Passive income
Learn what passive income is, how it is taxed in the Philippines, and simple ways to start earning it.
December 2023 | Published by Xero
Published Monday 31 August 2026
Table of contents
Key takeaways
- Passive income is money you earn with little day-to-day effort, usually from assets, investments, or business systems you set up once.
- Small business owners can build it through digital products, content, spare resources, subscriptions, and investments.
- Most passive income in the Philippines is taxable: bank deposit interest carries a 20% final tax and dividends a 10% final tax, while eligible small businesses can choose the optional 8% income tax.
- Tracking each income stream separately makes tax time simpler and shows you what every source actually earns.
What is passive income?
Passive income is money you earn without working for it day to day. It comes from assets, investments, or business systems you have already set up, and it keeps generating revenue with little ongoing effort.
Most passive income takes real work upfront, whether that is writing an ebook, building an online course, or saving enough to invest. The ‘passive’ part describes how the money flows once the setup is done, and meaningful returns usually build over months.
For a small business owner, passive income can sit alongside the revenue from your core services. It helps steady your cash flow through quieter months and slowly reduces how much you rely on trading time for money.
Passive income vs active income
Knowing the difference between passive and active income helps you plan your finances and meet your tax duties. The Bureau of Internal Revenue (BIR) treats different income types in different ways, so the distinction matters when you file your income tax return.
Active income is money you earn by exchanging your time and effort for payment directly. If you stop working, the income stops. Salaries, freelance fees, consulting charges, and client project revenue all count as active income.
Passive income keeps flowing even when you are not actively involved. Rental income, royalties from a book, or returns from an investment portfolio are common examples.
A third category is portfolio income, which covers earnings from investments such as dividends, interest, and capital gains. In the Philippines, some of these are taxed at source before the money reaches you, which affects how you report them to the BIR.
Types of passive income
Passive income comes in several forms, and most fall into one of three broad groups. Knowing which group a stream belongs to helps you weigh the effort, cost, and risk involved.
Business-based passive income
Business-based passive income comes from assets or systems your business owns and runs with limited daily input. Examples include rental properties, vending machines, coin laundry shops, and turning your expertise into something you can sell again and again.
Investment-based passive income
Investment-based passive income comes from money you put into financial products that pay a return. Dividends from shares, interest from bonds, and distributions from real estate investment trusts (REITs) are typical sources. As a rough guide, a PHP 100,000 investment at a 5% annual return would produce about PHP 5,000 a year before tax.
Digital and online 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.
Digital and online passive income comes from products or content you create once and sell or monetise many times over. Ebooks, online courses, stock photography, mobile apps, and affiliate marketing are common routes. For more ways to earn online, see our guide to online business ideas.
Passive income ideas for small businesses
If you already run a business, you can build passive income on top of what you do best. Here are four practical routes that suit most small businesses.
Sell your expertise as digital products
Package what you know into products people can buy without your direct involvement. Popular options include:
- ebooks and how-to guides
- templates and spreadsheets
- online courses and workshops
- checklists and toolkits
Create content
Build an audience around a topic you know well, then earn from it over time. Content also pairs well with paid freelance work, and our guide on how to start freelancing shows how to turn skills into income. Common formats include:
- a YouTube channel
- a podcast
- a blog with display ads or sponsorships
- a paid email newsletter
Make the most of your resources
Put assets you already own to work when you are not using them. Ideas include:
- renting out spare office space or a desk
- hiring out equipment or tools
- earning affiliate commissions from products you recommend
- letting out parking or storage space
Offer subscription services
Turn one-off sales into recurring revenue by charging a regular fee for ongoing access. This could be:
- a membership site
- a monthly product box
- a template or resource library
- a paid community
Investment options for passive income in the Philippines
Beyond your business, several Philippine investment products can generate passive income. Each carries a different mix of risk, return, and access, so it is worth comparing them before you commit. Common options include:
- dividend-paying shares and REITs listed on the Philippine Stock Exchange (PSE), where a REIT must distribute at least 90% of its distributable income to shareholders
- Retail Treasury Bonds (RTBs) from the Bureau of the Treasury, which pay regular interest and are open to retail investors at a low minimum
- Pag-IBIG MP2 savings, a government-backed voluntary scheme with tax-free dividends that reached 7.12% for 2025, as reported by the Philippine News Agency
- unit investment trust funds (UITFs) and mutual funds, which pool your money with other investors and are managed for you
- bank time deposits, which lock your savings in for a fixed term in return for a set interest rate
How passive income is taxed in the Philippines
Most passive income in the Philippines is taxable, and much of it is taxed at source through a final withholding tax before it reaches you. The rate depends on the type of income.
