What is the tax impact of passive income?

What is the tax impact of passive income?

If you hold the investment for more than 12 months then long-term capital gains tax rates will be applicable. Similarly, for property the holding period that determines a short or long-term capital gain is whether you have owned the asset for more or less than 3 years.

The tax rates for capital gains vary by the type of investment in question. Sometimes you might also be able to use losses from your investments to offset your taxes from other sources of income.

Whatever be the source of your passive income, you will need to declare it in your annual tax return, and pay taxes on it according to the existing tax rates and rules.

What is the tax impact of passive income?

What is the tax impact of passive income?

Like your salary income, any passive income that you generate will also create a tax liability for you. Depending upon the source of the income there might be different tax treatment applied. For instance, dividends from equity instruments such as stocks or equity mutual funds are tax free in the hands of the investor.

However, dividends distributed by a debt or a liquid fund will be subject to a dividend distribution tax paid out by the fund.

Further, the tax treatment also depends upon the time duration that you hold an asset or an investment. If you make a gain on a capital market investment, but hold it for less than 12 months, short-term capital gains tax rules will apply.

When can I start earning passive income?

When can I start earning passive income?

The choice whether to invest or not is of course yours, but please bear in mind the tradeoff in the long term - you can either consume today, or save up to consume for later.

If, however, you are in your middle age, you might not be left with much of a choice and your key goal should be to use as much of your income as possible from your remaining peak earning years to create a source of passive income, which is often the only source of funds for most people during retirement.

When can I start earning passive income?

When can I start earning passive income?

You can start as early as today! All you need is a regular source of salary income and the discipline of setting aside a part of this salary, even if it is a small amount, towards investment purposes before you start spending your money on your lifestyle or your living costs.

This of course might not always be easy, and depends upon the state of your personal finances and your family situation.

Also, if you are just starting out your career, you might not have the flexibility to invest immediately. To add to these is the peer pressure to spend money on items of conspicuous consumption like the latest mobile phone or a cutting edge flat screen LCD TV.

What is passive income?

What is passive income?

The salary you get from work is a direct result of your efforts at work, during your active working life. Passive income, on the other hand, is income that you can generate without having to directly work for it.

For instance, if you invest a part of your salary into instruments that will earn income for you without you spending any time on it, you can create passive sources of investment income for yourself. Apart from the act of investment, you are not directly doing any active work to generate investment income.

In effect, your money works for you to earn more money for no incremental effort on your part. Over time, if you have invested smartly, you can have enough money through these passive sources to make a down payment on an apartment or buy that dream car.

Even if you start small, the idea is that you should start creating passive income for your self. Through the sheer power of compounding of capital, small savings today can grow into a large amount within just a short period of 4-5 years.

How to Generate passive income to meet financial goals???

How to Generate passive income to meet financial goals???

Ever wondered how your colleague at work, who earns the same salary as you, has bought a BMW while you are still driving your five-year-old Honda City? Chances are your colleague has utilised his or her existing salary smartly to generate passive sources of income, on the back of which the car has been bought.

By generating passive income you can achieve financial freedom and flexibility through the creation of alternative sources of income that can complement your salary income.

People rarely achieve their financial goals and dreams only on the back of their salaries. One needs alternative sources of income that can increase one’s wealth and consumption capabilities. Here we share with you some tips on how to generate passive income.

What is passive income?

The salary you get from work is a direct result of your efforts at work, during your active working life. Passive income, on the other hand, is income that you can generate without having to directly work for it.

For instance, if you invest a part of your salary into instruments that will earn income for you without you spending any time on it, you can create passive sources of investment income for yourself. Apart from the act of investment, you are not directly doing any active work to generate investment income.

In effect, your money works for you to earn more money for no incremental effort on your part. Over time, if you have invested smartly, you can have enough money through these passive sources to make a down payment on an apartment or buy that dream car.

Even if you start small, the idea is that you should start creating passive income for your self. Through the sheer power of compounding of capital, small savings today can grow into a large amount within just a short period of 4-5 years.

When can I start earning passive income?

You can start as early as today! All you need is a regular source of salary income and the discipline of setting aside a part of this salary, even if it is a small amount, towards investment purposes before you start spending your money on your lifestyle or your living costs.

This of course might not always be easy, and depends upon the state of your personal finances and your family situation.

Also, if you are just starting out your career, you might not have the flexibility to invest immediately. To add to these is the peer pressure to spend money on items of conspicuous consumption like the latest mobile phone or a cutting edge flat screen LCD TV.

When can I start earning passive income?

The choice whether to invest or not is of course yours, but please bear in mind the tradeoff in the long term - you can either consume today, or save up to consume for later.

If, however, you are in your middle age, you might not be left with much of a choice and your key goal should be to use as much of your income as possible from your remaining peak earning years to create a source of passive income, which is often the only source of funds for most people during retirement.

What is the tax impact of passive income?

Like your salary income, any passive income that you generate will also create a tax liability for you. Depending upon the source of the income there might be different tax treatment applied. For instance, dividends from equity instruments such as stocks or equity mutual funds are tax free in the hands of the investor.

However, dividends distributed by a debt or a liquid fund will be subject to a dividend distribution tax paid out by the fund.

