Difference between Capital Expenditure and Revenue Expenditure
Capital expenditure and revenue expenditure differ in meaning, examples, accounting treatment, and what each does to growth and profits.
By UPSCYatra Editorial Team - May 1, 2026
Table of contents
Capital expenditure and revenue expenditure are the two heads of government spending. Capital expenditure creates a physical or financial asset, or reduces a liability. Revenue expenditure pays salaries, subsidies, and interest, and is used up in the same year.
Difference between Capital Expenditure and Revenue Expenditure
Feature
Capital Expenditure
Revenue Expenditure
Meaning
Spending that creates an asset or reduces a liability
The Government of India spends ₹50,000 crore building the Delhi-Mumbai Expressway. That is capital expenditure. The road stays on the books for decades and raises logistics productivity. In the same year it transfers ₹60,000 crore under PM-KISAN. That is revenue expenditure: consumption support, and no asset is left behind. Interest of ₹10 lakh crore on past debt is also revenue expenditure, because it does not create a new asset.
What this means for the exam
Capital expenditure builds an asset or reduces a liability. Revenue expenditure is used up now, in salaries, subsidies, and interest.
Capital expenditure
Capital expenditure is money the government spends to create a physical or financial asset, or to reduce a liability. A highway, a railway line, defence equipment, and a loan to a state all sit on this side. The asset stays on the books and is depreciated over time, which later shows up in NDP. Repaying a loan is capital expenditure for the same reason: it reduces a liability, and it does not pay for this year's consumption.
One rupee spent on a highway adds more to GDP than one rupee paid out as a subsidy. The FRBM framework and rating agencies favour budgets that put a larger share into this kind of spending. From 2019 to 2024, India's capex roughly doubled during the infrastructure push. The Centre led PM Gati Shakti and paid states to raise their own capex. States still put a smaller share into capital spending, because interest and salaries take so much of their budgets.
From Budget 2021 the documents also report effective capex. That figure includes grants-in-aid which states use to create capital assets. Leave those grants out and the infrastructure push looks smaller than it is. Some projects are financed through special purpose vehicles, including IFFCO and NHAI bonds, which keeps the borrowing off the main budget and makes the fiscal picture harder to read.
Revenue expenditure
Revenue expenditure pays for the day-to-day work of government and is used up in the same year. Salaries, pensions, MGNREGS wages, subsidies, and interest all belong here. It is written down as an expense. There is no asset left to depreciate.
Interest on past debt is revenue expenditure even when the bill is enormous. It creates no new asset. Subsidies and interest together are about 80% or more of revenue expenditure. When this spending runs ahead of revenue receipts, the revenue deficit widens. A deficit loaded with revenue expenditure is weaker fiscal quality than one used to build assets.
Defence is the usual mix-up. Rafale jets and naval vessels are capital expenditure. Defence salaries and pensions are revenue expenditure. Both are reported as defence, and they sit on different budget heads. Subsidy arrears are sometimes kept off the budget in the same way as some capital projects.
Key takeaway
Capital expenditure creates assets or reduces liabilities. Revenue expenditure (salaries, subsidies, and interest) is used up now.
Difference between Capital Expenditure and Revenue Expenditure FAQs
What is capital expenditure?
Capital expenditure is government spending that creates a physical or financial asset, or that reduces a liability. Highways, railways, defence equipment, and loans to states are examples. The asset is recorded and then depreciated.
What is revenue expenditure?
Revenue expenditure is spending used up in the same year. Salaries, pensions, subsidies, and interest are the usual heads. It is recorded as an expense, and it does not leave an asset on the books.
What is the main difference between capital expenditure and revenue expenditure?
Capital expenditure creates an asset or reduces a liability, and the benefit lasts beyond the year. Revenue expenditure pays for running the government and is used up within the year.
Is interest on government debt capital expenditure?
No. Interest is revenue expenditure. It creates no asset.
Is repayment of a government loan capital expenditure?
Yes. Repaying a loan reduces a liability, so it is treated on the capital account.
What is effective capital expenditure?
From Budget 2021, effective capex includes grants-in-aid that states use to create capital assets, along with the Centre's own capital spending. Counting only the Centre's line understates the infrastructure push.
PYQ linkage
2022 · Prelims
Which of the following is revenue expenditure? (1) Interest payments (2) Defence equipment purchase (3) Salaries of govt staff
