UPSC Prelims 2025 Q10: Capital vs Revenue Receipts — Explained
Consider the following statements:
I. Capital receipts create a liability or cause a reduction in the assets of the Government.
II. Borrowings and disinvestment are capital receipts.
III. Interest received on loans creates a liability of the Government.
Which of the statements given above are correct?
- I and II only
- II and III only
- I and III only
- I, II and III
Answer: (a) I and II only
Statement-wise explanation
- I: correct — This is the standard definition of a capital receipt in the NCERT Macroeconomics chapter on the Government Budget. A capital receipt either creates a liability, as a loan does because it has to be repaid, or reduces the government's financial assets, as selling PSU shares does. A receipt that does neither is a revenue receipt.
- II: correct — Borrowings create a liability because the government must repay them with interest. Market loans, small savings and external loans all count as borrowings. Disinvestment is the sale of government shares in public sector enterprises, so it reduces the government's assets. Both meet the test in Statement I. Borrowings are debt-creating capital receipts, and disinvestment is a non-debt capital receipt.
- III: incorrect — Interest the government receives on loans it has given out is income. It creates no obligation to repay and reduces no asset. It is therefore a revenue receipt, under non-tax revenue, together with dividends, profits and fees. A liability arises from interest the government pays on its own borrowings, which is revenue expenditure. Only repayment of the loan principal, called recovery of loans, is a capital receipt.
How to eliminate
Statement II can be settled from basic budget knowledge. Borrowings and disinvestment are the two standard examples of capital receipts, so Statement II is correct. That removes the option that leaves II out, which is I and III only. Statement I is the textbook definition, word for word, so it is also correct. That leaves only two possible answers: I and II only, or all three. The choice depends on Statement III, and it can be settled with logic. When the government receives interest, it is the lender and is being paid. Being paid creates no debt, so 'interest received creates a liability' cannot be right. The trap is mixing up interest received (non-tax revenue) with interest paid (expenditure on past borrowing). Fact to remember: loan principal recovered is a capital receipt, and interest earned on that loan is a revenue receipt.
Know more
Two tests for every government receipt. Ask whether it (a) creates a liability or (b) reduces an asset. If either is true, it is a capital receipt. If neither is true, it is a revenue receipt.
| Receipt | Type | Why |
|---|---|---|
| Income tax, GST, customs | Revenue (tax) | No liability, no asset lost |
| Interest received on loans given | Revenue (non-tax) | Earning on an asset; asset intact |
| Dividends and profits from PSUs | Revenue (non-tax) | Income from shares; shares retained |
| Fees, fines, grants received | Revenue (non-tax) | No repayment due |
| Market borrowings, small savings, external loans | Capital, debt-creating | Must be repaid |
| Recovery of loans (principal) | Capital, non-debt | Loan asset shrinks |
| Disinvestment and strategic sale | Capital, non-debt | Shareholding shrinks |
Why the split matters. The fiscal deficit is total expenditure minus revenue receipts minus non-debt capital receipts. That gap equals the government's borrowing. Raising more money through disinvestment or loan recoveries lowers the fiscal deficit. Raising more through borrowing does not.
Watch these pairs:
- Dividend from a PSU is revenue. Selling that PSU's shares is capital.
- Interest received is revenue. The principal recovered is capital.
- Interest paid is revenue expenditure. Repaying the principal of a loan is capital expenditure.
Scale (Union Budget 2025-26, BE, per PRS Legislative Research): Receipts other than borrowings were estimated at ₹34,96,409 crore and borrowings at ₹15,68,936 crore. The fiscal deficit target was 4.4% of GDP. Interest payments were 37% of revenue receipts. This shows how heavily past borrowing weighs on the revenue account.
NCERT Concepts to Revise
- Capital receipts: Statement I restates this definition; check each later statement against it.
- Debt-creating capital receipts: Tells you which kind of receipt borrowings are, as Statement II asks.
- Non-debt creating capital receipts: Disinvestment and recovery of loans belong here; contrast with borrowings when judging Statement II.
- Revenue receipts: The other side of the split; decides where interest received in Statement III belongs.
- Non-tax revenue: Interest, dividends and fees sit in this category. Check it against Statement III's claim.
- Disinvestment: Explains what disinvestment does to government assets, which is the test in Statements I and II.