Chapter 6 · Topic 6.1 · Prelims + Mains1 of 3
Public Finance: Budget, receipts and expenditure
Key points
- Budget basis.
- Receipts.
- Expenditure.
- Debt.
Prelims box: facts and traps
| Provision | Meaning |
|---|---|
| Article 112 | Annual Financial Statement (the Budget) laid before Parliament by the President |
| Articles 113–114 | Demands for grants; Appropriation Bill |
| Article 110 | Money Bill (Finance Bill carries tax proposals) |
| Article 266 / 267 | Consolidated Fund and Public Account / Contingency Fund |
| Vote on account | Interim spending authority until the full Budget is passed |
| Date | Presented on 1 February since 2017; Railway Budget merged in 2017. |
- The Budget Speech of 1 February 2026 put the Centre's net tax receipts for 2026-27 at ₹28.7 lakh crore (₹28,66,922 crore in Budget at a Glance).
- For BE 2026-27 it is ₹17,14,523 crore (about 4.4 per cent of GDP) against capital expenditure of ₹12,21,821 crore (about 3.1 per cent).
- Trap (UPSC Prelims 2022, the expenditure made by an organisation or a company): “Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure” is incorrect.
- Trap (UPSC Prelims 2016): all the statements are correct.
On this page (3 sections)
The Union Budget: constitutional basis
| Provision | Meaning |
|---|---|
| Article 112 | Annual Financial Statement (the Budget) laid before Parliament by the President |
| Articles 113–114 | Demands for grants; Appropriation Bill |
| Article 110 | Money Bill (Finance Bill carries tax proposals) |
| Article 266 / 267 | Consolidated Fund and Public Account / Contingency Fund |
| Vote on account | Interim spending authority until the full Budget is passed |
| Date | Presented on 1 February since 2017; Railway Budget merged in 2017 |
Prelims 2020 asked why the Macro-Economic Framework Statement is placed with the Budget. Answer: Provisions of the Fiscal Responsibility and Budget Management Act, 2003.
Along with the Budget, the Finance Minister also places other documents before the Parliament which include ‘The Macro Economic Framework Statement’. The aforesaid document is presented because this is mandated by
- Long standing parliamentary convention
- Article 112 and Article 110(1) of the Constitution of India
- Article 113 of the Constitution of India
- Provisions of the Fiscal Responsibility and Budget Management Act, 2003
Show answer
Answer: (d) · UPSC official key
Revenue and capital receipts
| Type | Includes | Test |
|---|---|---|
| Revenue receipts | Tax revenue (net of states’ share) and non-tax revenue (interest, dividends, RBI surplus, fees) | Neither creates a liability nor reduces assets |
| Capital receipts | Borrowings, recovery of loans, disinvestment (non-debt capital receipts) | Creates a liability or reduces assets |
Prelims 2025: capital receipts create a liability or reduce the Government’s assets, and borrowings and disinvestment are capital receipts. Interest received is revenue and creates no liability. Answer: I and II only.
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
Show answer
Answer: (a) · UPSC official key
Mains 2021 asked candidates to Distinguish between Capital Budget and Revenue Budget and explain the components of both: the revenue budget holds revenue receipts and revenue expenditure; the capital budget holds capital receipts and capital expenditure.
Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets.
Revenue and capital expenditure
| Type | Examples |
|---|---|
| Revenue expenditure | Salaries, pensions, interest, subsidies, grants to states (even if they build assets) |
| Capital expenditure | Roads, buildings, machinery; loans and advances to states and PSUs; equity investment |
| Effective capital expenditure | Capital expenditure plus grants for creating capital assets |
| Committed expenditure | Interest, pensions and salaries; largest item is interest (₹12.43 lakh crore in 2025-26, provisional) |
Prelims 2016: acquiring assets, loans received from foreign governments and loans given to states and UTs are all in the capital budget. Answer: 1, 2 and 3.
Which of the following is/are included in the capital budget of the Government of India? 1. Expenditure on acquisition of assets like roads, buildings, machinery, etc. 2. Loans received from foreign governments 3. Loans and advances granted to the States and Union Territories Select the correct answer using the code given below.
- 1 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
Show answer
Answer: (d) · UPSC official key
For a company, acquiring new technology is capital expenditure, but neither debt nor equity financing is expenditure at all. The 2022 answer was 1 only.
With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct ? 1. Acquiring new technology is capital expenditure. 2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure. Select the correct answer using the code given below :
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: (a) · UPSC official key
Mains box: analysis and answer points
- Interest received is revenue and creates no liability.
- For a company, acquiring new technology is capital expenditure, but neither debt nor equity financing is expenditure at all.
- Likely next angle: Funds
- Asked: Mains 2021 (GS Paper III, 10 marks): Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets.
Practice
Practice MCQs (8)
With reference to the tax revenue of the Union Government shown in the Union Budget 2026- 27, consider the following statements:
1. The tax revenue shown in the main table of Budget at a Glance is net of the States' share of central taxes.
2. The tax revenue net to the Centre in the Budget Estimates for 2026-27 is larger than its total revenue expenditure.
3. The Centre's net tax receipts in the Budget Estimates for 2026-27 are about ₹28.7 lakh crore.
Which of the statements given above is/are correct?
Answer (c) & explanation
Statements 1 and 3 are correct. The main table of Budget at a Glance shows 'Tax Revenue (Net to Centre)', that is, gross tax revenue minus the States' share devolved under the Finance Commission formula. The Budget Speech of 1 February 2026 put the Centre's net tax receipts for 2026-27 at ₹28.7 lakh crore (₹28,66,922 crore in Budget at a Glance). Statement 2 is wrong: revenue expenditure is budgeted at about ₹41.25 lakh crore, far above net tax revenue; even total revenue receipts (₹35.33 lakh crore) fall short of it, which is why there is a revenue deficit.
