UPSC Prelims 2025Question 10Economy

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

(a)I and II only
(b)II and III only
(c)I and III only
(d)I, II and III

Correct answer: a

Decision rule

If a receipt neither creates a liability nor reduces an asset it is revenue; interest received is income, only interest paid is expenditure.

Explanation

Correct Answer:

(a) I and II only

Explanation of the Correct Answer:

Let us examine each statement in the context of Government Budget classification:

Statement I:

Capital receipts create a liability or cause a reduction in the assets of the Government.

Correct.
Capital receipts either:
- Create a liability (e.g., borrowings), or
- Reduce government assets (e.g., disinvestment, recovery of loans).
This is the standard definition used in public finance and Union Budget.

Statement II:

Borrowings and disinvestment are capital receipts.

Correct.
Borrowings increase government liabilities.
Disinvestment involves sale of government assets.
Hence, both are classified as capital receipts.

Statement III:

Interest received on loans creates a liability of the Government.

Incorrect.
Interest received is income, not liability.
It is classified as a revenue receipt, since it does not create any liability nor reduce assets.

Thus, Statements I and II are correct, while Statement III is incorrect.

Why Other Options Are Incorrect

Option	Verdict	Explanation
(a) I and II only	Correct	Both statements correctly define capital receipts.
(b) II and III only	Incorrect	Statement III is wrong; interest received is revenue receipt.
(c) I and III only	Incorrect	Statement III is incorrect.
(d) I, II and III	Incorrect	Statement III is not correct.

Relevant Supplementary Information

Table: Revenue Receipts vs Capital Receipts (Government Budget)

Aspect	Revenue Receipts	Capital Receipts
Definition	Receipts that do not create liability or reduce assets	Receipts that create liability or reduce assets
Examples	Taxes, interest received, dividends	Borrowings, disinvestment, recovery of loans
Impact on Balance Sheet	No long-term impact	Affects assets or liabilities
Nature	Recurring	Non-recurring / structural
Budget Head	Revenue Account	Capital Account

Context and Current Relevance

Rising capital receipts through borrowings directly affect fiscal deficit and public debt.
Disinvestment proceeds are closely tracked for asset monetisation and fiscal consolidation.
UPSC often tests conceptual clarity between revenue and capital receipts.

Key Takeaways from the Table

Capital receipts either increase liabilities or reduce assets.
Borrowings and disinvestment are classic capital receipts.
Interest received is a revenue receipt, not a liability.
Confusing interest paid vs interest received is a common trap in prelims questions.

Capital receipts either increase liabilities (borrowings) or reduce assets (disinvestment, loan recovery).
Interest received is always a revenue receipt, never a liability.
Confusion often arises between interest paid (expenditure) and interest received (revenue).
UPSC frequently tests definition-based elimination in public finance questions.

Table: Classification of Government Receipts (India)

Type of Receipt	Revenue / Capital	Creates Liability?	Reduces Government Assets?	Examples	Key Insight
Tax Revenue	Revenue	No	No	Income tax, GST, customs duty	Regular income
Non-Tax Revenue	Revenue	No	No	Interest received, dividends, fees	No balance-sheet impact
Interest Received on Loans	Revenue	No	No	Loans to states/PSUs	Often confused with liability
Borrowings	Capital	Yes	No	Market loans, treasury bills	Increases public debt
Disinvestment Proceeds	Capital	No	Yes	Sale of PSU equity	Asset monetisation
Recovery of Loans	Capital	No	Yes	Loans repaid by states/PSUs	Asset reduction
Grants Received	Revenue	No	No	External grants	Non-debt inflow
Loan Repayment by Govt	Capital Expenditure	—	—	Principal repayment	Not a receipt

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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?