Taxation · Basic Concepts

Carry Forward of Losses in Amalgamation or Demerger (Section 116)

Updated 5 October 2026 · Fact-checked

Under section 116, an amalgamating company's accumulated business loss and unabsorbed depreciation pass to the amalgamated company only if prescribed conditions are met. In a demerger, the loss directly relatable to the transferred undertaking goes to the resulting company; loss not directly relatable is shared by asset ratio. Check conditions, then split the loss, then apply normal carry-forward limits.

Understand Carry Forward of Losses in Amalgamation or Demerger

Normally, a loss belongs to the company that suffered it. If that company disappears in an amalgamation, its losses would lapse. Section 116 of the Income-tax Act, 2025 is a relief provision. It lets the successor company use the accumulated loss and unabsorbed depreciation of the predecessor, but only when the rules are met.

Accumulated loss means the business loss (profits and gains of business or profession) that the predecessor could have carried forward had there been no amalgamation or demerger. Unabsorbed depreciation is depreciation that could not be set off against income and is being carried forward. The section does not cover capital losses, house property losses or speculation losses. These lapse with the predecessor.

For amalgamation, the conditions on this page apply to the amalgamation of a company owning an industrial undertaking, a ship or a hotel, with another company. The amalgamation of a public sector company engaged in the business of operation of aircraft with another public sector company is a separate case. It applies only to public sector companies, not to private aircraft operators. A banking company amalgamating with a specified bank is also a separate case. Each of these has its own rule and its own conditions. This page does not cover those rules, so do not apply the tests below to them unless the question tells you to. First, the transaction must be an amalgamation as the Act defines it. One part of that definition is that the amalgamated company is an Indian company. This is part of the definition, not a separate condition for carrying forward the loss under section 116. Two sets of loss conditions then apply. The amalgamating company must have been engaged in the business in which the loss arose for at least 3 years. It must also have held at least three-fourths of the book value of its fixed assets, continuously for 2 years before the amalgamation. After the amalgamation, the amalgamated company must hold at least three-fourths of the book value of the fixed assets it acquired, for 5 years from the effective date. It must also continue the business of the amalgamating company for 5 years and meet any other prescribed conditions for revival or continued operation of the undertaking.

If the conditions are met, the loss and depreciation are treated as the amalgamated company's own loss and depreciation of the tax year in which the amalgamation takes place. Because they are deemed to be the loss and depreciation of that year, they are carried forward and set off from the following tax year onwards. They are not set off against the amalgamated company's own income of the year of amalgamation. After that, normal carry-forward rules apply. Business loss can be carried forward for 8 tax years after the year of amalgamation, so the 8 years are counted from the tax year in which the loss is deemed to be the amalgamated company's loss. Unabsorbed depreciation has no time limit. If the amalgamated company later breaks a condition, the loss or depreciation already set off is treated as its business income of the tax year in which the failure happens.

For demerger, the loss moves to the resulting company, provided the transaction qualifies as a demerger under the Act. This means the resulting company must be an Indian company and must issue its shares to the shareholders of the demerged company in proportion to their holding, along with the other conditions in the Act's definition. The loss and depreciation directly relatable to the transferred undertaking go to the resulting company in full. Loss and depreciation that are not directly relatable to the transferred undertaking are split in the ratio of the assets of the transferred undertaking to the total assets of the demerged company immediately before the demerger. The asset ratio is never applied to the directly relatable amount. The demerged company's own carry-forward is reduced by the amount that moves. The resulting company then carries forward and sets off what it receives under the normal rules for the balance of the period allowed.

