Direct Tax Laws & International Taxation · Aggregation of Income, Set Off or Carry Forward of Losses

Losses in Amalgamation, Demerger and Change in Shareholding

Updated 5 October 2026 · Fact-checked

These rules decide whether a company's brought forward losses survive a change in ownership or a reorganisation. In a closely held company, business loss lapses unless 51% voting shares stay with the same persons. In amalgamation or demerger, losses pass to the successor only if prescribed conditions are met. Test the entity, the conditions, then compute.

Understand Losses in Amalgamation, Demerger and Change in Shareholding

A company's brought forward loss is a tax asset. Without a safeguard, a profitable company could buy a loss-making shell, or merge with one, only to wipe out its own tax. The Income-tax Act, 2025 therefore puts conditions on carrying forward losses when ownership or structure changes. The rules continue the earlier law in substance.

Change in shareholding. This applies to a company in which the public are not substantially interested (a closely held company). Its brought forward business loss cannot be set off in a tax year unless, on the last day of the year in which the loss was incurred and on the last day of the year of set-off, shares carrying at least 51% of voting power are beneficially held by the same persons. This test is about the same persons holding the shares, not about the company's name or management. The restriction covers business loss. It does not stop set off of unabsorbed depreciation.

There are exceptions. The test is not breached where the change is due to the death of a shareholder or a gift to a relative. It is also not breached for certain indirect changes from the amalgamation or demerger of a foreign company, if the shareholders of the foreign company continue as shareholders of the new foreign company. A resolution plan approved under the Insolvency and Bankruptcy Code, 2016 is also treated specially, after the tax authority has been given a reasonable opportunity. Special relief also exists for eligible start-ups, subject to their own conditions.

Amalgamation. Normally, a company's loss belongs to it alone. In a qualifying amalgamation, the accumulated business loss and unabsorbed depreciation of the amalgamating company are deemed to be those of the amalgamated company for the tax year in which the amalgamation takes place. This is allowed only for an amalgamation that meets the tax-law definition. It is also allowed only in specific cases: where the amalgamating company owns an industrial undertaking, a ship or a hotel; where a banking company is amalgamated with a specified bank; and in specified public sector cases.

The 3-year business condition and the 3/4 asset condition on the amalgamating company, and the 5-year conditions on the amalgamated company, apply to the industrial undertaking, ship or hotel case. The amalgamation of a banking company with a specified bank is governed by its own provisions, so do not apply those conditions to it automatically. In the industrial undertaking, ship or hotel case, breach of the conditions brings a claw-back.

Demerger. On a qualifying demerger, the loss and unabsorbed depreciation of the demerged company that are directly relatable to the undertaking transferred go to the resulting company. Where they are not directly relatable, they are split in the ratio of the assets of the transferred undertakings to the total assets of the demerged company. The balance stays with the demerged company.

A related general rule: a person who succeeds to a business by inheritance cannot carry forward the predecessor's loss. Amalgamation and demerger are the main planned exceptions where losses move across entities.

Key rules to remember

Shareholding test for closely held company: Business loss carried forward is allowed only if shares with ≥ 51% voting power are held by the same persons on the last day of the loss year and on the last day of the set-off year; Applies to a company in which the public are not substantially interested. It restricts brought forward business loss, not unabsorbed depreciation. Compare person by person, and take the lower of each person's two holdings.
Amalgamation (industrial undertaking, ship or hotel case): conditions on amalgamating company: Business in which loss arose carried on for ≥ 3 years AND ≥ 3/4 of book value of fixed assets (as held 2 years before amalgamation) held continuously for the 2 years before amalgamation; Both conditions must be met, and the company must own an industrial undertaking, ship or hotel. The banking company amalgamation with a specified bank and the specified public sector cases are governed by their own provisions.
Amalgamation (industrial undertaking, ship or hotel case): conditions on amalgamated company: For 5 years from amalgamation: hold ≥ 3/4 of book value of fixed assets acquired AND continue the business of the amalgamating company; also meet prescribed revival conditions; If any condition fails, the set off allowed earlier in the amalgamated company is treated as its income of the year of failure, and the balance loss is not carried forward.
Effect of qualifying amalgamation: Loss and unabsorbed depreciation of amalgamating company = deemed loss and depreciation of amalgamated company for the tax year of amalgamation; The 8-year limit for business loss is counted from the original loss year. Unabsorbed depreciation carries forward without a time limit.
Demerger: directly relatable loss: Loss and unabsorbed depreciation directly relatable to the transferred undertaking → resulting company; The demerger must meet the tax-law definition of a demerger.
Demerger: not directly relatable loss: Share of resulting company = Loss × (Assets of undertakings transferred ÷ Total assets of demerged company); Use the same asset basis for both parts of the ratio. The balance stays with the demerged company.

How to solve Losses in Amalgamation, Demerger and Change in Shareholding questions

Use the same sequence for any question on this topic. It stops you from skipping a condition, which is where marks are lost.

