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Capital Expenditure and Revenue Expenditure

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Laxmi Navlani

Capital Expenditure
Income from Business & Profession
Income Tax
Revenue Expenditure
Last updated on April 16th, 2021

A business organization incurs expenditures for various purposes during its existence. Some of these expenditures are meant to bring in more profits for the organization while some expenditures may involve investment strategies to bolster maintenance or business expansions which could help in long run. Also, Based on the nature of the expenditure, they are categorized as Capital Expenditure and Revenue Expenditure.

Moreover, Business entities need to identify the costs incurred by way of these categories to account for them accurately.

Also, being familiar with their fundamentals and point of differences will help manage them more effectively and enable sustainable earnings.

What is Capital Expenditure?

Capital expenditures or CAPEX are for long term benefits. These expenditures serve the purpose of increasing the capacity or capabilities of the long term asset by either enhancing or adding new assets to the organization.

Capital expenditure is mostly on assets. For Example: land, equipment, furnishings or vehicles that help to drive benefits by increasing the operating capability.

Generally, CAPEX influences a firm’s short-term and long-term financial standing. Also, it helps to boost its overall operations over the years. The formula of CAPEX is–

Capital expenditure = Net increase in PP & E + Depreciation Expense

Moreover, These expenditures form part of the asset side of the balance sheet also denoted in cash flow statement. Also, organization can charge depreciation on CAPEX every year. It is one of the prominent differences between capital expenditure and revenue expenditure.

Types of Capital Expenditure

Following are 3 distinct groups of Capital expenditure:

  1. Expenses that a firm incurs to lower cost.
  2. Expense that help to boost overall earnings.
  3. Expenses made on non-economic grounds.

In terms of outlay, Following are headers of CAPEX:

What is Revenue Expenditure?

Revenue expenditure or OPEX is the expenditure to manage the day to day functions of a business.  However, such costs do not result in asset creation. Also, the benefits resulting from OPEX is up to one accounting year.

Further, Revenue Expenditures does not result in an increase in the earning capacity of the business. However, it helps in maintaining the existing earning capacity. For example, wages & Salary, Printing & Stationery, Electricity Expenses, Repairs and Maintenance Expenses, Inventory, Postage, Insurance, taxes, etc.

Moreover, factors like the nature of the business operation, the purpose of a venture, frequency of activities, etc. prove useful in categorizing expenses as OPEX.

Also, Revenue Expenditures will be part of Profit & Loss Account, it will not to be shown under the Balance Sheet.

Types of Revenue Expenditure

Revenue expenditure can be categorized under 2 distinct groups as follows:

Difference between Capital and Revenue Expenditure

The table below mentions differences between capital expenditure and revenue expenditure –

Parameters Capital Expenditure Revenue Expenditure
Definition Capital expenditure is to acquire assets or to improve the quality of existing ones. Revenue expenditure is to maintain their everyday operations.
Purpose Such expenses boost earning capacity. Such expenses help to sustain profitability.
Time span Capital expenses are for the long-term. Revenue expenses are for a shorter-duration and are mostly limited to an accounting year.
Capitalization of expenses Capital expenses are capitalized. Revenue expenses are not capitalized.
Treatment in accounting books CAPEX is stated in a firm’s Cash Flow Statement. Also, It appears in the Balance Sheet of a company under fixed assets. OPEX is stated in a firm’s Income Statement but it is not reported in its Balance Sheet.
Treatment of depreciation Depreciation of assets is charged on capital expenses. Depreciation of assets is not levied on revenue expenditure.
Occurrence Typically, CAPEX is not quite frequent. OPEX are frequent expenses.
Yield The yield of these expenses is not upto to a year and is usually long-term in nature. The yield of these expenses is mostly upto to the current accounting period.
Examples Purchase of Machinery or patent, copyright, installation of equipment and fixture, etc. Wages, salary, utility bills printing and stationery, inventory, postage, insurance, taxes as well as maintenance cost, among others.

Hence, both capital expenditure and revenue expenditure are vital for the sustainable profitability of a business venture. Furthermore, revenue expenses are a periodic investment which does not result in immediate or delayed benefit. However, it is used to keep operations running uninterruptedly.

Moreover, capital expenditure is long-term investment that proves beneficial for a firm. Business entities must understand that they need to adopt effective strategies to monitor and regulate these expenses to boost overall profitability significantly.

FAQs

What are capital expenditure and revenue expenditure?

Capital expenditures are incurred to acquire physical assets whereas Revenue expenditures are operating expenses to run the daily operations.

With a single example, can capital expenditure and revenue expenditure be understood?

Yes, For example if a company purchases a storage facility, the cost to purchase such storage facility is capital expenditure and the cost of painting, refurbishing or other decorations is revenue expenditure.

Why is it important to distinguish between capital and revenue expenditure?

In maintaining accounting records it important to distinguish between capital and revenue expenditure because treatment of both the expenditures differ in the financial statements.

Got Questions? Ask Away!

  1. hi @d.r

    Expenses can be claimed on accrual basis if you are using mercantile system for accounting. If there is an invoice of FY 20-21 for which payment is made in FY 21-22 it can still be counted as an expenditure of FY 20-21.

  2. which type of expenses can be claimed for intraday, LTCG, STCG &FnO Trades…

    can we claim Brokerage,SEBI Charges,SGST,IGST ,CGST,Stamp Duty,STT…etc…
    kindly guide

  3. Hi @Shanmukh, you can claim all the expenses directly connected to the trading income. Make sure the expenses incurred should be wholly and exclusively in relation to business and professional income which in your case is intraday trading.

  4. some expenses are cant claim under intraday like STT…can this be claim for FnO…

  5. Hi @Shanmukh

    You can claim STT as an expense in case of equity intraday since it is treated as Speculative Business Income. And yes it can also be claimed against F&O.

    However, you cannot claim STT against LTCG and STCG as they are treated as Income from Capital Gains.

    Hope this helps :slightly_smiling_face:

  6. Let’s say I am a trader from a small town of Karnataka. I shift to Bengaluru with my family and I rent a 3 BHK flat whose rent is around Rs 45,000 per month. Its my home as well as trading office.

    Now my question is:-

    Can I claim Rs 45,000*12 = Rs 5,40,000 as my business expenses and reduce my taxable income ?

  7. Hello @Satya,

    As per Section 37 of Income Tax Act, 1961 any expenditure (not being a capital expenditure) which is incurred exclusively for business purpose is allowed as a deduction.

    However, when the expenses are incurred partly for personal purpose and partly for business purpose, you need to segregate the personal and business component of the same. In your case, the rentals for the flat (which is used for both personal and business purpose) needs to be segregated by taking a reasonable approach (For eg, area used for office and area used for residence).

    Also, you can claim the expenses only if you are self employed i.e. if you are not salaried.

    Hope it helps!

  8. I am a resident Indian and my husband is an NRI. He has an NRE account and transfers the money to my savings account periodically. Currently, I am doing F&O trading with that money, and also I take advice & expertise regularly from my husband to help my F&O trading business. In this case, can I pay a salary / fee to my husband for the above-mentioned services and claim the expenses under the professional consultancy??

    Please advise.

  9. Hi @Newtrader

    Section 40A(2) of Income Tax Act, 1961 deals with payments to relatives.

    As per this section, you can claim the amount paid to relatives. However, if you incur any expenditure in respect of which payment is to be made to relative and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the service for which the payment is made, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as expense.

    Hope this helps!

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