Key rules to remember

Amalgamation: conditions on the amalgamating company: Business running ≥ 3 years AND ≥ 3/4 of book value of fixed assets held continuously for 2 years before amalgamation; Both must be met. These conditions apply where the amalgamating company owns an industrial undertaking, a ship or a hotel. The aircraft case (a public sector company operating aircraft amalgamating with another public sector company only) and a banking company amalgamating with a specified bank have their own separate rules, not covered here.
Amalgamation: conditions on the amalgamated company: Hold ≥ 3/4 of book value of fixed assets acquired for 5 years AND continue the business for 5 years AND meet other prescribed conditions; The 5 years run from the effective date of amalgamation. That the amalgamated company is an Indian company is part of the definition of amalgamation, not a separate loss condition.
Effect of satisfying the conditions: Loss and unabsorbed depreciation of amalgamating company = loss and depreciation of amalgamated company for the tax year of amalgamation; Both the loss and the depreciation are deemed to be those of the year of amalgamation. They are carried forward and set off from the next tax year, not against income of the year of amalgamation. From the next year, the normal carry-forward rules apply and set-off is against income of that year in the permitted order. The 8-year period for business loss runs from the tax year of amalgamation. Unabsorbed depreciation has no time limit.
Consequence of breaching a condition: Loss or depreciation already set off = business income of amalgamated company in the tax year of failure; Set-off already made is reversed by adding it to income in the year of default.
Demerger: directly relatable loss: Loss and depreciation directly relatable to transferred undertaking → resulting company (100%); The demerger must satisfy the Act's definition of demerger, including proportionate issue of shares by the resulting company to the demerged company's shareholders.
Demerger: loss not directly relatable: Share to resulting company = Loss not directly relatable × (Assets of transferred undertaking ÷ Total assets of demerged company, immediately before demerger); Apply the same ratio to unabsorbed depreciation not directly relatable. The demerged company keeps the rest. Never apply the ratio to the directly relatable amount.
Demerger: carry forward in the resulting company: Amount received by resulting company is carried forward and set off under the normal rules for the balance of the period allowed; The demerged company's carry-forward is reduced by the amount that moves.

How to solve Carry Forward of Losses in Amalgamation or Demerger questions

Use this order for any question on losses in amalgamation or demerger. Decide first whether it is an amalgamation or a demerger, because the tests are different.

1Identify the event: amalgamation or demerger. Check that the transaction qualifies as one under the Act. The Indian-company requirement (amalgamated company in an amalgamation, resulting company in a demerger) is part of that definition. For demerger, also check the proportionate issue of shares by the resulting company to the demerged company's shareholders, with the other conditions in the definition.
2For amalgamation, test the amalgamating company: does it own an industrial undertaking, ship or hotel (the aircraft case, which covers only a public sector company operating aircraft amalgamating with another public sector company, and the case of a banking company amalgamating with a specified bank each have their own separate rules), has it run the business for 3 years or more, and did it hold three-fourths of fixed assets (book value) for 2 years before the amalgamation?
3For amalgamation, test the amalgamated company: three-fourths of acquired fixed assets held for 5 years, business continued for 5 years, other conditions met. If any test fails, say the loss is not available, and if a later breach is stated, add the set-off back to business income of the year of failure.
4For demerger, list the loss and depreciation directly relatable to the transferred undertaking. These go entirely to the resulting company.
5For the rest, which is not directly relatable, compute the ratio: assets of the transferred undertaking ÷ total assets of the demerged company immediately before demerger. Apply it only to the non-relatable loss and depreciation.
6Reduce the demerged company's carry-forward by the amount moved, and show what it keeps.
7Apply the normal rules in the successor's hands. In amalgamation, the loss and depreciation are both deemed to be those of the year of amalgamation, so they are carried forward and set off from the next tax year under the normal carry-forward rules, against income of that year in the permitted order; business loss is carried for 8 tax years after the year of amalgamation; unabsorbed depreciation indefinitely. In demerger, the resulting company carries forward what it receives under the normal rules for the balance of the period allowed.
8State the conclusion in a line: the amount allowed, the company that gets it and the time limit.

Quickest way: Condition checklist and ratio shortcut

When to use it: Use for MCQs and for the opening of a written answer. Both test whether you know which conditions apply and how the demerger loss is split.

