrid Financial Instruments

Hybrid financial products offer a guaranteed return on a pre-determined date the movement of a pre-specified market index, paid at maturity. Often, there are covenants, such as maximum interest, minimum interest, and exercise period, attached to the financial products.

What Type of Assets Generate Interest Income for a Bank?

For many financial institutions, the net interest margin is a primary source of income. The banks’ net interest margin can be interpreted as the cost of financial intermediation. Therefore, it is the difference between what borrowers pay for their loans and what they receive from lending.

Simply put, banks are risk-averse middlemen between depositors and borrowers of funds. Banks offer the following common financial products:

  1. Commercial and Personal Loans
  2. MortgagesMortgageA mortgage is a loan – provided by a mortgage lender or a bank – that enables an individual to purchase a home. While it’s possible to take out loans to cover the entire cost of a home, it’s more common to secure a loan for about 80% of the home’s value.
  3. Construction Loans
  4. Investment Securities

Interest Revenue

Interest revenue is generated through interest payments that the bank receives on outstanding loans. It is made up of credit lines and loans that the institution has on its balance sheet.

Calculating Interest Revenue

Interest revenue is calculated through the application of the effective interest rate to the gross carrying amount of the financial assets. There are only two exceptions in this calculation:

  1. Financial assets that were credit-impaired at purchase
  2. Financial assets that are credit-impaired

Interest Revenue = Effective Interest Rate * Financial Asset


  • Financial Asset is valued at its gross carrying amount

Interest Expenses

Interest expense is the price that the lender charges the borrower in a financing transaction or the cost of borrowing money. It is the interest that accumulates on outstanding liabilities. Common examples include customer deposits and wholesale financing.

Calculating Interest Expense

To calculate the interest expense, multiply the effective interest rate by the gross carrying amount of financial liabilities.

Net Interest Margin

Net interest margin refers to the difference between the interest income generated and the amount of interest paid out to lenders. It is an industry-specific profitability ratio for banks and other financial institutions that lend out interest-earning assets.

Interest Rates in the Economy and Net Interest Income

The equilibrium interest rate is primarily impacted by the demand for borrowing capital and the supply of capital that is being lent. Increasing interest rates benefit banks by increasing their net interest income.

Therefore, in periods of low interest rates, banks have lower net interest margins. Generally, a positive net interest margin is indicative of a bank that efficiently invests its capital, whereas a negative net interest margin signifies inefficiency.

Financial Institutions Shift Away from Interest Income

Declining interest rate margins for banks have altered how institutions structure their operations. Banks have been able to increase non-interest income through trading, services, and other financial operations.

Banks diversify their source of revenue thanks to financial stabilization and increase financial deregulation.

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™CBCA™ CertificationThe Certified Banking & Credit Analyst (CBCA)™ accreditation is a global standard for credit analysts that covers finance, accounting, credit analysis, cash flow analysis, covenant modeling, loan repayments, and more. 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:

  • Net Interest Rate SpreadNet Interest Rate SpreadNet interest rate spread refers to the difference between the interest rate a financial institution pays to depositors and the interest rate it receives
  • Treasury Bills (T-Bills)Treasury Bills (T-Bills)Treasury Bills (or T-Bills for short) are a short-term financial instrument that is issued by the US Treasury with maturity periods ranging from a few days up to 52 weeks (one year). They are considered among the safest investments since they are backed by the full faith and credit of the United States Government.
  • Interest RateInterest RateAn interest rate refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal.
  • Interest IncomeInterest IncomeInterest income is the amount paid to an entity for lending its money or letting another entity use its funds. On a larger scale, interest income is the amount earned by an investor’s money that he places in an investment or project.


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