Rule 105 of The General Financial Rules 2017 Interest on Capital Outlay
Original Rule Text
Visual Summary
Interest based on actual rates paid and incidental charges.
Interest rate determined annually by DEA, Ministry of Finance.
Specific loans must have clearly defined purpose in prospectus.
Executive Summary
Rule 105 of the General Financial Rules, 2017, outlines the principles for charging interest on capital outlay. For capital outlay funded by specific government loans, the interest rate is determined by the actual interest paid on those loans plus any associated incidental charges. These specific loans are characterized by being raised in the open market for a clearly defined purpose, as detailed in their prospectus. For all other forms of capital outlay, the interest rate is set annually by the Department of Economic Affairs within the Ministry of Finance, ensuring a standardized approach to financial management across government projects.
In-Depth Analysis of the Rule
Rule 105 is a cornerstone of financial propriety, ensuring that government capital expenditures are appropriately accounted for, particularly concerning the cost of borrowing. It distinguishes between specific loans and other funding sources, applying different methodologies for interest calculation to reflect the nature of the financing.
Breakdown of the Rule
- Rule 105 (1): Specific Loans for Capital Outlay
- Scope: Applies to capital outlay financed by specific loans raised by the Government.
- Interest Rate Determination: The interest rate is prescribed by the Government, taking into account the actual interest paid on such loans and all incidental charges incurred during their raising and management.
- Definition of Specific Loans: These are loans raised in the open market for a single, clearly specified purpose, with definite information provided in the prospectus at the time of raising.
- Rule 105 (2): Other Capital Outlay
- Scope: Covers capital outlay that is not financed by specific loans as defined in sub-rule (1).
- Interest Rate Determination: The interest rate for such outlay is determined annually by the Department of Economic Affairs, Ministry of Finance. This ensures a consistent and centrally managed approach for general capital expenditures.
Practical Example
Imagine the Ministry of Infrastructure raises a specific loan of ₹500 crore at 7% interest, incurring 0.5% in management fees, to build a new highway. According to Rule 105 (1), the interest charged on this capital outlay would be calculated based on the 7% actual interest plus the 0.5% incidental charges. In contrast, if the Ministry uses its general budgetary allocations for a smaller capital project, Rule 105 (2) dictates that the interest rate would be the standard rate determined by the Department of Economic Affairs for that financial year, regardless of specific borrowing costs.
Related Provisions
Understanding Rule 105 is enhanced by considering these related provisions:
- Rule 98 of The General Financial Rules, 2017 Capital Expenditure: Defines capital expenditure and its treatment.
- Rule 99 of The General Financial Rules, 2017 Allocation Between Capital And Revenue: Outlines principles for allocating expenditure between capital and revenue.
- Rule 104 of The General Financial Rules, 2017 Interest Rate: Specifies general interest rates for commercial departments.
- Rule 106 of The General Financial Rules, 2017 Method of Calculation of Interest: Details how interest is calculated on direct capital outlay.
Learning Aids
Mnemonics
- S.L.I.D.E. (Specific Loans: Interest Determined by Expenses) – Helps remember that for specific loans, interest is based on actual costs and incidental charges.
- O.D.E.A. (Otherwise: DEA Determines Each Year) – Reminds that for other capital outlay, the Department of Economic Affairs sets the annual interest rate.
Process Flowchart
Multiple Choice Questions
1. What determines the interest rate for capital outlay met out of specific loans raised by the Government, according to Rule 105 of the General Financial Rules, 2017?
- A) A fixed rate set by the Reserve Bank of India.
- B) The rate determined annually by the Ministry of Finance.
- C) The actual interest paid on such loans and incidental charges incurred.
- D) A rate negotiated directly with the borrowing entity.
Show Answer
Correct Answer: C) The actual interest paid on such loans and incidental charges incurred.
2. How are “specific loans” defined under Rule 105 of the General Financial Rules, 2017?
- A) Loans provided by international financial institutions.
- B) Loans raised in the open market for a clearly specified purpose in the prospectus.
- C) Loans granted by the Central Government to State Governments.
- D) Any loan used for capital expenditure.
Show Answer
Correct Answer: B) Loans raised in the open market for a clearly specified purpose in the prospectus.
3. Who determines the interest rate for capital outlay *not* met out of specific loans, as per Rule 105 (2) of the General Financial Rules, 2017?
- A) The Comptroller and Auditor General of India.
- B) The Department of Economic Affairs, Ministry of Finance.
- C) The administrative Ministry or Department concerned.
- D) The Reserve Bank of India.
Show Answer
Correct Answer: B) The Department of Economic Affairs, Ministry of Finance.
4. Which of the following is a characteristic of “specific loans” under Rule 105 (1) of the General Financial Rules, 2017?
- A) They are always interest-free.
- B) Their purpose is generally vague to allow flexibility.
- C) Definite information about their purpose is clearly specified in the prospectus.
- D) They are exclusively for revenue expenditure.
Show Answer
Correct Answer: C) Definite information about their purpose is clearly specified in the prospectus.
5. If a capital outlay is *not* funded by a specific loan, what is the frequency of determination for its interest rate according to Rule 105 (2) of the General Financial Rules, 2017?
- A) Once, at the start of the project.
- B) Annually.
- C) Every five years.
- D) Only when market conditions significantly change.
Show Answer
Correct Answer: B) Annually.
Frequently Asked Questions
What is the primary distinction Rule 105 of the General Financial Rules, 2017, makes regarding interest on capital outlay?
Rule 105 distinguishes between capital outlay funded by ‘specific loans’ and ‘otherwise provided’ capital outlay, applying different interest rate determination methods for each.
Can the Government raise a ‘specific loan’ without clearly defining its purpose under Rule 105 of the General Financial Rules, 2017?
No, Rule 105 (1) explicitly states that specific loans must be raised for “one specific purpose which is clearly specified in the prospectus” at the time of raising the loans.
Does Rule 105 (1) of the General Financial Rules, 2017, only consider the actual interest rate paid on specific loans?
No, it also considers “incidental charges incurred in raising and managing them” in determining the interest rate.
Key Takeaways
- Rule 105 governs interest calculation for government capital outlay.
- Specific loans incur interest based on actual rates and incidental charges, with clear purpose disclosure.
- Other capital outlay interest rates are set annually by the Department of Economic Affairs.
- The rule ensures transparent and accountable financial management of capital projects.
Conclusion
Rule 105 of the General Financial Rules, 2017, provides essential guidance for the transparent and accurate accounting of interest on capital expenditures. By differentiating between specific project-linked loans and general capital outlay, it establishes a clear framework for financial accountability, crucial for sound public finance management and informed decision-making regarding government investments.