MCQ: if the question mentions 3 years, 2 years, 5 years or three-fourths, it is about amalgamation. Match each number: 3 years of business, 2 years of holding before, 5 years of holding and business after, three-fourths of fixed assets.
MCQ: if the question gives a direct versus non-direct loss, it is demerger. Relatable loss goes in full. Only the balance is split by asset ratio.
MCQ elimination: reject any option that says capital loss or house property loss moves, that says the 8 years of business loss are counted from the original loss year of the amalgamating company, or that says unabsorbed depreciation lapses after 8 years.
Written format: heading, provision, facts, conclusion. Write (1) the rule, (2) each condition ticked or failed with the figure, (3) the amount allowed, (4) the effect of any breach.
For demerger sums, show the ratio on its own line, then the split in a small list (loss, depreciation, amount to resulting company, balance with demerged company). Step marks sit on the ratio and the split.

Common mistakes in Carry Forward of Losses in Amalgamation or Demerger

Counting the 8 years of business loss from the original loss year of the amalgamating company.
Students assume the loss keeps its old clock when it moves to the amalgamated company.
Fix: The loss is deemed to be the amalgamated company's loss of the tax year in which the amalgamation takes place. The 8-year period is counted from that year of amalgamation.
Allowing capital loss or house property loss of the amalgamating company.
The word 'loss' is read broadly.
Fix: Section 116 covers only accumulated business loss and unabsorbed depreciation. Other losses lapse.
Mixing up the amalgamating and amalgamated company conditions.
There are many numbers (3, 2, 5 and three-fourths) and they look alike.
Fix: Before the event, the amalgamating company's history is tested (3 years of business, 2 years of holding). After the event, the amalgamated company's conduct is tested (5 years of holding and business).
Applying the amalgamation 3-year and 5-year tests to a demerger.
Students treat both events with one checklist.
Fix: For demerger, the test is that the transaction qualifies as a demerger, then the relatable and asset-ratio split. Do not add the amalgamation holding tests.
Applying the asset ratio to all the loss in a demerger.
Students remember the ratio and forget that directly relatable loss goes in full.
Fix: First take out the directly relatable amount and give it entirely to the resulting company. Apply the ratio only to the balance.
Ignoring the reversal when the amalgamated company breaks a condition.
Students stop once the loss is set off.
Fix: If a condition is breached later, the loss or depreciation already set off is treated as business income of the tax year in which the failure occurs. Say so in the answer.

Worked examples

Example 1

A Ltd, a manufacturing company, amalgamates with B Ltd (an Indian company) during tax year 2026-27. A Ltd has been in business for 6 years and held all its fixed assets continuously for the 2 years before amalgamation. A Ltd has a brought forward business loss of ₹40,00,000 and unabsorbed depreciation of ₹15,00,000. B Ltd undertakes to meet all post-amalgamation conditions. B Ltd's business income for tax year 2027-28 before these items is ₹70,00,000. Compute B Ltd's business income for 2027-28 after set-off and state until when the loss can be carried forward.

Show the solution

Test A Ltd: it is an industrial undertaking (manufacturing), has run the business for 6 years (≥ 3), and held fixed assets for 2 years before amalgamation. Conditions met.
Test B Ltd: it is an Indian company, so the transaction meets that part of the definition of amalgamation. B Ltd will hold three-fourths of acquired fixed assets for 5 years and continue the business for 5 years. Relief is available.
The loss of ₹40,00,000 and depreciation of ₹15,00,000 are treated as B Ltd's loss and depreciation of tax year 2026-27, the year of amalgamation. They are carried forward and set off from tax year 2027-28. B Ltd's own income of 2026-27 is not available for this set-off.
In 2027-28, the carried forward unabsorbed depreciation and business loss are set off against B Ltd's business income under the normal carry-forward rules, in the permitted order. Total set-off = ₹15,00,000 + ₹40,00,000 = ₹55,00,000. This is less than ₹70,00,000, so all of it is absorbed.
Business income for 2027-28 after set-off = ₹70,00,000 − ₹55,00,000 = ₹15,00,000.
Time limit: the 8 years run after the year of amalgamation, so business loss can be carried forward and set off in tax years 2027-28 to 2034-35. Here it is fully absorbed in 2027-28, so nothing is left to carry forward.

