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The taxation of contingent consideration (earn-outs) remains legally unsettled under the Income-tax Act, 2025. Indian courts maintain that contingent amounts do not accrue in the transfer year because no enforceable right yet exists. Drawing from the UK's Marren v. Inglis ruling, this contingent right could be treated as a separate capital asset taxed upfront at fair market value, with subsequent gains taxed upon crystallization. Alternatively, taxpayers may argue it is a non-taxable capital receipt if the acquisition cost is indeterminable, despite recent legislative amendments. Additionally, earn-outs tied to continued employment risk being recharacterized and taxed as salary. Legislative clarity is ultimately required to resolve these ambiguities.
In the first part of this article1, the discussion focused on consideration placed in escrow and the difficulties that arise under the Income-tax Act, 2025 (IT Act) where a portion of the sale consideration does not accrue to the seller in the year of transfer, but only becomes receivable later upon fulfillment of stipulated conditions. The present part turns to a related, but conceptually distinct, issue: contingent consideration.
Unlike escrow, which ordinarily involves a retained portion of an already agreed consideration being held back as a risk-allocation mechanism, contingen