Further, the tax treatment also depends upon the time duration that you hold an asset or an investment. If you make a gain on a capital market investment, but hold it for less than 12 months, short-term capital gains tax rules will apply.

What is the tax impact of passive income?

If you hold the investment for more than 12 months then long-term capital gains tax rates will be applicable. Similarly, for property the holding period that determines a short or long-term capital gain is whether you have owned the asset for more or less than 3 years.

The tax rates for capital gains vary by the type of investment in question. Sometimes you might also be able to use losses from your investments to offset your taxes from other sources of income.

Whatever be the source of your passive income, you will need to declare it in your annual tax return, and pay taxes on it according to the existing tax rates and rules.

How to Plan early to fund your child’s education

How to Plan early to fund your child’s education

* Child education
* INVESTMENT PLANNING

Summer time is college admission season in India. So, it’s timely to think about financial planning for college and related expenses.

Whether you are preparing to fund your child’s college expenses that start as early as next week, or are wondering about how you will fund your child’s college education a few years from now, whether in India or abroad, the following is a simple guide to how to go about financing your child’s education.

To start with, recognise that it’s not just tuition fees that matter. There might also be boarding and lodging fees, and there will definitely be incidentals such as transport, daily expenses on food and snacks, and clothing costs.

You could either be faced with a crunch situation today where these expenses need to be provided for immediately, or you have some time to plan for all of the above expenses.

Education loans

If you need funds immediately, taking an education loan might be your best option. Any Indian national between the ages of 16 and 35, who has secured admission to one of the eligible courses and institutions, can apply for an educational loan.

If you need funds for a full-time course, you will likely need a co-applicant, who can be your parents, spouse, sibling or relatives. Your loan eligibility is calculated on the basis of your co-applicant’s income. Part-time courses might not require a co-applicant, but you can improve your loan eligibility by including a co-applicant. Also, some banks might require a guarantor for the loan.

Lenders exercise some discretion regarding which courses and institutions are eligible for loans. They take into consideration your earnings and income potential after the course.

Your chosen course can be full-time or part-time, undergraduate or post-graduate, degree or diploma, at a government or private institution within India or abroad. You should check with your lender if your course is eligible for a loan or not.

If your course is in India, you can get a loan up to Rs 10 lakh. If the course is abroad, you can get up to Rs 20 lakh. In both cases the loan is disbursed to your chosen education institution directly.

Lenders will usually expect you to fund 5-15% of the education cost, but in some cases can offer you 100% of the entire cost of education. The interest rate charged on these loans can range from 10% to 12%, and in most cases PSU banks offer a better rate than private sector banks.

For loans above Rs 4 lakh, you might be expected to put up some tangible security as collateral. Usually, you will get a period of one year from the completion of the course or six months after being employed, whichever is earlier, after which you are expected to start repaying your loan. The industry standard is a repayment period of up to five to seven years.

Stay way from taking a personal loan towards education purposes as personal loans are typically more expensive. Additionally, education loans are eligible for a tax deduction under Section 80E on the interest paid on loans taken for higher education for yourself, your spouse and children.

There is no limit on the amount of deduction you can claim. The only thing to keep in mind is that the course for which the loan is taken should be a graduate or post-graduate programme in engineering, medicine or management or a post-graduate course in the pure or applied sciences. Please check with your accountant for your eligibility.

Long-term funding

If your need for funding education is not immediate but a few years away, you must plan accordingly so that you can build a substantial pool of capital towards funding your child’s education goal.

Please recognise that whatever strategy you choose towards creating capital must take into account that tuition fee inflation is running at between 10% and 15% for most decent colleges/universities. Whichever of the following you choose, its best to start early so that you can take advantage of compounding of capital to offset the impact of rising education costs.

Child Ulips: These are insurance policy cum investment plans. Under these plans, a parent can buy a policy where the child is a beneficiary, but the parent is the life assured, i.e., the person who’s life is being insured such that if anything happens to this person the child will get some monetary compensation.

Child Ulips should be bought for the long-term. Many parents buy such policies when their kids are still 5-7 years, even though the college education date might be a decade away. If something happens to you during the course of the policy, the insurance company will continue to pay the premium towards the policy on your behalf, on top of giving the survivors the sum assured under the policy. Additionally, when your child is ready for college (or at a maturity date you pre-determine at the time of taking the policy), the insurer will pay you a sum (the fund value) that can be used towards funding the child’s education.

Stocks & MFs: Long-term investing in the equity capital markets is a very practical way to fund an education goal. Whether you buy stocks directly, or invest through a systematic investment plan into equity mutual funds, both allow you to take advantage of the superior returns that equities are expected to offer in the long-term over other asset classes that the common investor can invest in.

If your child will be ready to go to college in say a decade or more, then putting aside some money towards equities or equity mutual funds is a smart way of taking advantage of compounding of capital such that in a decade you have a substantial pool of capital to fund your child’s college expenses.

Property: If you have surplus funds today, you might also choose to buy a property for investment purposes from which you can generate rental income. This rental income can be invested to build a corpus of funds to be used later for education expenses. Alternatively, this rental income itself can be used to pay college related costs.

Whatever strategy you choose to employ, recognise that with a little bit of planning you can help your child achieve the best possible outcome towards his/her education. Our society places a great premium on top quality education. Don’t compromise on kids’ education just because you didn’t have the foresight to plan their education goals.

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