1Identify the event: change in shareholding, amalgamation, demerger, or succession. Each has a different rule.
2For a shareholding change, check whether the company is closely held. If the public are substantially interested, the 51% test does not apply.
3Run the 51% test person by person. For each shareholder, take the lower of the holding on the last day of the loss year and on the last day of the set-off year. Add them up and compare with 51%. Then check the exceptions (death, gift to a relative, foreign amalgamation or demerger, resolution plan).
4For an amalgamation, confirm the amalgamation meets the tax-law definition and identify which case applies. If the amalgamating company has an industrial undertaking, ship or hotel, check that the 3-year and 3/4 asset conditions are met. If it is a banking company amalgamated with a specified bank, or a specified public sector case, apply the provisions governing that case.
5In the industrial undertaking, ship or hotel case, check the successor's conditions: 3/4 asset holding and continuing the business for 5 years, along with the prescribed revival conditions. If a breach is described, apply the claw-back.
6For a demerger, separate the directly relatable loss from the rest. Apportion the rest on the asset ratio.
7Compute the set off. Current-year depreciation is set off first. Unabsorbed depreciation of earlier years is treated as part of the current year's depreciation, so it is set off before the brought forward business loss, and it is not hit by the shareholding test. Business loss follows its 8-year limit from the original year.
8Write the answer in provision, facts, conclusion form, with the figures.

Quickest way: Three-gate check

When to use it: Use this in MCQs and in short written parts where you have under two minutes to decide whether a loss survives.

Gate 1: What is the loss type? Unabsorbed depreciation is not hit by the 51% test. Business loss is.
Gate 2: What is the event? Shareholding change means the 51% test. Amalgamation means first identify the case: for an industrial undertaking, ship or hotel, test 3 years and 3/4 assets; a banking company merger with a specified bank follows its own provisions. Demerger means directly relatable first, then the asset ratio.
Gate 3: Is there a post-event breach? In the industrial undertaking, ship or hotel case, check the 5-year hold of 3/4 assets and continuation of the business. If it fails, the earlier set off becomes income.
Then compute, applying the 8-year limit from the original loss year.

Common mistakes in Losses in Amalgamation, Demerger and Change in Shareholding

Applying the 51% shareholding test to unabsorbed depreciation as well
Students remember that losses lapse on change in shareholding and treat depreciation as a loss.
Fix: The restriction is on brought forward business loss. Unabsorbed depreciation can still be set off.
Comparing only the total shareholding of the new owners rather than the persons who held on both dates
The test is read as 'at least 51% held by someone' instead of 'held by the same persons'.
Fix: Take each person's lower holding across the two dates and add them. Only continuity counts.
Applying the 51% test to a company in which the public are substantially interested
Students forget that the rule is aimed at closely held companies.
Fix: Check the nature of the company first. If the public are substantially interested, the test does not apply.
Ignoring the 3-year and 3/4 asset conditions of the amalgamating company, or assuming any amalgamation qualifies
The post-amalgamation conditions are remembered, but the pre-amalgamation ones are not.
Fix: Identify the case first. For an industrial undertaking, ship or hotel, list the conditions on both companies. Do not apply those conditions mechanically to a banking company merged with a specified bank, which has its own provisions.
Restarting the 8-year clock from the year of amalgamation
The loss is deemed to be of the amalgamated company for the year of amalgamation, so students treat it as a fresh loss.
Fix: The period is counted from the original loss year. Unabsorbed depreciation has no limit.
Allocating all of the demerged company's loss to the resulting company, or splitting everything on the asset ratio
Students miss the two-tier rule.
Fix: First give the resulting company the directly relatable loss. Only the balance is apportioned on assets transferred to total assets.

Worked examples

Example 1

Alpha Pvt Ltd, a closely held company, incurred a business loss of ₹40,00,000 in tax year 2023-24. It also has unabsorbed depreciation of ₹10,00,000 brought forward. On the last day of 2023-24, A held 60% and B held 40% of its voting shares. In tax year 2026-27, A sold half of his shares to C, a stranger (A now holds 30%, C holds 30%), and B's 40% did not change. The business income of 2026-27 before any set off is ₹30,00,000. Assume there is no current-year depreciation. Can the loss be set off, and what carries forward?

Show the solution

Alpha is closely held, so the 51% test applies to its brought forward business loss.
Holdings on the last day of the loss year (2023-24): A 60%, B 40%. On the last day of the set-off year (2026-27): A 30%, B 40%, C 30%.
Persons holding on both dates: A holds a lower of 60% and 30% = 30%. B holds a lower of 40% and 40% = 40%. C was not a shareholder on the first date, so contributes 0%.
Total continuity = 30% + 40% = 70%. This is at least 51%, so the test is met and the business loss can be set off. The loss of ₹40,00,000 is also within its 8-year limit (2023-24 to 2031-32).
Order of set off: unabsorbed depreciation is treated as part of the current year's depreciation, so it is set off first. Income = ₹30,00,000 − ₹10,00,000 = ₹20,00,000.
Brought forward business loss is set off next. Income = ₹20,00,000 − ₹20,00,000 = ₹0. Business loss left = ₹40,00,000 − ₹20,00,000 = ₹20,00,000, which carries forward within its 8-year limit.
Unabsorbed depreciation is fully used up, so none of it remains.

