Passive income streams and taxation in India

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Passive income is a great way to slowly wean yourself away from your job, but it does come with its own taxation. Here is a look at some of the common passive incomes and their taxation as per India:
1 - Dividends: Although many government-owned and private companies offer healthy dividends, the taxation in India leaves much to be desired. Dividend income up to 5000 rupees is not taxed, and then a tax of 10% is levied. The income received then is taxable income, according to your slab. So, you might end up paying a high tax on dividends. For example, a dividend of 10,000 INR exceeds the taxable limit of 5000 INR. A 10% tax is levied, so the person gets 9000 inr which is treated as taxable income.
2 - Another common passive income source in India is real estate. The taxation for this is very complex, but I will explain from my experience.
If you sell residential real estate in India within 3 years of buying it, the gains are short-term and fully taxable as per your slab. (There are exceptions to using your funds to buy a new house.).
If you sell your residential real estate within 5 years of buying it, any tax gains from the property are cancelled.
Using asset appreciation in residential real estate is therefore tricky, as the time horizons involved are longer. Normally, residential real estate is taxed at 20% after indexation after a 3-year holding period.

3 - Sovereign gold bonds - Government issued sovereign gold bonds are my favourite investment in India. They offer an interest rate of 2.5% per year along with the gold price appreciation. The cherry on top of the cake is that if you hold them for 8 years, the income gain earned is non-taxable. So, it is safe with a steady income and is non-taxable after maturity.
There are options to buy them directly from the government as they are issued or from the secondary market.
But, one of the reasons this source of passive income is not preferred in India is because of the love of physical gold. Gold is passed from generation to generation in the form of ornaments and displayed as an asset.
The problem with physical gold is the purity, which is mostly 22k, and the making charges which are high.
These are deducted if you sell gold. Also, gold is treated as a long-term capital gain in India.
The exemption for long term capital gain is 1 lakh INR every financial year. So, if you go over this limit, it becomes taxable.

Therefore, sovereign gold bonds are a prudent choice.

There are many other sources of income but these three are the most common ones according to my experience. According to me, dividends are taxed heavily, real estate is complex with too much paperwork and gold, specifically government issued sovereign gold bonds provide a better alternative.

The information given is based on personal experience and my own research. It is not meant to be investment advice. Please do your own research before investing.