- Interest from bank deposits is taxed at a 20% final withholding tax. Since 1 July 2025, interest on foreign-currency deposits is also taxed at 20%, up from 15%, under the Capital Markets Efficiency Promotion Act (CMEPA).
- Cash and property dividends from a domestic company to a resident individual are taxed at a 10% final withholding tax.
- Royalties are generally taxed at a 20% final tax, with a lower 10% rate for books, literary works, and musical compositions.
- Rental income and active business income are not final-taxed. They are added to your gross income and taxed at the graduated 0–35% rates, or you can elect the optional 8% flat tax on gross sales or receipts above PHP 250,000, available if your total gross sales or receipts stay within the PHP 3 million VAT threshold and you are not VAT-registered.
- Selling shares listed on the PSE carries a 0.1% stock transaction tax on the gross selling price, reduced from 0.6% by CMEPA on 1 July 2025. Shares not traded on an exchange face a 15% capital gains tax on the net gain.
Because rates and eligibility can change and depend on your situation, confirm your position with an accountant, and read our glossary entry on income tax for a fuller picture.
How to start earning passive income
Building passive income works best as a steady, staged process rather than a single big bet. These five steps help you start with less risk.
1. Assess your skills and resources
Start by listing what you already know, own, and can offer. A skill you take for granted, spare equipment, or an existing audience can each become the seed of a passive income stream. For more inspiration, browse our guide to small business ideas.
2. Start small and test
Test your idea on a small scale before you invest heavily. You might sell a single template, list one spare desk, or put a modest amount such as PHP 5,000 into an MP2 account to see how it performs.
3. Set realistic expectations
Passive income rarely arrives quickly or in large amounts at first. Treat early returns as proof that the idea works, and expect it to grow as you refine your approach and reinvest along the way.
4. Diversify your income streams
Relying on a single source leaves you exposed if it dries up. Spreading your effort across a few streams, such as a digital product and an investment, steadies your overall income.
5. Track your finances from the start
Record what each stream earns and costs from day one, so you can see which ones are worth your time. Clear records also make tax time far simpler. Our guide on what counts as revenue explains how to measure what your business brings in.
Manage your passive income with Xero
When your income comes from several sources, keeping track of it all is where things get tricky. Xero brings your bank feeds, invoices, and reports into one place, so you can see what each passive income stream earns without digging through spreadsheets.
Xero customers who use online invoice payments get paid up to twice as fast, which helps steady your cash flow while your passive income grows. You can get one month free when you sign up to a Xero plan and start tracking every peso in one place.
FAQs on passive income
Still have questions about passive income? Here are quick answers to the ones small business owners ask most.
How much money can you make from passive income?
There is no fixed ceiling: some streams earn a few hundred pesos a month, while a popular course or a large investment can bring in far more. Your return depends on how much you put in upfront, in money, time, or both.
Is passive income really passive?
Not entirely. Most streams need real work to set up and some upkeep to keep running, so ‘passive’ describes the earning stage rather than a hands-off business.
Do you pay tax on passive income in the Philippines?
Yes, most passive income is taxable. Interest and dividends usually have final withholding taxes deducted at source, while rental and business income are taxed at the graduated rates or the optional 8% income tax.
What is the easiest passive income to start?
A bank time deposit or a Pag-IBIG MP2 account is among the simplest, since you just deposit money and earn a return. If you run a business, a digital product built from your expertise is a strong first step.