Tax Planning and Business Restructuring: formula sheet

Key formulas

Amalgamation: eligible cases

Loss and unabsorbed depreciation of amalgamating company are deemed to be those of the amalgamated company for the tax year of amalgamation

Applies to: industrial undertaking, ship or hotel company; banking company with a specified bank; public sector companies; erstwhile public sector company in strategic disinvestment cases (section 116(1)).

Conditions on the amalgamating company

Business in which the loss arose for 3 or more years; at least ¾ of the book value of fixed assets held 2 years preceding the date of amalgamation still held continuously as on the date of amalgamation

Both tests must be met (section 116(4)(a)).

Conditions on the amalgamated company

Hold at least ¾ of book value of fixed assets acquired, and continue the business, for a minimum of 5 years from the date of amalgamation; fulfil other prescribed conditions

Section 116(4)(b). The prescribed conditions aim at business revival or a genuine business purpose.

Consequence of breach

Loss or depreciation set off earlier = income of the amalgamated company in the year of non-compliance

Section 116(5). Planning point: breach reverses the benefit already taken.

Demerger: directly relatable losses

Loss and unabsorbed depreciation directly relatable to transferred undertakings go to the resulting company

Section 116(6)(a).

Demerger: non-relatable losses

Demerged company's share : resulting company's share = assets retained by the demerged company : assets of undertakings transferred to the resulting company

Section 116(6)(b). The demerged company's share follows the assets it retained and the resulting company's share follows the assets transferred. Each company then carries forward its share.

Time limit on carry forward

Loss carried forward for not more than 8 tax years immediately succeeding the tax year in which it was first computed for the original predecessor entity

Section 116(12), for amalgamations and reorganisations effected on or after 1 April 2025.

Accumulated loss

Business loss (excluding speculation loss) that would have been eligible for carry forward and set off to the predecessor under section 112 had the amalgamation or demerger not occurred

Section 116(13)(a). Unabsorbed depreciation is defined in the same way in 116(13)(e).

Amalgamation or demerger expenses

Annual deduction = Expenditure × 1/5, for five tax years

Only for an Indian company, expenditure wholly and exclusively for amalgamation or demerger of an undertaking. Starts in the tax year of the amalgamation or demerger.

VRS payment

Annual deduction = Amount paid × 1/5, for five tax years

Amount paid to an employee under a voluntary retirement scheme. Starts in the tax year of payment.

Spectrum fee or licence fee

Annual deduction = Fee ÷ number of years from the initial tax year to the year the spectrum or licence expires

Initial year is the later of the start of the telecom business and actual payment. Capital expenditure actually paid.

No double deduction

Section 52 items (amalgamation, demerger, VRS) get no deduction under any other provision

Spectrum and licence fee get no depreciation under section 33(1) to (10) once deduction under section 52 is claimed.

Reorganisation during the VRS period

Predecessor: no deduction in the year of reorganisation. Successor: continues the remaining instalments

Applies to a specified business reorganisation such as amalgamation or demerger.

Special reserve limits (section 32(e))

Transfer ≤ 20% of profits from eligible business; cumulative reserve ≤ 2 × (paid-up share capital + general reserves)

For specified entities such as banking companies and housing finance companies. No deduction on the excess.

Capital gain on slump sale

Capital gain = Full value of consideration − Net worth

Full value of consideration is deemed to be the FMV of the capital assets on the date of transfer, calculated in the prescribed manner (section 77(3)(b)). Net worth is deemed to be both cost of acquisition and cost of improvement (section 77(3)(a)).

Net worth

Net worth = Aggregate value of total assets − Value of liabilities (as in books)

Revaluation changes in asset value are ignored (section 77(5)(a)).

Depreciable assets

Value = WDV of the block of assets under section 41(1)(c)

Use block WDV, not book value, for depreciable assets.

Self-generated goodwill

Value = nil

Applies to goodwill not acquired by purchase from a previous owner. Purchased goodwill is taken at book value as an 'other asset'.

Assets fully deducted under section 46

Value = nil

Applies where the entire expenditure has been or is allowable as a deduction under section 46.

Other assets

Value = book value

Includes current assets, land and investments at book value.

Nature of gain

Held 36 months or less → short-term; otherwise long-term

Holding period is of the undertaking or division, not of individual assets.

Core rule for amalgamation

Accumulated loss + unabsorbed depreciation of amalgamating company = deemed loss and depreciation of amalgamated company

Applies to the cases in section 116(1), for the tax year of amalgamation, if section 116(4) is met.

Amalgamating company tests

Business run ≥ 3 years AND, as on the date of amalgamation, ≥ 3/4 of the book value of fixed assets held 2 years before amalgamation is still held continuously

Section 116(4)(a). Both tests must be met. The base is the assets held two years earlier, tested at the date of amalgamation.

Amalgamated company tests

Hold ≥ 3/4 of book value of acquired fixed assets for 5 years; continue the business for 5 years; meet prescribed conditions

Section 116(4)(b). The period runs from the date of amalgamation.

Demerger loss allocation

Directly relatable loss goes to resulting company; other loss is apportioned in the ratio of assets retained to assets transferred

Section 116(6). Applies to accumulated loss and unabsorbed depreciation.

Carry-forward cap

Loss carried forward for not more than 8 tax years immediately succeeding the tax year for which it was first computed for the original predecessor

Section 116(12), for amalgamations and reorganisations on or after 1 April 2025. It applies only to loss forming part of the accumulated loss, not to unabsorbed depreciation. Always note the year the loss was first computed. Only the part of the loss still within the eight-year window can be set off.

