Taxes and borrowings make up the majority of the revenue while a significant portion of the expenditure is allocated to mandatory obligations such as interest payments and state transfers. The Budget also offers insights into how the government generates revenue and allocates its funds. Let’s understand how this process works and its impact on the economy
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Finance Minister Nirmala Sitharaman presented the Union Budget for 2025-26, the 14th consecutive budget under the Narendra Modi government. She highlighted the government’s continued focus on boosting economic growth and ensuring inclusive development.
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Union Budget 2025
One of the major announcements was a revision in the new tax regime, making annual incomes up to ₹12 lakh tax-free. For salaried employees, this limit extends to ₹12.75 lakh after taking into account a standard deduction of Rs 75,000.
The annual Budget provides a detailed view of how the government earns and spends money. Let’s break it down in simple terms to understand how it affects individuals and the overall economy.
How the government earns revenue
The government’s income comes mainly from borrowing and liabilities (24%), income tax (22%), GST and indirect taxes (18%) and corporate tax (17%). Other sources include non-tax revenues, excise duties, customs, and non-debt capital receipts.
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.
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.
Where the government spends
The government allocates its revenue for various purposes, including repaying past debts and financing key development projects. Here’s a simplified breakdown of how the funds are utilised:
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.
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 are fully funded by the central government and account for about 15-20 paise. Centrally Sponsored Schemes, which are jointly funded by the central and state governments, make up another 8-10 paise. Approximately 8-10 paise is spent on defence to ensure national security and maintain the armed forces. Subsidies on food, fertilisers, and fuel take up around 6-8 paise. Around 4-5 paise is spent on pensions for retired government employees, including defence personnel. Other Expenditure, which include miscellaneous expenses like grants to financial commissions, disaster relief, and administrative costs, collectively accounts for about 8-10 paise.
