Passive income
Learn what passive income is, how it’s taxed in Malaysia and practical ways to start earning it.
December 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Passive income is money you earn with little ongoing effort, though it usually needs upfront time or money to set up
- Small business owners can build passive income from digital products, content, subscriptions and spare space or equipment
- In Malaysia, rental and business income is taxed at scale rates, while bank deposit interest and most dividends are exempt
- Tracking passive income alongside your business finances keeps you organised for tax time and shows which streams to grow
What is passive income?
Passive income is money you earn without working for it day to day. It comes from assets or systems you’ve already set up, and it keeps paying with little ongoing effort.
The effort comes first. Building an online course or saving enough to invest all take real work upfront. Most streams then need months of steady effort to pay well.
Think of it like planting a durian tree: the digging and watering happen early, and the harvest comes later with less work each season. For small business owners, passive income adds to the revenue from your core services and can support managing cash flow during quieter months.
Passive income vs active income
Active income depends on your time, while passive income keeps arriving after the initial work is done. Knowing the difference helps you plan your finances and declare income correctly.
Active income is money you earn by swapping your time and effort for payment. When you stop working, the income stops, whether it comes from a salary, freelance fees, consulting charges or client projects.
Passive income keeps flowing when you step back. Rental income and book royalties are common examples, because the work or money went in upfront.
There’s also a third category called portfolio income, which covers earnings such as dividends and interest. Some people group it under passive income, but the Inland Revenue Board of Malaysia (LHDN) treats each income type differently for tax purposes.
Malaysian tax law lists business profits, dividends, interest, rents and royalties as separate classes of chargeable income, according to PwC Malaysia’s tax booklet. The tax section of this guide explains how each one is treated.
Types of passive income
Passive income usually falls into three broad types: business-based, investment-based and digital. Knowing which suits your situation helps you pick a starting point.
Business-based passive income
Business-based passive income comes from commercial systems that run without your constant involvement. Examples include rental properties, vending machines, self-service laundries or a business you own but don’t manage day to day.
It can also mean productising your expertise. If you deliver a service in person, you could package that knowledge into a template pack or a licensing deal that customers buy without you.
Investment-based passive income
Handy resources
Advisor directory
You can search for experts in our advisor directory
Xero Small Business Guides
Discover resources to help you do better business
Cash flow forecast template
Download our free template to help predict cash flow for your business
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
Investment-based passive income comes from putting your money to work. Dividends from shares, interest on deposits or bonds, and distributions from real estate investment trusts (REITs) all fit here.
What you earn depends on how much you invest and the rate of return. As a simple illustration, RM10,000 earning a 4% annual yield would produce about RM400 a year.
Digital and online passive income
Digital passive income comes from products and platforms online. Ebooks, online courses, stock photography, mobile apps and affiliate websites are common examples.
Digital products are often cheap to create compared with physical goods, and they scale without much extra cost. Once your course is live on a platform, it can sell to hundreds of customers with no extra work from you.
Dropshipping is a related option, though it needs more hands-on work with suppliers and customers. For more ways to earn from your laptop, browse these online business ideas.
Passive income ideas for small businesses
The best passive income for a small business builds on what you already have: your expertise, audience, content or spare assets. Digital products and subscriptions suit knowledge-based businesses, while renting out space or equipment suits asset-heavy ones.
Whether you’re weighing up home business ideas or adding a stream to an existing operation, these four approaches are practical places to start.
Sell your expertise as digital products
Your industry knowledge has value beyond the services you offer today. Packaging it into digital products lets you sell it again and again without adding hours to your week.
You could create:
- ebooks or guides that solve a specific customer problem
- templates or spreadsheets that save your audience time
- online courses that teach a skill you’re known for
- downloadable checklists or planners
Ecommerce and course hosting platforms make listing these products simple, and the ones that sell solve a problem people will pay to fix. If you’re building from zero, these startup ideas can spark a product angle.
Create content
YouTube channels and blogs can earn passive income through advertising and affiliate links. It’s a longer-term play, but older content keeps earning once you’ve built an audience.
