3 Simple Ways to Make Passive Income from Equity Investments

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Before we tell you how to make passive income from equity investments, let’s first understand What Equity Investments are?

Equity Investment is when you invest your money in a company by purchasing its shares, which are typically traded on a stock exchange. By virtue of being the shareholders, you also get a stake in the company.

Now, let’s talk about ways “how to make passive income from equity investments”:

  • Dividend via stocks

The simplest and the most popular way to make money from equity investments is to receive Dividends on your shares.

Till the time dividend income remained tax-free, it was a great idea to make passive income through dividends. But, Effective April 1, 2020, as per the Income Tax Act (1961), the dividend income has become taxable. Shareholders in the receipt of any income exceeding Rs. 5,000 in a fiscal year, are liable to pay TDS as per your tax slab on the entire dividend amount. So, Until dividends became taxable, they were a very lucrative way to make money as irrespective of whether the price of the share goes up or down, you would still earn at least the tax-free dividend on your shares. However, with the current scenario, all of your dividend income is taxable as per your tax slab.

On the contrary, if the company was not paying you dividends, you could sell the shares after one year and you won’t have to pay any taxes up to Rs. 1 lac as per Capital Gains on equity (as Rs1lc of long-term capital gains on equity are tax-free). You would in fact be better off if the company is not paying you dividends as you could at least save on the taxes and instead book capital gains.

Therefore, Dividends are the easiest but now have now become one of the most inefficient ways of making passive income from equity investments.

 

  • Systematic Withdrawal Plans

A systematic Withdrawal Plan(SWP) usually happens through mutual funds. It’s basically a facility that allows an investor to periodically withdraw funds from one mutual fund to his/her bank account. This helps the investors in creating a regular flow of income from their equity investments.

The biggest flaw with this scheme of investment is that the withdrawal should happen on the basis of the valuation of funds and not on the basis of a timeline or set automation. In other words, you should be able to cash out from an investment when you as an investor feel that the investment now values more than its worth and the price is not likely to rise further.

One way is to buy stocks that are selling at discounted prices and you later choose to sell them when you feel they have reached their fair value. Once you’ve sold them, even if the price goes up or down, you have at least booked yourself capital gains which you can treat as your profits or you can reinvest them. Your capital gains, thus, become your passive income through equity investments.

If we go by withdrawals on the basis of timeline and automation, even if your portfolio hasn’t booked profits/capital gains, the scheme would still be taking out money from your investments and that money would be your capital. Not only would you be booking losses here but also losing out on your capital in the equity investments.

  • Profit Only

This is also the strategy that we recommend at AskTheWiseGuy. This strategy suggests you only withdraw your profits from time to time from your equity investments. If you want to use the power of compounding, you would obviously have to re-invest the money back into the equity market. If not, you can enjoy your timely profit withdrawals from your investments. This method is purely based on the valuation of the investments and is not bound by timelines and automation.

 

Based on the amount of passive income you generally make from equity investments, you can decide which of the three strategies would work best for you. There may be more ways prevalent in the equity market which can help you make passive income from equity investments, however, these are the simplest and the most popular methods that investors are following these days. To learn more about “how to make passive income”, click here.