Use the opening investment ratio after establishing the transfer
For tax year 2026–27, qualifying assets transferred to a spouse or son’s wife and invested in business are subject to the formula in section 99(2) of the Income-tax Act, 2025. The attributed amount is A = B × C ÷ D. C and D are measured on the first day of the tax year. A closing balance or a monthly weighted average is not the formula stated in this subsection. First establish that the underlying transfer falls within section 99(1)(a)(ii) or (b); a family relationship alone does not determine the amount.
The Finance Act, 2026 correction matters
The enacted Act as amended by Finance Act, 2026 expressly changes the cross-reference in section 99(2) from section 99(1)(a)(i) to section 99(1)(a)(ii), effective 1 April 2026. The latter addresses income from transferred assets. Spouse remuneration from a concern in which the individual has substantial interest remains a separate test under section 99(1)(a)(i). Reusing the original unamended cross-reference can therefore send the working to the wrong income stream.
Define all four inputs before calculating
B is the income and interest, or both, arising from the business or firm during the tax year. C is the value of qualifying transferred assets invested in the business or contributed as capital on the first day of that year. D is the recipient’s total corresponding investment or capital contribution on that date. A is the income to include in the transferor’s computation. Keep separate businesses and identifiable transfers traceable; do not combine an unrelated bank deposit with the capital denominator merely to dilute the ratio.
Section 99(1)(a)(ii) covers direct or indirect spouse transfers otherwise than for adequate consideration, with the statutory living-apart exception and the section 25(a) qualification. Clause (b) addresses corresponding transfers to a son’s wife on or after 1 June 1973. The illustrations assume these conditions, an established relationship at the relevant times and a continuing identifiable investment. They calculate attribution, not the final tax, surcharge or cess. For a firm, determine taxable interest or other relevant income under the applicable provisions before applying this formula; do not automatically treat an exempt profit share as taxable interest.
Prepare a source-to-capital reconciliation
Link the transferor’s bank debit, recipient’s receipt, business introduction and opening ledger. Record independent funds separately. If the opening denominator is zero, do not divide by zero or invent a deemed ratio. A transfer introduced only later in the year calls for analysis of the general direct or indirect income rule and timing facts; a zero opening numerator is not a safe blanket exemption for all later income. Section 99(5)(d) also says income includes loss, so adverse results need attribution and the normal loss provisions, rather than being discarded.
Frequent mistakes
Common errors are applying the ratio to sales instead of computed income, substituting closing capital, including the transfer itself as business profit, counting the same income in both returns, and using the higher-income-spouse rule for every gifted-asset case. That higher-income rule in section 99(5)(a) is expressly tied to the remuneration provision. Asset-transfer attribution follows the relevant transferor. A gift’s own tax treatment and taxation of income subsequently earned from that gift are separate questions.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Mixed opening funds
On 1 April 2026, a spouse’s business investment is ₹10,00,000, including ₹4,00,000 traceable to a qualifying gift. Computed annual business income is ₹3,00,000. A = ₹3,00,000 × ₹4,00,000 ÷ ₹10,00,000 = ₹1,20,000. The remaining ₹1,80,000 is outside this attribution working; it is not an additional exemption.
Illustrative example 2: Son’s wife and independent funds
Opening investment is ₹15,00,000, comprising ₹6,00,000 from a qualifying post-1973 transfer and ₹9,00,000 of independent funds. B is ₹4,50,000. The ratio is 40%, giving ₹1,80,000 attributable to the transferor and ₹2,70,000 remaining with the recipient before other provisions.
Illustrative example 3: Later capital withdrawal
Opening C is ₹2,00,000 and D is ₹8,00,000. Later withdrawals reduce closing total investment to ₹5,00,000. With B of ₹2,40,000, the stated opening ratio gives ₹60,000. Using the closing denominator would produce ₹96,000, an overstatement of ₹36,000 in this simplified continuing-investment case.
Illustrative example 4: Recipient adds independent capital during the year
Opening C is ₹3,00,000 and D is ₹6,00,000. The recipient introduces another ₹4,00,000 from independent savings later. Assuming the same qualifying business and no other tracing issue, B of ₹2,00,000 gives A of ₹1,00,000 using the opening 50% ratio. Substituting closing D of ₹10,00,000 would incorrectly reduce this formula result to ₹60,000.