A well-optimised blog article can attract search traffic for months or years after it’s published. The upfront time is real, and the ongoing upkeep is fairly light.
Capitalise on your resources
Many small businesses have physical assets sitting idle. Renting out office space, a workshop, storage or specialist equipment can bring in steady income with little effort.
Options to consider include:
- renting spare office or desk space through flexible workspace platforms
- listing equipment for hire when you’re not using it
- joining affiliate programmes for products you already use and recommend
- renting out parking bays or storage you only need part of the time
Affiliate marketing works best when you already have a website or social media following. You earn a commission each time someone buys through your recommendation, and it pairs well with freelancing or other service work.
Offer subscription services
Subscriptions turn one-off purchases into recurring revenue. Bundling your expertise or content into a monthly offer creates a more predictable income stream.
Examples include membership sites with exclusive content, monthly product boxes curated for your niche, or ongoing access to a template library. Subscribers who stay month after month give you income you can plan around.
Investment-based passive income in Malaysia
In Malaysia, the main investment routes to passive income are Bursa Malaysia shares, funds, REITs, government securities, fixed deposits and retirement savings. The right mix depends on how much risk you’re comfortable with and when you need the money.
If you have savings beyond what your business needs, you can reach each of these options through a licensed bank or stockbroker.
Dividend shares on Bursa Malaysia
Many companies listed on Bursa Malaysia share part of their profits with shareholders as a dividend. You can buy individual shares through a stockbroker or choose dividend-focused funds instead.
ETFs and unit trusts
Exchange-traded funds (ETFs) and unit trusts spread your money across many companies at once. Some ETFs track the FBM KLCI, Bursa Malaysia’s benchmark index, so you don’t need to pick individual stocks.
Malaysian REITs
REITs let you invest in property without buying a building. They own portfolios of malls, offices, hotels or industrial sites and pass most of their income on to unit holders.
A Malaysian REIT pays no tax at fund level if it distributes at least 90% of its total income, says PwC’s corporate tax summary.
Government securities and Bon Simpanan Malaysia
Malaysian Government Securities (MGS) pay a fixed rate of interest over a set term. Bon Simpanan Malaysia is a savings bond issued by Bank Negara Malaysia. Both are generally lower risk than shares, with lower returns to match.
Fixed deposits and savings accounts
Fixed deposits with licensed banks are the simplest option: you lock money away for a set period and earn a fixed return. Perbadanan Insurans Deposit Malaysia (PIDM) protects eligible deposits up to RM250,000 per depositor per member bank, according to PIDM’s deposit insurance FAQs.
EPF and PRS
Your Employees Provident Fund (EPF) savings earn an annual dividend, set at 6.15% for 2025 on both conventional and syariah savings, according to KWSP. Both EPF and Private Retirement Schemes (PRS) are long-term savings, so treat them as income for later life.
PRS contributions qualify for up to RM3,000 in tax relief each year of assessment (YA) until YA2030, according to PwC’s personal deductions summary.
How passive income is taxed in Malaysia
Business, rental and royalty income is taxable in Malaysia, while bank deposit interest and most dividends are exempt. What you owe depends on the type of income and your total chargeable income for the year.
If you’re new to how income tax works, LHDN taxes resident individuals on chargeable income after reliefs. The sections below cover each type of passive income.
Tax rates and filing
Resident individuals pay progressive rates of 0% to 30% on chargeable income for YA2025 and YA2026, according to PwC’s personal tax guide. Malaysia has no flat tax-free allowance for side or rental income, so you declare all of it, even small amounts.
With business income, you file Form B by 30 June on paper or 15 July through e-Filing, according to LHDN’s filing deadlines.
Interest and dividends
Interest that resident individuals earn on deposits with licensed banks is tax exempt. So is interest on government securities, Bon Simpanan Malaysia and sukuk approved by the Securities Commission Malaysia, according to PwC’s exempt income list.
Dividends from Malaysian companies are generally exempt under the single-tier system. From YA2025, individuals pay 2% on annual dividend income above RM100,000, according to PwC Worldwide Tax Summaries.
