UPSC Prelims 2012 Q76: Indian Economy – Taxation
Under which of the following circumstances may ‘capital gains’ arise?
1. When there is an increase in the sales of a product
2. When there is a natural increase in the value of the property owned
3. When you purchase a painting and there is a growth in its value due to increase in its
popularity
Select the correct answer using the codes given below:
- (a) 1 only
- (b) 2 and 3 only
- (c) 2 only
- (d) 1, 2 and 3
Answer: (b) 2 and 3 only
Explanation
Capital gains
A capital gain is the profit that arises when a capital asset rises in value above the price paid for it.
| Circumstance | Capital gain? | Reason |
|---|---|---|
| 1. When there is an increase in the sales of a product | No | This is business income (revenue), not a gain on an asset |
| 2. When there is a natural increase in the value of the property owned | Yes | Property is a capital asset |
| 3. When you purchase a painting and there is a growth in its value due to increase in its popularity | Yes | A painting is a capital asset |
Capital gains tax in India:
| Point | Detail |
|---|---|
| Type of tax | Direct tax, part of income tax |
| Charged when | The asset is sold (the gain is realised) |
| Two kinds | Short-term and long-term, by the period of holding |
| Capital assets | Land, buildings, shares, gold, art |
Answer: (b) 2 and 3 only.
Why each option is right or wrong
- (a) Incorrect. An increase in the sales of a product gives business income, not capital gains.
- (b) CORRECT. A rise in the value of property or a painting is a capital gain.
- (c) Incorrect. Statement 3 is also true; a painting is a capital asset.
- (d) Incorrect. Statement 1 is false; sales revenue is not a capital gain.
Key point
Capital gain: rise in value of a capital asset (land, shares, gold, art); taxed on sale as short-term or long-term; a direct tax. Sales of goods give revenue income.
Remember
Asset grows in value = capital gain.
Common mistakes
- Treating higher sales as a capital gain.
- Thinking only land and shares are capital assets; art and jewellery count too.
- Forgetting that the tax applies when the asset is sold.
Exam tip
Capital gain comes from owning, revenue comes from selling goods. Ask which of the two is happening.
Sources
- Income-tax Act, 1961 — Sections 2(14) and 45 (capital asset; capital gains)
- NCERT Class XII — Introductory Macroeconomics, Ch 5 (Government Budget and the Economy)