The Government sells a part of its equity in a Central Public Sector Enterprise and uses the entire proceeds to pay salaries in the same year. In the Union Budget, the proceeds of this sale are
Answer (a) & explanation
Option (a) is correct. A receipt is classified by its nature, not by the use to which it is put. A sale of equity reduces the Government's assets, so it is a capital receipt; it creates no repayment obligation, so it is non-debt. Using the money for salaries, which are revenue expenditure, does not turn it into revenue; it only means that a capital receipt is being used to finance a revenue deficit, which is regarded as poor fiscal practice.
With reference to the classification of receipts in the Union Budget, consider the following statements:
1. Proceeds from disinvestment in Central Public Sector Enterprises are non-debt capital receipts.
2. Proceeds from the auction of telecom spectrum are treated as non-tax revenue.
3. Amounts raised through the sale of Treasury Bills are treated as revenue receipts because they are repaid within a year.
Which of the statements given above is/are correct?
Answer (a) & explanation
Statements 1 and 2 are correct. Disinvestment reduces the Government's assets, so its proceeds are capital receipts that do not create debt. Spectrum auction proceeds are booked as non-tax revenue under communication services, because the Government is charging for the right to use a resource, not selling an asset it owns on its balance sheet. Statement 3 is wrong: the Key to Budget Documents lists borrowings through Treasury Bills among capital receipts; short maturity does not change the fact that they create a liability.
Which one of the following is a debt-creating capital receipt of the Union Government?
Answer (d) & explanation
Option (d) is correct. Small savings collected from the public are credited to the National Small Savings Fund in the Public Account, and the Centre borrows from the Fund by issuing special securities. These securities against small savings are a liability of the Centre and appear among debt receipts in the sources of financing the fiscal deficit (about ₹3.87 lakh crore in BE 2026-27). Recovery of loans and strategic sales are non-debt capital receipts, and interest received is revenue.
Consider the following receipts of the Union Government:
1. Dividends from public sector enterprises and the surplus transferred by the Reserve Bank of India
2. Interest received on loans given to State Governments
3. Grants received from foreign governments and international bodies
4. Repayment of the principal of loans given to State Governments
How many of the above are classified as non-tax revenue?
Answer (c) & explanation
Items 1, 2 and 3 are non-tax revenue. Budget at a Glance groups non-tax revenue into interest receipts, dividends and profits (including the RBI surplus), external grants and other non-tax revenue such as fees. Item 4 is different: the recovery of loans reduces a financial asset of the Government, so it is a non-debt capital receipt, even though the interest on the same loan is revenue.
With reference to 'effective capital expenditure' in the Union Budget, consider the following statements:
1. It is the sum of capital expenditure and grants-in-aid for the creation of capital assets.
2. In the Budget Estimates for 2026-27, effective capital expenditure is about 4.4 per cent of GDP, while capital expenditure is about 3.1 per cent of GDP.
3. Effective capital expenditure is always smaller than capital expenditure because grants to States are deducted from it.
Which of the statements given above is/are correct?
Answer (a) & explanation
Statements 1 and 2 are correct. Budget at a Glance defines effective capital expenditure as capital expenditure plus grants-in-aid for creation of capital assets. For BE 2026-27 it is ₹17,14,523 crore (about 4.4 per cent of GDP) against capital expenditure of ₹12,21,821 crore (about 3.1 per cent). Statement 3 is wrong: grants for capital assets are added, not deducted, so effective capex is larger than capex whenever such grants are positive.
On the basis of the Budget Estimates for 2026-27 in Budget at a Glance, consider the following statements:
1. More than nine-tenths of the Centre's capital receipts consist of borrowings and other liabilities.
2. Revenue receipts make up about two-thirds of the total receipts of the Centre.
3. Recovery of loans is budgeted to bring in more than the item 'Other Receipts'.
Which of the statements given above is/are correct?
Answer (b) & explanation
Statements 1 and 2 are correct. In BE 2026-27, capital receipts are ₹18,14,165 crore, of which borrowings and other liabilities are ₹16,95,768 crore (about 93 per cent). Revenue receipts of ₹35,33,150 crore are about 66 per cent of total receipts of ₹53,47,315 crore. Statement 3 is wrong: recovery of loans is ₹38,397 crore, less than half of 'Other Receipts' (₹80,000 crore, mainly disinvestment-type proceeds). Non-debt capital receipts are thus a small slice of the budget.
Consider the following statements: Statement-I: Grants-in-aid given by the Union Government to the States are recorded as revenue expenditure in the Union accounts, even when the States use them to build capital assets. Statement-II: In the Union accounts, expenditure is treated as capital expenditure only when it results in the creation of assets for the Government of India.
Which one of the following is correct in respect of the above statements?
Answer (a) & explanation
Both statements are correct and Statement-II explains Statement-I. The Key to Budget Documents says that expenditure which does not create assets for the Government of India is revenue expenditure, and that all grants to States, UTs and other parties are revenue expenditure in the Centre's books even if the grantees create assets with them. This accounting rule is exactly why the effective revenue deficit was devised: it deducts grants for creation of capital assets from the revenue deficit.
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In 150 words, explain the significance of Public Finance with one recent example.
Flashcards (6)
Article for the Annual Financial Statement?
Article 112.
Budget date since 2017?
1 February.
Is disinvestment a capital receipt?
Yes.
Capital receipt test?
Creates a liability or reduces assets.
Loans to states are which expenditure?
Capital.
Effective capital expenditure?
Capex plus grants for capital assets.
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