Rule 106 of The General Financial Rules 2017 Method of Calculation of Interest
Original Rule Text
Visual Summary
Interest calculation starts with direct capital outlay from the end of the previous year.
Half of the capital outlay for the current year is added to the base for calculation.
The source of capital outlay (current revenues or other) does not impact the interest calculation method.
Executive Summary
Rule 106 of The General Financial Rules, 2017, specifies the precise method for calculating interest on direct capital outlay. It mandates that interest is computed on the capital outlay existing at the end of the previous financial year, augmented by half of the capital outlay incurred during the current year. A key aspect of this rule is that the source from which the capital outlay was met, whether current revenues or other funding mechanisms, is explicitly deemed irrelevant to this calculation.
In-Depth Analysis of the Rule
Introduction: Rule 106 provides a clear and standardized approach for determining the base upon which interest on capital outlay is to be calculated. This ensures consistency and transparency in financial accounting across government departments and undertakings.
Breakdown of the Rule:
- Base Capital Outlay: The primary component for interest calculation is the direct capital outlay recorded at the close of the preceding financial year. This forms the foundational amount.
- Current Year’s Contribution: To this base, half of the direct capital outlay incurred during the current financial year is added. This proportional inclusion accounts for the capital deployed during the ongoing period.
- Irrelevance of Funding Source: The rule explicitly states that the method of calculation remains unchanged regardless of whether the capital outlay originated from current revenues or any other financial sources. This simplifies accounting and prevents differential treatment based on funding origin.
Practical Example: Consider a project with a direct capital outlay of ₹100 crore at the end of the previous year. In the current year, an additional ₹20 crore is spent on capital outlay. According to Rule 106, the amount on which interest will be calculated is ₹100 crore (previous year’s outlay) + (₹20 crore / 2) (half of current year’s outlay) = ₹100 crore + ₹10 crore = ₹110 crore. This calculation applies whether the ₹20 crore came from the department’s revenue or a special grant.
Related Provisions
Understanding Rule 106 is enhanced by reviewing related financial principles:
- Rule 98 of The General Financial Rules 2017 Capital Expenditure: Defines what constitutes capital expenditure.
- Rule 104 of The General Financial Rules 2017 Interest Rate: Specifies the general principles for interest rates on capital.
- Rule 105 of The General Financial Rules 2017 Charging of Interest on Capital Outlay: Details how interest is charged on capital outlay met from specific loans.
Learning Aids
Mnemonics
- 106: P.Y. + H.C.Y. = I.C. (Previous Year + Half Current Year = Interest Calculation).
Process Flowchart
Multiple Choice Questions (MCQs)
1. What is the primary base for interest calculation under Rule 106 of the General Financial Rules, 2017?
- A) The total capital outlay of the current year.
- B) The direct capital outlay at the end of the previous year.
- C) The average capital outlay over the last five years.
- D) The projected capital outlay for the next year.
Show Answer
Correct Answer: B) The direct capital outlay at the end of the previous year.
2. According to Rule 106 of the General Financial Rules, 2017, how much of the current year’s capital outlay is included in the interest calculation?
- A) The full amount.
- B) One-quarter of the amount.
- C) Half of the amount.
- D) None of the amount.
Show Answer
Correct Answer: C) Half of the amount.
3. Which factor is explicitly stated as irrelevant for interest calculation under Rule 106 of the General Financial Rules, 2017?
- A) The type of project.
- B) The department incurring the outlay.
- C) Whether the outlay was met from current revenues or other sources.
- D) The total budget allocation for the year.
Show Answer
Correct Answer: C) Whether the outlay was met from current revenues or other sources.
4. If a project had a direct capital outlay of ₹50 crore at the end of the previous year and ₹10 crore in the current year, what is the total amount on which interest is calculated as per Rule 106 of the General Financial Rules, 2017?
- A) ₹50 crore
- B) ₹55 crore
- C) ₹60 crore
- D) ₹45 crore
Show Answer
Correct Answer: B) ₹55 crore (₹50 crore + ₹10 crore/2)
5. Rule 106 of the General Financial Rules, 2017, primarily deals with the calculation of interest on what specific financial aspect?
- A) Government loans to State Governments.
- B) Revenue receipts.
- C) Direct capital outlay.
- D) Contingent expenditure.
Show Answer
Correct Answer: C) Direct capital outlay.
Frequently Asked Questions
Q1: Does the source of capital outlay influence the interest calculation method under Rule 106 of the General Financial Rules, 2017?
No, Rule 106 explicitly states that the interest calculation method remains the same irrespective of whether the capital outlay has been met from current revenues or other sources.
Q2: What are the two main components considered for calculating the interest base as per Rule 106 of the General Financial Rules, 2017?
The two main components are the direct capital outlay at the end of the previous year and half of the direct capital outlay incurred during the current year.
Key Takeaways
- Interest on capital outlay is calculated based on the previous year’s closing balance.
- Half of the current year’s capital outlay is added to this base.
- The funding source of the capital outlay (revenue or other) is not a factor in this calculation.
- This rule ensures a consistent and standardized approach to interest calculation on capital investments.
Conclusion
Rule 106 of The General Financial Rules, 2017, is fundamental for maintaining uniformity and clarity in government accounting practices, particularly concerning the calculation of interest on capital outlays. By providing a precise formula and clarifying the irrelevance of funding sources, it ensures equitable and predictable financial management across various projects and departments.