Budget in India: Where rupee comes from, where it goes

Budget 2025

Ever wondered how the Indian government collects money to spend on development, welfare, and infrastructure? The annual Budget lays it all out—a detailed plan of where the money comes from and where it is allocated. Let’s break it down into simpler terms to help you understand how this affects you and the economy.

Where does the government’s rupee come from?

The government generates revenue from various sources, primarily taxes, borrowing, and non-tax revenues. For every rupee the government collects, here’s a broad approximation of how it is divided (based on FY 2022-25 Budgets):

Taxes: About two-thirds of the government’s income comes from taxes. These include:

Income Tax and Corporation Tax: Together, they make up roughly one-third of the government’s revenue. Taxes paid by individuals and businesses form the backbone of government income.

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Goods and Services Tax (GST): A major indirect tax, GST accounts for about 15-20 paise of every rupee, combining central and state GST collections.

Customs and Excise Duties: These indirect taxes on imports and certain goods add about 10 paise to the rupee.

Non-Tax Revenue: Around 6-9 paise comes from non-tax revenue, such as profits from public sector enterprises, dividends from state-owned companies, and fees for government services.

Borrowings and Other Liabilities: The government often spends more than it earns, covering the gap by borrowing. This accounts for approximately one-third of the rupee, making it the largest single source of income.

Where does the government’s rupee go?

The collected revenue is used for a variety of purposes, from paying interest on past borrowings to funding critical development projects. Here’s a simplified look at where the rupee is spent:

Interest Payments: About 20 paise of every rupee goes toward paying interest on loans the government has previously taken. This is a non-negotiable expense that ensures the government maintains its creditworthiness.

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State Governments’ Share: Roughly 20-25 paise is transferred to state governments as their share of taxes. This helps states fund their own developmental and welfare programs.

Central Sector and Centrally Sponsored Schemes:

Central Sector Schemes: These are fully funded by the central government and account for about 15-20 paise.

Centrally Sponsored Schemes: Jointly funded by the centre and states, they make up another 8-10 paise.

Defence: About 8-10 paise is spent on defence to ensure national security and maintain the armed forces.

Subsidies: Subsidies on food, fertilisers, and fuel take up around 6-8 paise.

Pensions: Around 4-5 paise is spent on pensions for retired government employees, including defence personnel.

Other Expenditure: This includes miscellaneous expenses like grants to financial commissions, disaster relief, and administrative costs, which collectively account for about 8-10 paise.

Also Read | Non-Tax Revenue: How the government earns beyond taxes

Why should you care?

Understanding the Budget isn’t just for economists or policymakers; it’s essential for everyone. When you pay taxes or buy goods, you contribute to the government’s revenue. Similarly, the quality of public services you receive—from infrastructure to welfare—depends on how this rupee is allocated.

For instance, when the government increases spending on infrastructure, it can boost economic growth and create jobs. On the other hand, a large portion of spending on interest payments or subsidies might limit funds for future development.

Conclusion

The annual Budget offers a clear snapshot of how the government plans to balance its income and expenditure. While taxes and borrowings dominate the revenue side, significant portions of the expenditure go toward mandatory obligations like interest payments and state transfers, leaving a smaller pool for developmental initiatives. By understanding where the government’s rupee comes from and where it goes, you gain a clearer perspective on how public finances impact your life and the broader economy.

FAQs: Your budget questions answered