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Economy · Budget: Receipts, Expenditure & Classification

UPSC Prelims 2025, Question 10

The concept being tested: Capital Receipts - borrowings and disinvestment (create liabilities or reduce assets).

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?

Options

  1. AI and II onlyCorrect answer
  2. BII and III only
  3. CI and III only
  4. DI, II and III

The answer: I and II only

The Receipts Budget classifies a receipt as capital only if it either creates a liability for the Government or reduces its financial assets. Borrowings — from the public, RBI, or foreign sources — create a repayment liability, and disinvestment of equity in public sector undertakings reduces a government asset, so both are textbook capital receipts, which is exactly what statement II says, matching the general rule in statement I. Interest received on loans that the Government has extended to states or PSUs, however, is booked as a non-tax revenue receipt — it is income, not a fresh liability or an asset reduction. Only the principal recovered on such a loan counts as a capital receipt. Because statement III wrongly extends the capital-receipt logic to interest income, it fails, leaving only statements I and II correct.

What UPSC was testing

UPSC is testing the principal-versus-interest split on government loans: recovery of the loan principal is a capital receipt because it reduces a government asset, but interest earned on that loan is a revenue receipt because it is income, not a new liability or asset change — the statement-count format with an 'only' qualifier punishes anyone who assumes anything loan-related must be capital in nature.

How often this comes up

This concept has appeared 13 times in UPSC Prelims General Studies Paper I between 2015 and 2025 — in 2015, 2016, 2017, 2018, 2021, 2022 and 2025.

The option-by-option autopsy for this question — why each of the other three is wrong, and which neighbouring concept each one was built from — is in the app.