Payments which are not made in return for some productive service, e.g. payments made by the state to needy individuals which, in effect, transfer income from wealthier sectors of the population to the poorer. Examples are old-age pensions, unemployment benefit and widows’ pensions. They are not a payment in return for productive services, but rather represent an income redistribution. Likewise, taxation is a transfer payment to the government. Whenever it is desired to measure income generated by some kind of investment, or by the economy as a whole, transfer payments must be excluded, since they do not arise from the production of new goods and services. The treatment of transfer payments is of importance in several areas of economics, particularly in cost-benefit analysis and national income determination.
Reference: The Penguin Dictionary of Economics, 3rd edt.