The concept of passive income has gained a lot of attention lately. While the opportunities used to be limited, the development of various online platforms has given Indians an opportunity to increase their main income.
Additionally, a pandemic like Covid-19 has increased the need for passive income. Let’s dive deep into the concept of passive income and how to generate one.
What is passive income?
Passive income refers to income that doesn’t require too much investment in terms of money, time, and resources. It doesn’t guarantee active participation, and you don’t have to put in any set hours to build passive income. Unlike regular income, passive income is low-maintenance.
Passive income helps you earn a little extra. Every penny earned counts, and you can use the funds to build an emergency fund, start a systematic investment plan in mutual funds, etc.
Passive income ideas
1. Giving property for rent
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 rent out the unoccupied one and earn money. Your rental income can be significant if you own a property in a prime location with good infrastructure and connections.
Renting out a commercial property can bring you a substantial sum in rent. Therefore, before buying a property, consider the rental aspect in case you should need it in the future. To earn a reasonable rent, keep the property well maintained and make necessary repairs in a timely manner.
Use real estate portals to offer your property for rent. You can place ads in local newspapers to attract potential renters. The rent you earn will be taxed under Section 24 of the Income Tax Act.
2. Non-cumulative Fixed Deposits
Non-cumulative fixed deposits can serve as a potent source of passive income. With such deposits, the financial institution, bank or NBFC does not withhold the interest but pays it out periodically. Interest is paid either monthly or quarterly. In a few cases it is semi-annually.
Unlike a cumulative term deposit, where you earn nothing during the term of the FD, a cumulative term deposit behaves differently. Note, however, that interest on a non-cumulative deposit is slightly lower than on a cumulative deposit. In addition, there is no possibility to reinvest in a non-cumulative deposit.
Investing in such a deposit is simple and straightforward. Go to the branch of the bank where you have an account, fill out the deposit form and you’re done. You can also invest in a non-cumulative balance with internet banking. In most cases you will receive the deposit confirmation on the same day.
3. Dividend options in mutual funds
Mutual funds need no introduction. They have become a popular investment vehicle for many to build money for their desired life goals. The mutual fund universe is large and offers different types of funds. The dividend option in mutual funds can be a good source of passive income.
With a dividend plan, the profits made are distributed among investors. You are not invested in the system. You receive the dividends quarterly, semi-annually or semi-annually. Note that the declared dividend is deducted from the fund’s NAV. If the NAV of the fund is INR 100 and the fund house declares a dividend of INR 20, the NAV of the fund will be INR 80.
Also, a dividend is only declared if the fund makes a profit. The amount is not guaranteed. If you want a regular income stream from your investment in mutual funds, you can go for the dividend option. Note that the dividend you receive will be added to your income and taxed at the applicable tax rates.
4. High Interest Savings Account
While interest rates on bank savings accounts have fallen, some banks are offering a higher interest rate. Also, some banks credit the interest on the money every month instead of quarterly. These high-yield savings accounts can serve as a good source of passive income.
If you have a low risk tolerance and want a secure income, you can invest in a high-yield savings account. However, do your due diligence before investing. Also note that interest earned over INR 10,000 in any financial year will be added to your income and taxed at the applicable tax rates.
5. Peer-to-Peer Lending
If you have money to lend, listing on peer-to-peer (P2P) lending platforms can help build a prudent source of passive income. P2P lending platforms act as intermediaries between borrowers and lenders. You will be connected to the potential borrower, who will be evaluated based on their creditworthiness.
You can determine the interest rate you want to charge for lending. Once the paperwork is done, you deposit the money into the borrower’s account and if you pay EMI, you get the interest. P2P platforms must have an NBFC P2P license to operate and are subject to RBI regulations.
Most P2P platforms also help you recover in case of non-payment. However, to avoid non-refunds, opt to list yourself on P2P platforms with a solid risk assessment mechanism.
6. Freelance work in various fields
You can freelance to make extra money. 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, you can try digital marketing if you are good at marketing.
If you are someone with a lot of followers on social media, you can become an influencer and make a handsome sum. The rise of the gig economy in recent years means you can turn your passion into income. All you have to do is look for opportunities in your domain and take advantage of them immediately.
Start with an idea at the beginning and see how it works. If it works well for you, you can branch out and try different ideas. Since passive income does not require much effort, it is advisable to actively scout and try them out.