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Option 1 states that both statements are individually true and that statement II is the correct explanation of statement I.
Statement I states that the annexation of Awadh by Lord Dalhousie in 1856 adversely affected the financial conditions of the sepoys. This implies that the sepoys faced negative consequences as a result of the annexation.
Statement II states that the sepoys had to pay higher taxes on the land where their family members stayed in Awadh. This explanation suggests a specific reason why the financial conditions of the sepoys were affected.
Based on this information, option 1 suggests that both statements are independently true and that statement II provides the correct explanation for why the sepoys` financial conditions were adversely affected.
In conclusion, option 1 is the correct answer as it accurately interprets and explains the relationship between the two statements.