Budget, taxation & public finance

Answer: (a) 1 and 2 only

Because the principal and payouts of an IIB rise with inflation, investors do not need an extra premium for inflation risk, so the government can borrow at a lower (real) coupon while investors are shielded from inflation. There is no tax break: normal tax rules apply to both interest and capital gains.

• ✓ 1. The RBI's technical paper on IIBs lists cost savings for the government, partly by removing the risk premium that lenders charge for uncertain inflation, so the coupon can be set lower in real terms.
• ✓ 2. The principal is indexed to inflation and the coupon is paid on the indexed principal, so the investor's real return is protected when prices rise.
• ✗ 3. The RBI's FAQ says existing tax provisions apply to interest and capital gains on IIBs; there is no special tax treatment.

Remember · IIBs: principal indexed to inflation, real coupon; cheaper borrowing for government (no inflation risk premium) and inflation protection for investors; fully taxable as usual.

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India

An 'indirect transfer' is the sale of shares of a company based outside India whose value comes mainly from assets in India — the Indian assets change hands indirectly. The Finance Act, 2012 made such gains taxable in India with retrospective effect, and the Taxation Laws (Amendment) Act, 2021 withdrew that retrospective tax for deals before 28 May 2012.

• ✓ (d) Since 2012, Section 9(1)(i) of the Income-tax Act treats shares of a foreign company as situated in India if they derive their value substantially from Indian assets, so their transfer offshore can be taxed in India.
• ✗ (b) A foreign investor paying tax at home on its profits is ordinary cross-border taxation; no Indian assets are being transferred through offshore shares.
• ✗ (a) This is simply outward investment by an Indian company taxed abroad; it has nothing to do with Indian assets changing hands through a foreign entity.

Remember · Indirect transfer = offshore sale of shares of a foreign company that derive substantial value from Indian assets. The 2012 retrospective tax on such pre-28 May 2012 deals was withdrawn in 2021.

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (a) 1 only

Spending that creates a lasting asset — such as new technology, machinery or equipment — is capital expenditure. Debt and equity are ways of raising money, not ways of spending it, so neither can be classed as capital or revenue expenditure.

• ✓ 1. Buying new technology adds a long-lived asset that yields benefits over years, which is exactly what capital expenditure means (like spending on machinery and equipment).
• ✗ 2. Borrowing (debt) and issuing shares (equity) are sources of funds. For a government, loans are capital receipts because they create a liability; they are not expenditure of any kind.

Remember · Capital expenditure creates assets or cuts liabilities (land, machinery, technology). Debt and equity are financing — receipts, not expenditure.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (c) Both 1 and 2

The government borrows at home from the public — directly through small savings schemes and indirectly through banks, insurers and provident funds that hold household money — so part of household savings finances it. Most of the Centre's internal debt is in dated securities sold at auctions.

• ✓ 1. Household deposits in small savings schemes are lent to the Centre through the National Small Savings Fund, and bank deposits flow into government bonds that banks must hold under the SLR.
• ✓ 2. At end-March 2022, dated securities alone made up 66.5 per cent of the Centre's public debt, most of which is internal debt; they are sold through auctions at market-determined yields.

Remember · Centre's internal debt: dominated by auctioned dated securities (about two-thirds of public debt, 2022); household savings reach the government via small savings (NSSF) and banks' SLR holdings.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error