Answer: The 51% test is met (70% continuity), so the business loss can be set off. Unabsorbed depreciation of ₹10,00,000 is set off first and ₹20,00,000 of business loss is set off next, leaving total income nil for 2026-27. ₹20,00,000 of business loss carries forward, and no unabsorbed depreciation remains. Had continuity been below 51%, the business loss could not have been set off, but the ₹10,00,000 depreciation would still have been set off, leaving ₹20,00,000 of income taxable and the entire ₹40,00,000 loss unused.

Example 2

Pavan Ltd, which owns a manufacturing industrial undertaking, amalgamates with Qube Ltd on 1 October 2026 in an amalgamation that meets the tax-law definition. Pavan has accumulated business loss of ₹60,00,000 (₹35,00,000 from 2022-23 and ₹25,00,000 from 2024-25) and unabsorbed depreciation of ₹20,00,000. Pavan has carried on its business for 5 years and has held 80% of the book value of its fixed assets continuously for the 2 years before amalgamation. Qube will continue the business and hold all the assets, and the prescribed revival conditions are assumed to be satisfied. Qube's income for tax year 2026-27, before set off, is ₹1,00,00,000 (₹1 crore). Compute Qube's total income. Also state what happens if Qube sells assets forming 40% of the book value of the acquired fixed assets in 2028.

Show the solution

Check eligibility of Pavan: it owns an industrial undertaking. It carried on the business for 5 years (≥ 3 years). It held 80% of fixed assets (≥ 3/4, which is 75%) for the 2 years before amalgamation. The conditions are met. The prescribed revival conditions on Qube are also required, and are assumed to be satisfied here.
Under a qualifying amalgamation, Pavan's loss of ₹60,00,000 and unabsorbed depreciation of ₹20,00,000 are deemed to be Qube's for tax year 2026-27. Total available = ₹80,00,000.
The 2022-23 loss runs to 2030-31 and the 2024-25 loss to 2032-33 (8 years from the original years). The depreciation has no time limit.
Qube's income before set off is ₹1,00,00,000. After setting off ₹60,00,000 of loss and ₹20,00,000 of depreciation, total income = ₹1,00,00,000 − ₹80,00,000 = ₹20,00,000.
Post-amalgamation condition: Qube must keep at least 3/4 (75%) of the book value of the acquired fixed assets for 5 years from 1 October 2026. Selling 40% leaves 60%, which is below 75%.
Result: the condition is breached in 2028. The set off allowed to Qube is treated as Qube's income of the year of the breach, and the loss that remained unabsorbed cannot be carried forward.

Answer: Qube's total income for tax year 2026-27 is ₹20,00,000 after absorbing Pavan's loss of ₹60,00,000 and unabsorbed depreciation of ₹20,00,000, assuming the prescribed revival conditions are satisfied. If Qube sells 40% of the acquired fixed assets in 2028, it falls below the 75% holding condition. The set off already allowed is then brought to tax as income of the year of breach, and no balance is carried forward.

Exam tips

Always state the type of loss first. A single sentence that business loss is restricted but unabsorbed depreciation is not earns marks in shareholding questions.
In shareholding questions, show the person-wise lower-holding table. Examiners mark the working, and it protects your marks if the final figure differs.
In amalgamation answers, list the conditions in two groups: on the amalgamating company and on the amalgamated company. Quote the 3 years, 3/4 and 5 years figures exactly.
In case-scenario MCQs, look for the trap: a public company, a death or gift, or a loss that is actually depreciation. These change the answer.
For demerger, show both tiers: directly relatable loss first, then the asset ratio on the balance. Present the ratio with its numbers.

Practice questions from Aggregation of Income, Set Off or Carry Forward of Losses

Losses in Amalgamation, Demerger and Change in Shareholding in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Losses in Amalgamation, Demerger and Change in Shareholding: frequently asked questions

Does the 51% shareholding test apply to every company?

No. It applies to a company in which the public are not substantially interested, that is, a closely held company. It restricts brought forward business loss. It does not apply to unabsorbed depreciation.

Can the loss of an amalgamating company be carried forward by the amalgamated company in every merger?

No. The amalgamation must meet the tax-law definition. The amalgamating company must hold an industrial undertaking, ship or hotel, or the case must be a banking company merged with a specified bank or a specified public sector case. The 3-year and 3/4 asset conditions apply to the industrial undertaking, ship or hotel case, while the bank and public sector cases follow their own provisions.

How is the loss divided in a demerger?

The loss and unabsorbed depreciation directly relatable to the transferred undertaking go to the resulting company. If they cannot be tied to an undertaking, they are split in the ratio of the assets of the transferred undertakings to the total assets of the demerged company.

Does the 8-year period restart after an amalgamation?

No. The loss is treated as the amalgamated company's for the year of amalgamation, but the 8-year limit for business loss is counted from the year in which it was originally incurred. Unabsorbed depreciation carries forward without a time limit.

What happens if the amalgamated company breaches the 5-year conditions?

In the industrial undertaking, ship or hotel case, the set off already allowed to the amalgamated company is treated as its income of the year in which the breach occurs. The unabsorbed balance cannot be carried forward.