Passive income

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.

Paying Income tax is one thing, which most of the people do not like. Everyone tries to minimize their income tax by some or the other means.

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.

There are three types of passive activities:

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.

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

Tax free Passive income

Agricultural Income:

Agricultural Income is exempted from tax. However, the income from agriculture (if earned more than Rs 5000 a year) has to be taken into consideration for calculating the tax payable.

Dividends received from your shares or equity mutual funds

You receive dividends from your stocks or equity mutual funds (dividend option). This dividend money you get is also tax-free in your hand. However, the bad side of the story is that company anyways pays the dividend distribution tax to govt before giving the dividends to its shareholders. Hence, anyways we are getting slightly less share of profits in our hand anyway.

Now after budget 2018, the dividends from equity shares or mutual funds will be taxed at a flat rate of 10% above the threshold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after a year was 100% tax free.

Profits from shares or equity mutual funds after a year

When you earn any profits from your shares or equity mutual funds after holding it for minimum 1 yrs, it is called Long-term Capital gains, and it is 100% tax exempted as per current tax rules.

Now after budget 2018, the profits from shares or equity will be taxed at a flat rate of 10% above the threshold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after a year was 100% tax free.

Any amount received through WILL or Inheritance

There is no inheritance tax in India now. So, anything you get in inheritance through WILL is not taxable in your hands. It becomes your property and now when you invest that money, only the interest part earned on that property will be taxed.

Money received from your EPF account after 5 yrs

The money one gets from their EPF account is also tax-free, provided the money is taken out after 5 yrs of service.

Money got under VRS scheme up to Rs 5 Lacs

If a person takes VRS (Voluntary retirement scheme) than any amount received up to Rs 5 lacs is income tax-free. However, not everyone is eligible for it. Only employees of Public sector companies or an authority established under a Central or State govt is eligible for this.

Maturity or Claim amount received by Life Insurance Company

The money you get from life insurance companies on maturity, claim or surrender is 100% tax-free provided, If the premium paid does not exceed 20% of the sum assured. I am quoting new amendments which have come in recent years.

As per amendments introduced in the Finance Act, 2003, (i.e., with effect from April 1, 2003), any proceeds received on account of maturity/surrender of an insurance policy were exempt from tax only if the premium paid did not exceed 20% of the sum assured.

Interest on saving bank interest up to Rs 10,000 a year

From 2013 onwards, a new section 80 TTA is introduced under which, the interest on your saving bank account up to Rs 10,000 is not taxable. So if your saving bank interest for a year is Rs 20,000, then out of that Rs 10,000 is exempted and only the rest Rs 10,000 will be added to your taxable income.