Answer: B Ltd's business income for 2027-28 after set-off is ₹15,00,000, after setting off the unabsorbed depreciation of ₹15,00,000 and the business loss of ₹40,00,000 (total ₹55,00,000). Had any business loss remained, it could be carried forward up to tax year 2034-35, and unabsorbed depreciation would have no time limit. If B Ltd later breaches a condition, ₹55,00,000 would be added to its business income of the year of failure.

Example 2

X Ltd demerges its Unit P into Y Ltd (the resulting company) and the transaction qualifies as a demerger. Just before the demerger, X Ltd has an accumulated business loss of ₹60,00,000, of which ₹20,00,000 is directly relatable to Unit P, and unabsorbed depreciation of ₹10,00,000, none directly relatable to Unit P. Assets of Unit P are ₹3,00,00,000 and total assets of X Ltd are ₹12,00,00,000. Find the loss and depreciation that pass to Y Ltd and the balance with X Ltd.

Show the solution

Directly relatable loss = ₹20,00,000. It goes entirely to Y Ltd.
Loss not directly relatable = ₹60,00,000 − ₹20,00,000 = ₹40,00,000.
Ratio = ₹3,00,00,000 ÷ ₹12,00,00,000 = 1/4.
Share of non-relatable loss to Y Ltd = ₹40,00,000 × 1/4 = ₹10,00,000.
Total loss to Y Ltd = ₹20,00,000 + ₹10,00,000 = ₹30,00,000. Balance loss with X Ltd = ₹60,00,000 − ₹30,00,000 = ₹30,00,000.
Unabsorbed depreciation to Y Ltd = ₹10,00,000 × 1/4 = ₹2,50,000. Balance with X Ltd = ₹10,00,000 − ₹2,50,000 = ₹7,50,000.

Answer: Y Ltd gets accumulated loss of ₹30,00,000 and unabsorbed depreciation of ₹2,50,000. X Ltd keeps loss of ₹30,00,000 and unabsorbed depreciation of ₹7,50,000. Y Ltd carries these forward and sets them off under the normal rules for the balance of the period allowed.

Exam tips

Write the section name in your answer as section 116 of the Income-tax Act, 2025, and use the term 'tax year', never 'assessment year' or the old section number.
In amalgamation questions, set out the conditions as a short checklist and tick each against the facts given. A missing fact often means the question wants you to say the condition is met or not met.
In demerger sums, always separate directly relatable and non-relatable amounts before applying the ratio. Show the ratio as a fraction.
Watch the wording about which losses move. If the question mentions capital loss or speculation loss of the predecessor, say it does not pass under this section.
MCQs often test the number: 3 years, 2 years, 5 years, three-fourths. Memorise who each number applies to.

Practice questions from Basic Concepts

Carry Forward of Losses in Amalgamation or Demerger in other exams

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

Carry Forward of Losses in Amalgamation or Demerger: frequently asked questions

Which losses can be carried forward by the successor company under section 116?

Only the accumulated business loss and unabsorbed depreciation of the predecessor company. Capital losses, house property losses and speculation losses do not pass under this section. In the hands of the successor, they are subject to the normal carry-forward rules.

What happens if the amalgamated company does not meet the 5-year conditions?

The loss or depreciation already set off in earlier years is treated as business income of the amalgamated company for the tax year in which the failure occurs. It is taxed in that year. This reversal is why you must continue the business and hold the assets for the full period.

Does unabsorbed depreciation lapse after 8 years in amalgamation?

No. Unabsorbed depreciation has no time limit for carry forward. Only the business loss has an 8-year limit, counted from the tax year of amalgamation, in which the loss is deemed to be the amalgamated company's loss.

How is loss divided in a demerger?

Loss and depreciation directly relatable to the transferred undertaking go to the resulting company in full. The rest is divided in the ratio of the assets of the transferred undertaking to the total assets of the demerged company immediately before the demerger. The demerged company keeps the balance.