LHDN has said EPF, Amanah Saham Nasional Berhad (ASNB) and unit trust distributions don’t count towards the RM100,000 threshold, as reported by The Star.
Rental and REIT income
Rental income is taxed at your normal scale rates on the net amount, after allowable expenses. Keep records of your rental costs so you can deduct the ones LHDN allows.
From YA2026, the 10% final withholding tax on REIT distributions has ended for resident individuals, as set out in LHDN Practice Note No. 2/2026 and summarised in EY’s tax alert. You now declare these distributions on your tax return and pay tax at your scale rate.
Tax rules change each year, so check your position with a tax agent or accountant before you file. They can also show you how passive income fits alongside your business income on Form B.
How much passive income can you realistically earn?
What you can earn depends on how much capital or time you put in and the return each stream produces. Simple arithmetic shows what popular targets would take.
Take a goal of RM100 a day, which adds up to RM36,500 a year. At an illustrative 4% yield, you’d need roughly RM912,500 invested to produce it.
A target of RM500 a day works out to RM182,500 a year. At the same 4% yield, that needs about RM4.56 million of capital.
Business-based streams follow the same logic. A RM50 template would need 730 sales a year to reach RM36,500, before platform fees and other costs.
Treat these figures as illustrations only, since real yields and sales change year to year. Your own results depend on:
- how much capital or time you invest upfront
- the yield or price each stream earns
- the fees and tax on that income
- how long you reinvest before you draw an income
How to start earning passive income
You can start earning passive income by building on what you already have and testing small ideas first. These five steps help you choose an approach and build momentum.
1. Assess your skills and resources
Start with what you already have. What expertise could you package into a product, and do you have spare space, equipment or savings to put to work?
The strongest streams build on strengths you’ve already developed. Browsing small business ideas can help you narrow your focus.
2. Start small and test
You can begin without thousands of ringgit upfront. Create one digital product, list a piece of equipment for hire, or put a modest monthly amount into a unit trust or PRS.
Starting small shows you what works before you commit more time or money.
3. Set realistic expectations
Most passive income streams take months to produce meaningful returns. An online course might take weeks to build and months to gain traction, while investment returns compound over years.
Steady, consistent effort matters more than finding the perfect idea.
4. Diversify your streams
Spread your passive income across more than one source. Pairing a digital product with investment income gives you more stability, so if one stream slows, the other cushions the impact.
5. Track your finances from the start
Keep passive income separate and well documented from day one. Clear records make filing Form B easier and show you which streams are worth growing.
Manage your passive income with Xero
Xero keeps your passive income and business finances in one place, so you can see what each stream earns. That means less manual tracking as your income sources grow.
Automatic bank feeds bring in transactions as they happen, so you can categorise rental income, royalties, product sales and investment returns quickly. Customisable reports break down earnings by source, helping you spot your most profitable streams and get ready for Form B.
Try Xero today and get one month free to keep every income stream organised from day one.
FAQs on passive income
Here are quick answers to common questions about passive income in Malaysia.
Is passive income really passive?
Partly, since most streams need setup effort and some ongoing upkeep. The aim is to front-load the work until the income needs far less of your time than hourly work.
Do you pay tax on passive income in Malaysia?
Yes, for taxable types such as rental, business and royalty income, which you declare to LHDN each year. If you don’t have an income tax file yet, register one before your first filing, even when the amounts are small.
How can you earn passive income in Malaysia?
Pair a local investment, such as Bursa Malaysia dividend shares or a REIT, with a business stream like digital products or equipment hire. Starting with one of each keeps things manageable while you learn what works.
Can you live on passive income?
You can, but it usually takes a large capital base or several mature income streams built over many years. A practical first goal is passive income that covers one fixed cost, such as rent or a car loan, before you aim higher.
What is the easiest passive income to start?
Fixed deposits and savings accounts with licensed banks are the simplest because they need no specialist knowledge. For business owners, selling a template or guide is often the natural next step because it builds on expertise you already have.