Illustrative example 5: Interest on firm capital
A spouse’s opening firm capital is ₹12,00,000, with ₹3,00,000 traceable to qualifying transferred assets. Assume the relevant taxable interest B, after its own statutory analysis, is ₹1,20,000 and no other income enters this model. The attributed interest is ₹30,000 and the balance is ₹90,000. This does not decide treatment of remuneration or an exempt profit share.
Illustrative example 6: Business loss
Qualifying transferred investment C is ₹5,00,000 out of total opening D of ₹10,00,000. B is a computed loss of ₹1,60,000. The 50% formula produces a loss attribution of ₹80,000, leaving ₹80,000 outside that attribution. Section 99’s inclusion of loss does not itself override the separate conditions for setting off or carrying forward that loss.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the tax year | Use the 2025 Act as amended for the year beginning 1 April 2026. |
| 2 | Identify the statutory relationship | Document spouse or son’s-wife facts and relevant transfer dates. |
| 3 | Establish the qualifying transfer | Keep consideration, living-apart and indirect-transfer evidence. |
| 4 | Use the corrected cross-reference | Mark section 99(1)(a)(ii), not the original remuneration reference. |
| 5 | Trace transferred assets | Match bank movements to the business or firm capital account. |
| 6 | Fix opening C | Retain the first-day value of qualifying assets invested. |
| 7 | Fix opening D | Reconcile total corresponding investment on the same date. |
| 8 | Compute B separately | Use statutory income and interest computations, not turnover. |
| 9 | Reconcile both taxpayers | Avoid double inclusion and keep separate remuneration analysis. |
| 10 | Review losses and disclosures | Apply loss rules and preserve a reproducible attribution schedule. |
Sixteen practitioner FAQs
1. Does a spouse’s every business receipt get clubbed?
No. Establish the qualifying asset transfer and apply the appropriate provision to income arising from it.
2. Which 2026 amendment affects this formula?
Finance Act, 2026 corrects the subsection’s spouse-transfer cross-reference to section 99(1)(a)(ii), effective 1 April 2026.
3. Is turnover the value of B?
No. B refers to income and interest, or both, from the business or firm, not its gross sales.
4. When are C and D measured?
On the first day of the tax year, as expressly specified in section 99(2).
5. Can closing capital replace opening capital?
No. A closing balance may support reconciliation but is not the specified formula input.
6. Can the spouse’s independent savings enter D?
Yes, where they genuinely form part of the corresponding total opening investment or capital contribution.
7. Does the spouse’s salary use this ratio?
Not merely because it is salary. Section 99(1)(a)(i) has a separate substantial-interest and professional-knowledge framework.
8. Is the higher-income spouse always assessed?
That rule is expressly attached to the remuneration clause. Do not transplant it to all transferred-asset income.
9. Are son’s-wife transfers included?
Clause (b) covers the specified direct or indirect transfers on or after 1 June 1973, otherwise than for adequate consideration.
10. What if full consideration was paid?
Test the transaction against the underlying transfer provision before using a gifted-assets ratio.
11. Does an indirect transfer escape?
No. The relevant clauses expressly extend to direct and indirect transfers; keep the complete funding chain.
12. What if opening investment is zero?
The formula cannot be mechanically divided by zero. Analyse timing and the underlying income rule from the actual facts.
13. Is a later gift automatically outside clubbing?
No. A later introduction requires its own direct or indirect income analysis; a zero opening entry alone is not a universal exclusion.
14. Are losses relevant?
Yes. Section 99(5)(d) includes loss within income, subject to the separate loss-utilisation provisions.
15. Does this calculation give the tax payable?
No. It determines attribution. Income heads, deductions, regime, rates and other taxpayer facts still affect final tax.
16. Should the same amount remain in both computations?
Reconcile the attribution so the schedule does not count the same income twice. Retain evidence supporting each taxpayer’s treatment.
Conclusion
Section 99(2) attributes business income using the transferred-assets share of opening investment. Trace the gift, use the enacted 2026 cross-reference and separate remuneration from asset income.