Q. Consider the following statements
Statement I: Capital receipts create a liability or cause a reduction in the assets of the Government.
Statement II: Borrowings and disinvestment are capital receipts.
Statement III: Interest received on loans creates a liability of the Government.
Which of the statements given above are correct?
(a) I and II only
(b) II and III only
(c) I and III only
(d) I, II and III
✅ Correct Answer: (a) I and II only
🧩 Detailed Explanation of Capital vs Revenue Receipts
Understanding Government Receipts
Government receipts represent the various sources through which the Government raises money. They are broadly classified into two categories:
- Revenue Receipts
- Capital Receipts
(This PYQ is testing the Basic Economic Concepts)
Statement-wise Analysis of this Economic PYQ 2025
Statement I — Capital receipts create liability or reduce assets ✅
This statement is correct.
- Capital receipts are those receipts of the Government which either create a liability (for example, borrowings) or cause a reduction in the assets (for example, disinvestment or recovery of loans).
- They are non-recurring and affect the balance sheet of the Government.
Examples:
- Loans from the Reserve Bank of India (RBI)
- Foreign borrowings
- Sale of Government shares in public enterprises (disinvestment)
- Recovery of loans previously granted to States or Union Territories
Thus, Statement I is correct.
Also See: Taxation of Agricultural Income: UPSC Prelims 2025 Question Solved
Statement II — Borrowings and disinvestment are capital receipts ✅
This statement is correct.
- Borrowings increase Government liabilities because the Government has to repay them with interest.
- Disinvestment involves selling Government-owned shares in public sector undertakings (PSUs), which reduces Government assets.
Both are, therefore, part of capital receipts.
Thus, Statement II is correct.
Statement III — Interest received on loans creates a liability ❌
This statement is incorrect.
- Interest received on loans is a revenue receipt, not a capital receipt.
- It represents income earned by the Government for lending funds, and does not create any liability.
Hence, Statement III is incorrect.
📊 Classification of Government Receipts
| Type | Definition | Examples | Impact on Assets / Liabilities |
|---|---|---|---|
| Revenue Receipts | Receipts that neither create liabilities nor reduce assets. | Tax revenue, non-tax revenue, interest, dividends, fees, fines | No change in assets or liabilities |
| Capital Receipts | Receipts that create liabilities or reduce assets. | Borrowings, recovery of loans, disinvestment | Create liability or reduce assets |
Revenue Receipts in Detail
Revenue receipts are current income receipts of the Government from all sources such as taxes, profits of public enterprises, and grants.
They do not either create liability or reduce assets.
Also See: Business Responsibility and Sustainability Report: UPSC Prelims Question 2025
Classification of Revenue Receipts
| Category | Description | Examples |
|---|---|---|
| Tax Revenue | Compulsory payments made by individuals and firms to the Government without any direct benefit in return. | Income Tax, Goods and Services Tax (GST), Customs Duty, Excise Duty |
| Non-Tax Revenue | Income from sources other than taxes. | Fees, fines, interest receipts, dividends, profits from public sector undertakings |
Capital Receipts in Detail
Capital receipts include those items that either increase liabilities or reduce assets.
Major Sources of Capital Receipts
Borrowings
- Domestic Borrowings: Issuance of Government securities, Treasury Bills, or borrowings through Public Provident Fund (PPF) and National Savings Schemes.
- External Borrowings: Loans from foreign governments or international institutions such as the World Bank, International Monetary Fund (IMF), and Asian Development Bank (ADB).
💡 Borrowings create a liability as they must be repaid with interest.
Also See: Key Government Directorates under Department of Revenue
Recovery of Loans
- The Central Government often provides loans to State Governments and Union Territories.
- When these loans are repaid, the government recovers its assets in the form of cash. Since these receipts involve repayment of loans rather than revenue from regular operations, they are classified as capital receipts.
- When government receives interest on the loans given to state governments, then it comes under revenue receipts, because there is no change in assets of the government, but when it receives the whole loan given, then it is considered as Capital Receipt, because there is reduction in liabilities of the government.
Disinvestment
- Disinvestment means selling Government ownership in public sector undertakings (PSUs).
- Since it reduces Government assets, it is a capital receipt.
📘 Example:
The sale of Government shares in Bharat Petroleum Corporation Limited (BPCL) or Life Insurance Corporation (LIC) constitutes disinvestment.
Also See: Sources of Income of RBI: UPSC Prelims 2025 Question 2
🧮 Summary Table: Capital vs. Revenue Receipts
| Feature | Revenue Receipts | Capital Receipts |
|---|---|---|
| Nature | Regular and recurring | Non-recurring |
| Creates Liability | ❌ No | ✅ Yes |
| Reduces Assets | ❌ No | ✅ Yes |
| Examples | Taxes, Fees, Fines, Interest | Borrowings, Disinvestment, Loan Recovery |
| Impact on Government Balance Sheet | No change | Change in assets/liabilities |
🧠 Mnemonic to Remember
👉 “R² C²” — Revenue = Regular, Recurring; Capital = Creates or Cuts assets
Also See: Alternative Investment Funds – UPSC Prelims 2025 — Q1 (Set A)
📝 Prelims Practice Questions
Q1. Which of the following best describes the difference between capital and revenue receipts?
(a) Capital receipts are those that create liabilities or reduce assets; revenue receipts do neither.
(b) Capital receipts are recurring in nature; revenue receipts are non-recurring.
(c) Both capital and revenue receipts create liabilities.
(d) Revenue receipts reduce assets while capital receipts create income.
Answer: (a)
❓ Frequently Asked Questions (FAQ)
Q1. Why is interest on loans a revenue receipt?
Because it represents income earned by the Government, and does not involve any creation of liability or reduction in assets.
Q2. What is the main difference between borrowing and disinvestment?
Borrowing increases Government liabilities.
Disinvestment reduces Government assets.
Q3. Is recovery of loans also a capital receipt?
Yes. Since it reduces the Government’s outstanding loans (assets), it is categorized as a capital receipt.
Q4. What are examples of non-tax revenue?
Fees, fines, interest receipts, dividends, profits from public enterprises, and license charges.
Q5. Why are capital receipts non-recurring?
Because they arise from occasional transactions such as borrowings, disinvestment, or loan recovery—not from regular income sources.
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