If you receive income from bonds or other obligations that are exempt from Illinois Income Tax, the exempt amount you are entitled to claim is the interest net of bond premium amortization.
That is the exact language from the Publication (quoted in my answer). It says nothing about capital gains distributions being exempt and that actually makes perfect sense; the increase in the value of those exempt bonds has nothing to do with their exempt status.
It's the same on the federal level with respect to municipal bonds; the interest on those bonds is exempt from federal income tax but any gain in value (which is capital gain) is taxable.
