What is income?

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Income means the amount of money received in exchange for products or services. Although typically involving a sum of money, income can also be expressed in terms of property and other valuable transfers received as a payment for products; as compensation for services provided; as returns on investments; as gifts; as pension distributions; as dividends; and as more, over a set period of time.

For an individual, for example, their gross income is the sum total of earnings from wages or salaries, return on investments, dividends earned on stocks, sales of property, and other receipts. In this case, the net income would be gross income, subtracting the costs incurred in producing the income.

In the case of businesses, gross income is the total receipts from services, products and any interest received regarding the cash accounts and reserves. Net income is calculated by deducting gross income from business expenses.

Types of income

Understanding the different types of income will help you to choose from alternative ways to make money and define income more clearly.

Here are the three main types of income:

Active income

This is the money received in exchange for products and services provided at the moment or within a short span of time, say a week or month. Active income mostly includes payments in the form of wages, salaries and commissions.

For example, a person serving in a restaurant receives a salary from their employers and may also receive tips from customers from time to time. The income for the waiter is the sum of their salary or wages plus tips. Sources for active income can be sales, management, customer service work, software development, teaching, construction work, designing and many more.

Portfolio income

This type of income is generated from investments like capital gains, interest earned, dividends and royalties received. Portfolio income may not be regular, and is generally used for retirement or large purchases.

Sources of portfolio income include investment returns from owning stocks, exchange traded funds (ETF) or other instruments, savings accounts that offer interest over time or fixed deposits. Portfolio income is often known as capital gains.

Passive income

Passive income means an individual is not actively involved, yet is receiving a stream of income from time to time.

Sources of passive income include royalties from book sales, renting or leasing equipment or property, part-time ownership of a business, independent merchandise selling from a blog or website, and many more.

Taxation

Any type of income is generally subject to taxation. Federal, state and local tax laws of any country will specify the categories of income that are subject to tax, and have rules that clarify tax-exemption amounts and allowable deductions.

Certain investment-like bonds issued by governmental entities can be exempt from tax.