The victim Jainam Shah was son of local businessman Trilok Shah and grandson of former Kankrej MLA late Shantilal Shah.
Trilok, a class VII student, was allegedly kidnapped by the accused on early Tuesday morning when he was on his way to attend his tuition class, police said.
"At around 6:45 AM (on Tuesday), the kidnappers called up Trilok and claimed that his son has been kidnapped and demanded Rs 50 lakh," said Shihori division Circle Police Inspector, S D Patel.
Police said the duo, who had lost nearly Rs 6 lakh in gambling, disclosed during interrogation they had already murdered Jainam and dumped his body into a nearby Narmada canal.
"We searched the canal last night and fished out Jainam's body," said Patel.
Police said the duo decided to get rid of Jainam as he had identified Prajapati because the latter is also a resident of Thara town.
"Prajapati feared that Jaimin may spill the beans after he is released. Out of fear, the duo killed him and threw his body into canal," Patel said, adding Jainam's body is sent for post mortem.
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