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An individual gifts ₹10,00,000 to their spouse without adequate consideration, and the spouse contributes it as capital to a firm in which the spouse is a partner. On the first day of tax year…

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An individual gifts ₹10,00,000 to their spouse without adequate consideration, and the spouse contributes it as capital to a firm in which the spouse is a partner. On the first day of tax year 2026–27 the spouse's total capital in the firm is ₹15,00,000, including the whole gift. The firm pays the spouse interest on capital at 12% a year, ₹1,80,000 for the tax year, and is allowed the whole amount as a deduction. How much is included in the individual's income under section 99(2) of the Income-tax Act, 2025?

  1. ₹1,20,000

  2. Nil

  3. ₹1,80,000

  4. ₹60,000

Answer and explanation

Correct answer: A - ₹1,20,000

Section 99(2) of the Income-tax Act, 2025 includes in the individual's income the interest arising to the spouse from the firm in the proportion that the gifted capital bears to the spouse's total capital on the first day of the tax year: ₹1,80,000 × ₹10,00,000 ÷ ₹15,00,000 = ₹1,20,000. The whole ₹1,80,000 is not included, because a third of the capital is the spouse's own; ₹60,000 is the part attributable to that own capital, which stays taxable in the spouse's hands.

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