Question

Ms. Reeta D’Costa, retired from the post of Income Tax Commissioner in the year 2023.

Apart from her pension, she also receives the following from various sources:

• Rental income from a flat she owns.
• Interest income from her fixed deposits.
• Money sent by her children settled abroad.

Identify and classify, her monthly incomes into ‘factor income’ and ‘transfer income’, with valid reasons.

Answer 1

1. Understanding Factor Income: Factor income is the compensation received by owners of the factors of production (land, labour, capital, and entrepreneurship) in exchange for providing productive services in the creation of goods or services. It is an “earned” income.
2. Understanding Transfer Income: Transfer income refers to receipts obtained without any corresponding flow of goods or services. These are ”unearned” receipts, such as gifts, charity, or remittances, typically involving a redistribution of existing income.
3. Classification of Ms. D’Costa’s Receipts:
   • Rental income from a flat: This is Factor Income. It is earned by providing the services of a physical asset (land/property), which is a factor of production.
   • Interest income from fixed deposits: This is Factor Income. It is the reward for providing capital, which is used for investment and production activities in the economy.
   • Money sent by children from abroad: This is Transfer Income. It is a private remittance (gift) from family members. Since no productive service is rendered by Ms. D’Costa in exchange for this money, it is a unilateral transfer.