The concept of passive income has gained popularity lately. Where before the options were limited, the evolution of various online platforms has given Indians the opportunity to increase their main income.
Additionally, a pandemic like Covid-19 has heightened the need for passive income. Let’s dive deeper into the concept of passive income and how you generate one.
What is Passive Income?
Passive income refers to income that does not require too much effort in terms of money, time, and resources. It doesn’t warrant active participation, and you don’t need to put in fixed hours dedicated to building passive income. Unlike regular income, passive income requires little maintenance.
Passive income helps you earn a little more. Every penny earned counts, and you can deploy the funds to build an emergency fund, start a systematic mutual fund investment plan, and more.
Passive Income Ideas
1. Letting out a property
This is perhaps one of the most sought after sources of passive income, especially for those who own multiple properties. For example, if you own two houses, you can put the unoccupied one up for rent and earn money. Your rental income can be substantial if you own a property in a prime location with good infrastructure and connectivity.
If you put a commercial property up for rent, it can earn you a large sum of money in rent. Therefore, before buying a property, consider the rental aspect if you need it in the future. To earn a decent rent, maintain the property well and make any necessary repairs on time.
Use property portals to list your property for rent. You can advertise in local newspapers to attract potential tenants. The rent you earn is taxed under Section 24 of the Income Tax Act.
2. Non-cumulative fixed deposits
Non-cumulative fixed deposits can be a powerful source of passive income. In such deposits, the financial institution, bank or NBFC does not retain the interest but pays it regularly. Interest paid is monthly or quarterly. In some cases, it is semi-annual.
Unlike a cumulative fixed deposit, where you earn nothing for the duration of the FD tenure, the case is different for a non-cumulative deposit. However, note that the interest of a non-cumulative deposit is slightly lower than a cumulative deposit. Also, there is no option to reinvest in a non-cumulative deposit.
Investing in such a deposit is simple and easy. Enter the branch of the bank where you have an account, complete the deposit form and you are done. You can also invest in a non-cumulative deposit with internet banking. In most cases, you will receive the certificate of deposit the same day.
3. Dividend Options in Mutual Funds
Mutual funds need no introduction. They have become a popular investment tool for many to build funds for their desired life goals. The universe of mutual funds is vast and offers different types of funds. The dividend option in mutual funds can be a source of good passive income.
In a dividend scheme, the profits made are distributed among the investors. They are not invested in the scheme. You receive the dividends on a quarterly, half-yearly or half-yearly basis. Note that the declared dividend is reduced by the net asset value of the fund. If the net asset value of the fund is INR 100 and the fund house declares a dividend of INR 20, the net asset value of the fund drops to INR 80.
Also, a dividend is only declared when the fund makes a profit. The amount is not guaranteed. If you are looking for a steady stream of income from your investment in a mutual fund, you can opt for the dividend option. Note that the dividend you receive is added to your income and taxed according to the applicable tax rates.
4. Savings account with high interest rate
As interest rates on bank savings accounts have come down, some banks are offering a higher interest rate. Also, some banks credit interest on the money monthly instead of quarterly. These high-interest savings accounts can be a good source of passive income.
If you have a low tolerance for risk and want assured income, you can invest in a high yield savings account. However, do your due diligence before investing. Also note that interest income over INR 10,000 in a financial year is added to your income and taxed at the applicable tax rates.
5. Loan between individuals
If you have money to lend, signing up with peer-to-peer (P2P) lending platforms can help you create a prudent source of passive income. P2P lending platforms act as intermediaries between borrowers and lenders. You are put in contact with the potential borrower whose evaluation is based on his credit score.
You can decide what interest rate you want to charge for the loan. Once the formalities are completed, you credit the money to the borrower’s account and upon payment of EMI, you earn the interest. P2P platforms must have an NBFC P2P license to operate and are subject to RBI regulations.
Most P2P platforms also assist you with recovery in the event of non-payment. However, to avoid non-refunds, opt for registration on P2P platforms with a strong risk assessment mechanism.
6. Freelancing in various fields
You can be self-employed to earn a few extra dollars. For example, if you are good at writing, you can try your hand at content writing. Many companies and platforms hire freelance writers for their projects. Likewise, if you are good at marketing, you can try digital marketing.
If you are someone with many social media followers, you can become an influencer and earn a handsome sum. The rise of the gig economy fueled in recent years means you can turn your passion into income. All you have to do is search for opportunities in your field and grab them instantly.
Start with an idea at the beginning and see how it works. If that works well for you, you can branch out and try different ideas. Since a passive income does not require much effort, it is advisable to actively seek them out and give it a try.