Which of the following is not a component of capital account ?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Transfer Payments

The capital account records international dealings in assets: shares, bonds, companies and loans taken or given. Its components are foreign investment, external borrowings and external assistance. A transfer payment, such as a gift, a remittance or a grant, is received for free, creating no asset and no claim, so it is recorded with the invisibles in the current account, not in the capital account.

What the other options are

Option (1) External Assistance. — Capital account item (Incorrect). Aid received as loans from foreign governments and agencies creates a liability to repay, so it is a capital account item.
Option (2) Investments. — Capital account item (Incorrect). Foreign direct and portfolio investment are purchases and sales of assets, the core of the capital account.
Option (3) External Borrowing. — Capital account item (Incorrect). Borrowing from abroad, such as external commercial borrowings, is a capital inflow that must be repaid.

NCERT (2025-26): “6.1.1 Current Account … Current Account is the record of trade in goods and services and transfer payments. … Trade in goods includes exports and imports of goods. Trade in services includes factor income and non-factor income transactions. Transfer payments are the receipts which the residents of a country get for ‘free’, without having to provide any goods or services in return. They consist of gifts, remittances and grants. They could be given by the government or by private citizens living abroad.…

6.1.2 Capital Account Capital Account records all international transactions of assets. An asset is any one of the forms in which wealth can be held, for example: money, stocks, bonds, Government debt, etc. Purchase of assets is a debit item on the capital account. If an Indian buys a UK Car Company, it enters capital account transactions as a debit item (as foreign exchange is flowing out of India). On the other hand, sale of assets like sale of share of an Indian company to a Chinese customer is a credit item on the capital account. … These items are Foreign Direct Investments (FDIs), Foreign Institutional Investments (FIIs), external borrowings and assistance.”