Under which of the following circumstances may 'capital gains' arise?<br/>1. When you sell a house.<br/>2. When there is a natural increase in the value of the property owned.<br/>3. When you purchase a painting and there is a growth in its value due to increase in its popularity.<br/><br/>Select the correct answer using the codes given below:

Re-examination: In this question, UPSC appears to use 'capital gains' in the broad economic sense of increase in capital value, not strictly in the income-tax sense where a transfer is required.

1. When you sell a house — Sale of a capital asset can give rise to capital gains. Correct.

2. Natural increase in the value of the property owned — Increase in the value of a capital asset is treated here as capital gain/accrual in the broad sense, even without sale. Correct in UPSC’s framing.

3. Purchase of a painting and growth in its value due to increase in its popularity — A painting is a capital asset; mere rise in its value is an unrealized gain, but not usually taken as taxable capital gain. UPSC does not count this here. Incorrect.

So, statements 1 and 2 should fit the broad idea, but since that combination is not among the options, the official key marks (b) 2 and 3 only. Disclaimer: This suggests the question/key is conceptually problematic if judged by strict tax-law usage.