Most Individuals invest in financial instruments with an aim of capital appreciation or to generate extra income from investment made. However one has to also be careful, as investments that are made with the purpose of tax savings, have a lock-in period and most certainly do not provide an individual with regular income.
Having an alternative passive income or regular income is not easy unless you have some savings and are inclined to invest the same. Generating passive income without having to give your time is very tricky. There are many ways to generate income where one needs to devote extra time.
Note that returns from passive income will depend on the type of financial instrument, tax slab, the tenure of the investment.
If you are not looking for quick and high returns while you want to generate some income based out of your investment, here are some of the investments which can generate passive income or more likely investment income.
Real Estate - Rental Income
Individuals who are looking for passive income at a later stage in life can consider investing in property such that it should be able to generate high rental income.
While, the rental income will depend on the location, area and near by facilities. In cities like Mumbai, these can generate capital appreciation as well as rental income.
If you own a land or second home and if you can rent it out, one can enjoy monthly rent. Also, one can earn interest on security amount deposited by the tenant.
However, income earned by way of rent from a second home (not self occupied) is to be added to total income for the purpose of tax.
Stocks - Dividend Income
Individuals with an inclination towards stocks and looking for passive income can consider investing in dividend-paying stocks.
Most investors prefer capital appreciation over dividend stocks which may not be beneficial in all the cases.
Note that dividend income received by investors is already taxed through Dividend Distribution Tax (DDT) and not taxable in the hands of investor.
In fact, individual companies tend to pay the DTT that is applicable, before they distribute the tax. For investors whose dividend income is more than Rs 10 lakh, there will be a tax that is applicable at the rate of 10 per cent.
Mutual Funds - Dividend income
Income from dividend mutual funds is not for individuals who are looking for capital appreciation. The funds here generate a decent income in the form of dividends where the capital may get compromised when paying dividends.
When mutual fund houses pay a dividend from profit, NAV of the mutual fund falls. Note that if there is no profit there will be no dividend payment for that year. Like shares, dividend distribution from mutual fund is also tax free in the hands of the investor.
Capital Gains - Income
Any profit or gains arising from the transfer of capital asset held as investments are called capital gains. The gain can be on account or short- and long-term gains.
The gains made attract tax depending on the tenure of the asset. You can generate a capital gains income from trading of shares, but, short term capital gains attracts a tax.
Banks - Interest Income
Bank deposits are one of the common and popular investments to generate passive income. When booking fixed deposit in banks or any financial institutions, an investor can select the option of interest payments as monthly, quarterly, half-yearly.
Interest on Fixed Deposit is taxable under the head "Income from other sources" on entire amount whether TDS is deducted or not.
An investor should note that interest earned above Rs 10,000 TDS will be applicable.
Post office Monthly Income Scheme
Post office Monthly Income Scheme can be opened with the post office by individuals who are looking for monthly passive income from investment.
The interest rate is applicable at 7.80% per annum which is payable monthly. Monthly interest will be credited into savings account held any CBS Post offices.
An individual can invest maximum Rs 4.5 lakh in MIS and Rs 9 lakh in a joint account.