Introduction

Passive income has become a popular term in the financial sector, and it’s easy to see why. It refers to earnings that require little to no effort to sustain and can be an excellent way to boost your regular income or even reach financial independence. In this blog, we’ll delve into the concept of passive income, its mechanics, and how it can be pursued within the Nepalese context.

What is Passive Income?

Passive income is money generated without direct involvement in business operations or trades. It comes from investments, rental properties, or other avenues that need minimal upkeep. The concept is to establish a steady income flow that offers financial stability without the need for active labour.

How does passive income work?

Passive income operates by putting money into assets that produce earnings without needing constant attention. For instance, investing in dividend-paying stocks or rental properties can yield passive income. Other sources include interest from savings accounts or bonds, royalties from creative work, and profits from businesses managed by others.

One advantage of passive income is that it can keep generating money even when you’re not working. For example, rental properties can bring in rent while you’re on vacation, and dividend-paying stocks can continue to provide income regardless of your active involvement.

Passive income in Nepal

Passive income is not new in Nepal. For years, individuals have been earning passive income through rental properties and investments in stocks and bonds. However, numerous new opportunities for generating passive income in Nepal have emerged and are worth exploring.

1. Investment in stocks and bonds

Investing in stocks and bonds can be an effective way to generate passive income in Nepal. The Nepal Stock Exchange (NEPSE), the country’s one and only licensed securities market, offers opportunities to invest in various company stocks listed on the exchange. Investors can earn dividends from their investments, providing a steady stream of passive income. Similarly, investing in bonds issued by the government or private companies can yield regular interest income. In Nepal, bonds issued by private companies are known as debentures, while those issued by the government are called government bonds. Private sector debentures issued by Banks and Financial Institutions are listed on NEPSE and are publicly tradable. Additionally, many government bonds are now listed on NEPSE, although their trading activity is relatively low. NEPSE also operates an OTC (Over The Counter) Market for trading of shares of those companies who do not meet the listing criteria of NEPSE. You must note that there are lakhs of companies in Nepal, but only are listed in Nepal. All other companies do not have open investment opportunities, for which you need to approach the concerned company to explore any investment in it through. There is absence of such a platform which mediates such unlisted companies with prospective investors through common or preferred stocks, debts, etc. As of 1^st July, 2024, the following mentioned securities have been listed in NEPSE:

• Equity Shares of 248 companies,
• 36 Mutual Funds,
• 74 Non-Convertible Debentures

It is to be noted that the Non-Convertible Debentures issued in Nepal are unsecured. But, there is legal provision for Debenture Trustee who is required on behalf and for the interests of the debenture holders.

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, and owning one can provide a steady stream of rental income. This primarily includes real estate, such as land and buildings, as well as investments in automobiles and construction equipment that are leased for public transport. There is still potential for exploring other types of rental properties in Nepal. However, investing in rental properties requires significant upfront capital and effective management skills to handle the property and tenants efficiently.

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, firstly, you need to set up a business entity* (which can be a Sole Proprietorship Firm, a Partnership Firm, a Company or a Cooperative Organization, selection of such business form depends on your ease, capital, number of entrepreneurs and investors and further, you need to comply with the Income Tax Act, 2058 and Value Added Tax Act, 2052 and all other laws and regulations of the country, including the province and local laws. Failure to comply such laws and regulations 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). The federal parliament has recently approved a law to govern, regulate and facilitate online business and e-commerce. 

4. Peer-To-Peer lending

Peer-to-peer (P2P) lending has long been a significant source of financing for Nepalese people. While Nepal does not currently have formal P2P lending platforms, investors and borrowers often rely on friends, family, or relatives, with transactions based on trust. Investors can earn interest income from the loans they provide, creating a steady stream of passive income. However, P2P lending carries risks, such as the risk of default, so investors should carefully assess the borrowers before committing funds.

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 create passive income streams. However, it is important to note that IP protection in Nepal is weak. The relevant laws include the Patent, Design and Trademark Act, 2022, and the Copyright Act, 2059.

Conclusion

Passive income can be an excellent way to achieve financial independence and stability. In Nepal, there are several opportunities for generating passive income, including investments in stocks and bonds, rental properties, online businesses, royalties from intellectual property, 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 create a passive income stream that provides long-term financial stability and independence. Additionally, all forms of passive income are subject to taxes under the Income Tax Act, 2058, so be sure to account for any tax obligations with consultation with a Chartered Accountant or Registered Auditor or with a Tax Lawyer having practice in Nepalese Taxation.

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Note

• Investments in cryptocurrencies and foreign stocks and bonds (securities) are illegal in Nepal 
• All the dates used in this article are in Bikram Sambat (B.S.), the national calendar system 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.