Transfer payment is the payment received without effort and productive service. It is the type of income which is earned without contribution made to the flow of goods and services. Scholarship, old- age pensions, food relief, unemployment benefits, and sickness. Benefit, etc. are some of the examples of transfer payments.
Transfer payment is classified into current and capital transfers. Current and capital transfers are also further divided into voluntary transfers and forced transfers.
(1) Current transfer payments:
Current transfer payment is paid out of the current income of the payer and is utilized by the recipient for consumption purposes. Current transfer payment arises within and outside the country. The transfer payment is made by the households, business firms and Govt inside the country.
Current transfers by the households consist of direct taxes, educational fees, gifts to non-profit organizations. Current transfer by ‘business firms include direct and indirect tax paid to the Govt, scholarships and gifts given to households. Current transfer by Govt includes old age pension, interest on public debt etc. Current transfers arise-among different countries of the world. Gifts in the form of clothes, food, medicines etc. during natural calamities provided by one country to another.
(2) Capital transfers:
Capital transfers are paid in cash or in kind out of the saving of the payer for the purpose of gross capital formation or for long term developmental expenditure of the recipient. Capital transfers take place both inside and outside the country.
The current and capital transfers are made either voluntarily or forcefully. When transfer payments are made by the people in form of donations and scholarships etc. it is called voluntary transfers. Forced transfer is compulsorily made by the people to the Govt, in the firm of taxes, duties etc.