UPSC Prelims 2012 · Question 76 of 98
UPSC Prelims 2012 question on Capital Gains
- ExamUPSC CSE
- Year2012
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicImportant Economic Concepts
- DifficultyMedium
- TypeStatement
"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:"
Show answer
Answer: B. 2 and 3 only
Verdict
Correct Answer: 2 and 3 only
Statements 2 and 3 are correct because they involve appreciation in capital assets, while increase in product sales is business income, not capital gain.
Analysis
Capital gain arises when a capital asset is transferred and the sale value exceeds its cost of acquisition. It is different from ordinary business income or regular sales revenue.
Statement by statement
1. Increase in sales of a product — Incorrect
Increase in sales of a product is business income or operational revenue.
It is not capital gain because it does not arise from the transfer of a capital asset.
2. Natural increase in the value of property owned — Correct
Land or building is a capital asset.
If its value increases over time due to market forces and the owner sells it at a higher price, the profit is treated as capital gain.
3. Increase in value of paintings due to increase in their popularity — Correct
Paintings and artworks are treated as capital assets, even though many personal effects are excluded.
If their value rises due to popularity or scarcity and they are sold at a profit, the gain is treated as capital gain.
Extra UPSC info
* Capital gain is taxable only when the asset is transferred or sold.
* Short-term and long-term capital gains depend on the holding period of the asset.
* Immovable property is generally treated as long-term if held for more than 24 months.
* Rural agricultural land in India is not treated as a capital asset.
* Personal effects like clothes and furniture are generally excluded, but jewellery, paintings, sculptures and archaeological collections are exceptions.
* Do not confuse business profit with capital gain; business profit comes from regular trading activity.