Penalty for breach

Loss or depreciation already set off = income of successor in the year of non-compliance

Section 116(5), (9) and (11).

Post-tax cost of debt

Kd after tax = Interest rate × (1 − tax rate)

Use only when the interest is fully deductible and the company has taxable profit to set it against.

Tax saved by interest

Tax saving = Interest deductible × tax rate

Compare with the same plan funded by equity, where no deduction arises.

Return on equity

ROE = Profit after tax ÷ Equity capital

Shows why debt can raise ROE: the equity base shrinks while profit falls by less.

Bonus shares

Cost of bonus shares = nil; holding period starts from the date of allotment

No tax on receipt. The whole sale price becomes the gain when you sell them.

Investment fund (Schedule V, Sl. No. 1 and 2)

Fund: income other than business income not included. Unit holder: taxed on the proportion that is business income

Business income of the fund is taxed in the unit holder's hands, not the fund's.

Business trust (Schedule V, Sl. No. 3 and 5)

Trust: SPV interest and SPV dividend not included. Unit holder: distributed income exempt, except the proportion that is SPV interest or REIT rent from real estate assets owned directly

Clause (b) of Sl. No. 5 stands omitted by the Act No. 21 of 2026 with effect from 1-4-2026.

Tax planning

Legal means + genuine commercial purpose + consistent with the intention of the law

Uses incentives, deductions and choices the law gives. Acceptable.

Tax avoidance

Letter of law followed + purpose of law defeated (often no commercial substance)

Not a crime like evasion, but the benefit can be denied under GAAR.

Tax evasion

Illegal means: concealment, false entries, suppression of facts

Leads to penalty and prosecution.

GAAR trigger (section 178(1))

Arrangement by an assessee → may be declared an impermissible avoidance arrangement → tax consequence determined under the Chapter

Applies irrespective of anything else in the Act.

Step or part of arrangement (section 178(2))

GAAR can be applied to any step in, or part of, the arrangement

The whole arrangement need not be abusive.

Treaty relief for non-residents (section 159(8))

Residency certificate from foreign government + prescribed documents and information

Both conditions are needed to claim relief under the agreement.

Treaty vs Act (section 159(4) and (6))

Act applies only where more beneficial to assessee; Chapter XI applies even if not beneficial

Exception for Chapter XI is stated in section 159(6).

Quick revision

• Section 116 of the Income-tax Act, 2025 covers loss and unabsorbed depreciation in amalgamation, demerger and reorganisation.
• Sub-section (1): amalgamation of a company owning an industrial undertaking, ship or hotel is covered.
• A banking company merged with a specified bank, and public sector company amalgamations, are also covered.
• Amalgamating company must have run the business for three or more years.
• It must have held continuously three-fourths of the book value of fixed assets held two years before amalgamation.
• Amalgamated company must hold three-fourths of those assets for five years and continue the business for five years.
• Breach of conditions makes the set-off deemed income in the year of non-compliance.
• Demerger: directly relatable losses go with the undertaking; others are apportioned by assets retained and transferred.
• For amalgamations or reorganisations on or after 1 April 2025, such losses carry forward for not more than eight tax years from the year the loss was first computed for the original predecessor entity.
• Accumulated loss excludes speculation business loss.
• Tax planning is lawful and uses the law as intended; avoidance exploits gaps; evasion is illegal concealment.

Common mistakes

• Assuming every amalgamation carries forward losses. Fix: First confirm the case is one of the four listed categories before testing conditions.
• Applying the 5-year holding test to the amalgamating company. Fix: Amalgamating company: 3 years of business, and at least ¾ of the book value of fixed assets held two years preceding the date of amalgamation still held continuously on that date. Amalgamated company: 5 years of holding and continuing business.
• Claiming the whole amalgamation expense in the year it was incurred. Fix: Remember that section 52 allows only equal instalments over five tax years, and bars other deductions for it.
• Starting the five years from the tax year after the payment. Fix: The initial year is the tax year of the amalgamation or demerger, or of the VRS payment. The first instalment is in that year.
• Using the book value of depreciable assets in net worth. Fix: Use the written down value of the block of assets under section 41(1)(c) for depreciable assets.
• Including self-generated goodwill at its book value. Fix: Self-generated goodwill not acquired by purchase from a previous owner is nil. Purchased goodwill is not covered by this nil rule.
• Assuming every amalgamation carries forward losses. Fix: Check section 116(1) first. Only the listed cases qualify, such as a company owning an industrial undertaking, ship or hotel.
• Testing only the amalgamated company. Fix: Test both sides. The amalgamating company needs three years of business and the asset-holding condition as well.
• Treating dividend as a deductible expense for the company. Fix: Remember that interest is a cost of borrowing, while dividend is a distribution of profit after tax. Only interest is deducted.
• Saying that more debt is always better. Fix: Add the limits: default risk, covenants, a limit on interest paid to foreign associated enterprises, and the need for taxable profit to claim the deduction.

Exam tips

• Write the section 116 provision first, then apply the facts, then conclude. Examiners reward this order in case-based answers.
• Always list the conditions for the amalgamating and the amalgamated company separately. Mixing them costs marks.
• In demerger questions, show the split of relatable and non-relatable loss in a small working before the ratio.
• Mention the 8-year limit and the consequence of breach in any loss question on a post-April 2025 scheme.
• End with a practical compliance point, such as tracking asset holding for 5 years after the scheme.
• Quote section 52(1) and the five-year rule for amalgamation, demerger and VRS. Name the Indian company condition.
• Keep section 32 and section 52 apart in your answer. Name the right section for each item.
• For reorganisation questions, always cover section 52(6): predecessor loses the year of reorganisation and the successor continues.