Passive Income

Reviewed by Bhavana | Updated on Aug 26, 2020

Introduction

Passive income comprises of earnings which are derived via a rental property, limited partnership, or any other enterprise in which any individual is not involved in active participation. Usually, passive income is taxable.

A few analysts consider portfolio income as passive income, and hence, interest and dividends would be regarded as passive income. Passive income requires little to no effort in order to earn and maintain. It is termed as progressive passive income when an earner puts in little effort to generate income.

A passive income investment will make the life of an investor easier in several ways, especially when a hands-off approach is chosen. The four passive income investment options include - Real Estate, Peer-to-Peer Lending, Dividend Stocks, and Index Funds. These four options indicate varying levels of risk and diversification. As with any kind of financial investment, it's vital to gauge the expected returns with respect to a passive income opportunity versus the potential for loss.

Understanding Passive Income

In a nutshell, passive income is money which flows in regular intervals without the need for putting in a considerable amount of effort to create it.

There are three types of passive activities:

  1. Cash flows via property income, inclusive of profits from ownership of capital, rent via ownership of resources such as rental income, cash flows from a property or from any piece of real estate, and in the form of interest through owning financial assets.

    1. Trade/business-related activities in which an individual does not take part in the operations of a business other than investing during the year.

    2. Royalties, i.e. payments initiated by one firm (the licensee) to another firm/an individual (the licensor) for the right to utilise the latter's intellectual property (music, video, book).