Passive Income in Nepal

Passive income has become a buzzword in the world of finance, and for a good reason. Passive income is a type of income that requires minimal effort to maintain and can be a great way to supplement your regular income or achieve financial independence. In this blog, we will explore what passive income is, how it works, and how it can be achieved in the context of Nepal.

What is Passive Income?

Passive income is income earned without actively participating in a business or trade. It is money earned from investments, rental properties, or other sources that require little to no effort to maintain. The idea behind passive income is to create a stream of income that can provide financial stability without requiring you to work actively to earn it.

How does passive income work?

Passive income works by investing in assets that generate income without requiring active involvement. For example, investing in dividend-paying stocks or rental properties can provide passive income. Other examples of passive income sources include interest from savings accounts or bonds, royalties from creative work, and profits from businesses that are managed by others.

One of the benefits of passive income is that it can continue to generate income even when you're not actively working. For example, rental properties can generate rental income even when you're on vacation. Dividend-paying stocks can continue to provide income regardless of whether or not you're actively managing your investments.

Passive income in Nepal

Passive income is not a new concept in Nepal. People have been earning passive income from rental properties and investments in stocks and bonds for many years. However, there are many new opportunities for passive income in Nepal that are worth exploring.

1. Investment in stocks and bonds

Investing in stocks and bonds can be a great way to generate passive income in Nepal. The Nepal Stock Exchange (NEPSE), Nepal's one and only¹ licensed securities market / securities exchange provides opportunities for people to invest in stocks of various companies listed on the exchange. Investors can earn dividends on their investment, which can provide a steady stream of passive income. Similarly, investing in bonds issued by the government or private companies can provide a regular stream of interest income. In Nepal, the bonds issued by private sector companies are called Debentures and that by the government are called government bonds. All the private sector debentures are listed in NEPSE and are publicly tradable, similarly, nowadays, many government bonds too are listed in NEPSE but their transactions are a little not encouraging.

2. Rental properties

Investing in rental properties can be an excellent way to generate passive income in Nepal. The demand for rental properties is high in Nepal, and owning a rental property can provide a steady stream of rental income. Rental properties primarily include land, building, etc. i.e. primarily the real estate sector and a vast investments in automobiles and construction equipments which are then let out to be used in public transport sector. So, investment in other probable rental properties are still yet to be explored and used in Nepal. However, investing in rental properties requires significant upfront capital and management skills to manage the property and tenants effectively.

3. Online businesses

With the increasing use of internet in Nepal, online businesses have become an attractive option for generating passive income. E-commerce businesses, affiliate marketing, and online courses are some of the ways people can generate passive income online. However, these businesses require skills and knowledge of digital marketing, e-commerce platforms, and social media management. In order to conduct an online business, you need to first set up a business entity* (which can be a Sole Proprietorship Firm, a Partnership Firm, a Company or a Cooperative Organization, as per your ease, capital, number of entrepreneurs and investors and also you need to comply with the Income Tax Act, 2058 and Value Added Tax Act, 2052, just in case you exceed the threshold of Rs. 50 lakhs of transactions, either purchase or sales in any 12 months period; failure to comply may lead to various financial and civil punishments in future hence it is recommended that before starting any type of business, you consult a Business Consultant, probably a Professional Accountant who are Chartered Accountants and Registered Auditors who will help you to run business smoothly along with compliance with laws of the land). Another thing to be noted is that until the day of writing, there is not any law which governs the online businesses and e-commerce transactions happening in Nepal, but the government is drafting a law to govern, regulate and facilitate online business and e-commerce in near future. 

4. Peer-to-peer lending

Peer-to-peer (P2P) lending has always been a major source of financing for Nepalese people. There isn't any P2P Lending Platform already in Nepal, hence investors and borrowers are intermediated by their friends, families or relatives and the borrowing transaction happens on the foundation of trust. Investors can earn interest income on the loans they provide, which can provide a regular stream of passive income. However, P2P lending carries risks, such as default risk, and investors should carefully evaluate the platform and borrowers before investing.

5. Royalties from Intellectual Property

Intellectual Property (IP), such as patents, trademarks, and copyrights, can generate passive income through licensing fees and royalties. Nepali entrepreneurs and inventors can consider protecting their intellectual property and licensing it to generate passive income. But it should be noted that protection of IP in Nepal is very poor. The Patent, Design and Trademark Act, 2022 and the Copyright Act, 2059 are the IP related laws in Nepal.

Conclusion

Passive income can be an excellent way to achieve financial stability and independence. In Nepal, there are several opportunities for generating passive income, including investing in stocks and bonds, rental properties, online businesses, royalties from Intellectual Properties and peer-to-peer lending. However, each of these opportunities carries risks, and investors should carefully evaluate their options before investing. With careful planning and research, anyone can generate a passive income stream that can provide financial stability and independence in the long term. And all above incomes attract income taxes as per the Income Tax Act, 2058, so don't miss out the taxes you need to pay!

@EMBF

Note

• Investments in cryptocurrencies and foreign stocks and bonds (securities) are illegal in Nepal 
• All the date used in this article are in Bikram Sambat (B.S.), the national calendar used in Nepal which is about 56.7 years ahead of the Gregorian calendar system
• *A separate article will be written about the business entities that can be setup in Nepal
• ¹As of 2080-01-10 (23^rd April, 2023)