WHAT ARE ACTIVE, PASSIVE & PORTFOLIO INCOMES

We received income from various sources, such as employment, investments, or business ventures. It is the total amount of money that an individual or household earns over a certain period of time, typically a month or a year. Income is an important factor in determining an individual's financial well-being, as it can impact their ability to meet their basic needs, save for the future, and make financial decisions.

Let’s see how many types of income can be generated. Mainly we can divide the income into three (3) parts:

1.            Active Income
2.            Passive Income
3.            Portfolio Income

 

1. Active Income

Active income is income that is earned through the performance of a particular activity, such as working at a job or running a business. This type of income is generally earned on a regular basis, and it is typically earned in exchange for time spent working. Examples of active income include wages, salaries, and self-employment income.

Wages and salaries are forms of active income that are earned by employees who work for a company or organization. This type of income is typically earned on a regular basis, such as weekly or monthly, and it is paid in exchange for the time and effort that the employee puts into their job.

Self-employment income is another form of active income that is earned by individuals who are self-employed or run their own businesses. This type of income is earned through the sale of goods or services, and it is typically earned in exchange for the time and effort that the individual puts into their business. 

Overall, active income is a type of income that one earns against his/her time and effort. Active income is the main source of income for a large portion of the population.

But the problem with the active income is that it has a limit that cannot be increased for example if someone’s hourly, daily, weekly or monthly salary is fixed maybe he can make some extra money by working overtime but it has also a limit of Couse no one can work for 24 hours.

2. Passive Income

Passive income is the type of income that is not earned through the performance of a particular activity. Passive income is generated through investments and other sources that do not require the recipient to be actively involved in order to generate income.

Examples of passive income include rental income, dividends from stocks, and income from a business in which the recipient is not actively involved.

Rental income is a type of passive income that is generated from the rental of a property, such as an apartment, house, or commercial space, it can be a piece of equipment. Rental income is typically earned on a regular basis, such as monthly, quarterly or yearly.

Dividends are another form of passive income that is generated through investments in stocks or mutual funds. A company distributes dividends to its shareholders, dividends can be in the form of cash or additional shares of stock. Dividends are typically paid out of a company's profits and are a way for the company to distribute a portion of those profits to its shareholders.

Income from a business in which the recipient is not actively involved is another example of passive income. This can include income from a business that is owned by an individual but is run by someone else, or income from a business that is owned by a partnership or corporation in which the recipient is not an active participant.

Overall, passive income is a type of income where the recipient is not a time bound worker and not required active participation because of this reason passive income doesn’t have a limit, one can earn as much as he built a business, investment, royalties or other assets. 

3. Portfolio Income

Portfolio income is a type of passive income that is generated from investments, such as stocks, bonds, mutual funds, and other securities. It is generated when the investments in a portfolio generate returns, such as dividends, interest, or capital gains.

There are several types of portfolio income, including:

Dividends: Dividends are payments made by a company to its shareholders, typically in the form of cash or additional shares of stock. Dividends are typically paid out of a company's profits and are a way for the company to distribute a portion of those profits to its shareholders.

Interest: Interest is the fee that is paid for the use of borrowed money. When an investor holds a bond or other type of fixed-income security, they will typically receive interest payments on a regular basis.

Capital gains: Capital gains are profits that are realized when an investment is sold for a higher price than what was paid for it. Capital gains can be short-term (realized on investments held for less than a year) or long-term (realized on investments held for longer than a year).

Overall, portfolio income is a type of passive income that is generated through investments in stocks, bonds, and other securities. It is important for investors to understand the tax implications of their portfolio income, as this can impact the overall return on their investments.