When we heard the word, passive, the first thing that comes to our minds is “something that is not active”. Therefore, passive income is the term used when a person earns an income without actively contributing for the same. Some of the best examples of passive income are money earned by renting out one’s property, money earned by being involved in a limited partnership and earning money from any other source that one is not actively involved in or contributing to. It is a taxable income.
In the following sections, let us see more passive income, its types, and some ideas on how you can generate passive income for yourself.
Passive Income – Meaning
The term, passive income, has been used quite frequently in the recent past. People who want to be their own boss, those involved in freelancing gigs and other flexible projects are the ones who are passionate about earning passive income. In most cases, people earn passive income in addition to their active income. For example, you may get a monthly salary from the job you do, but you could also earn passive income in the form of rent from the property you have let out to tenants.
Types of passive income
For tax purposes, passive income is divided into three main types. They are:
- Self-Charged Interest
The Income Tax Department has allowed certain corporations to be set up as S-corporations (also known as S subchapter corporations). These corporations have a maximum of 100 shareholders only. They pay money directly to the investors and owners, so that they can be free from double-taxation. When you lend money to such corporations, the interest you earn on the loan amount is classified as passive income.
- Rental Properties
When you get rental income from the property or properties you let out to tenants, that income is classified as passive income. However, this rule doesn’t apply in two cases. Firstly, if you are a real estate professional, the income you get as rent will become your active income. Secondly, if you have rented out your own property to a business that you own, you cannot claim that rental income as passive income.
- Silent or minimal participation in business
If you only put in money in a business that others own, the owner may pay you a percentage of profits, because you are an investor. That income becomes your passive income, as you are earning an income without actively contributing to the business.
Some ideas to earn passive income in 2021
In layman’s terms, passive income refers to the idea of getting some income for doing little or nothing at all. It is quite natural that you are tempted to earn some passive income for yourself this year. After all, extra money doesn’t hurt us at all, does it? So, here are some passive income ideas that you can consider trying in 2021 to add cash to your kitty.
This is one of the most popular and successful marketing techniques followed by youngsters to earn extra cash without doing much. All you need to do is become an affiliate of certain online retail giants like Amazon. You can promote Amazon’s products /services on your website or blog. When your website visitor clicks on these links, you get paid per click or per sale, as per the contract. Affiliate commission is a popular means of passive income today.
Peer to Peer Lending
One thing that you should remember that some of these passive income ideas have their own element of risk associated with them. You can try these if your risk appetite is high. In a peer to peer lending, you (the lender) can arrange for a loan to your friend or colleague (borrower). You can use online funding intermediaries for the loan. The interest that you charge on this personal loan will be your passive income. The risk is that, being an unsecured loan, you don’t have the assurance that the borrower would pay the entire loan without defaulting.
Some companies pay out dividends to their shareholders at regular intervals. As a shareholder, you don’t have to do anything except own that particular stock to earn dividends. Here, the risk factor is that you have to do your analysis properly and invest in the right, dividend-yielding shares only.
Try out one of these ideas, and think out of the box for your own ideas to earn passive income at regular intervals, without taking too much risk.