Direct Tax Laws and International Taxation · Different Aspects of Tax Planning

Tax Planning for Amalgamation, Demerger and Business Restructuring

Updated 11 October 2026 · Fact-checked

Tax planning for restructuring means choosing a form (amalgamation, demerger, slump sale or itemised sale) that keeps tax cost low and preserves losses. Under section 116 of the Income-tax Act, 2025, accumulated loss and unabsorbed depreciation pass to the successor only if the stated conditions are met. Check the form, the conditions, then the loss position.

Understand Tax Planning for Amalgamation, Demerger and Business Restructuring

Restructuring means changing how a business is held: merging two companies, splitting one into two, selling an undertaking, or converting a firm into a company. Each route has a different tax result. Tax planning is choosing the route that meets the commercial goal at the lowest lawful tax cost.

The Act gives special relief to some routes. In a tax neutral reorganisation, the transfer of assets is not taxed as a sale, and the successor can take over the predecessor's tax attributes. The main attribute is the accumulated loss and unabsorbed depreciation. Section 116 deals with how these pass to the successor.

For amalgamation, section 116(1) applies only to listed cases: a company owning an industrial undertaking, a ship or a hotel amalgamating with another company; a banking company with a specified bank; public sector companies among themselves; and certain erstwhile public sector companies after strategic disinvestment. In these cases the loss and depreciation of the amalgamating company are deemed to be those of the amalgamated company for the tax year of amalgamation.

The relief has conditions in section 116(4). The amalgamating company must have run the business for three or more years and held at least three-fourths of the book value of its fixed assets from two years before the amalgamation. The amalgamated company must hold at least three-fourths of those assets and continue the business for five years, and meet any prescribed conditions. If a condition fails, the loss set off earlier is treated as income of the amalgamated company in the year of non-compliance (section 116(5)).

For demerger, section 116(6) splits the loss. Loss directly relatable to the transferred undertaking goes to the resulting company. Other loss is apportioned in the ratio of assets retained and transferred. Business reorganisations such as firm to company, proprietary concern to company, or company to LLP also carry losses under section 116(8) and (10), subject to their own conditions. A slump sale (whole undertaking for a lump sum) is a sale, not a tax neutral route, so you plan around gains and the price allocation instead.

Key rules to remember

Amalgamation loss transfer: Loss of amalgamating company = deemed loss of amalgamated company for the tax year of amalgamation; Applies only to the cases listed in section 116(1) and only if section 116(4) conditions are met.
Amalgamating company conditions: Business run ≥ 3 years; ≥ ¾ of book value of fixed assets held 2 years before amalgamation, held continuously till amalgamation; Both limbs must be satisfied. Section 116(4)(a).
Amalgamated company conditions: Hold ≥ ¾ of book value of assets acquired for ≥ 5 years; continue the business ≥ 5 years; meet prescribed conditions; Failure makes the set-off made earlier taxable in the year of default (section 116(5)).
Demerger loss: directly relatable: Loss/depreciation directly relatable to transferred undertaking → resulting company; Section 116(6)(a).
Demerger loss: not directly relatable: Apportion in the ratio of assets retained : assets transferred; Section 116(6)(b). The share goes to the demerged or resulting company accordingly.
Carry forward cap: Inherited loss carried forward for not more than 8 tax years after the year the loss was first computed for the original predecessor; Section 116(12), for amalgamations or reorganisations effected on or after 1 April 2025.

How to solve Tax Planning for Amalgamation, Demerger and Business Restructuring questions

Use this order for any case on restructuring and loss carry forward.

1Identify the route: amalgamation, demerger, slump sale, itemised sale, or conversion of firm, proprietorship or company.
2For amalgamation, check whether the case is one listed in section 116(1): industrial undertaking, ship or hotel; bank with specified bank; public sector companies.
3Test the amalgamating company conditions: three years in the business and three-fourths of fixed assets held over the two years before amalgamation.
4Test the amalgamated company conditions: three-fourths of assets and the business continued for five years, plus prescribed conditions.
5Work out the loss that passes. For a demerger, split directly relatable loss first and apportion the rest by asset ratio.
6Apply the eight-year limit from the year the loss was first computed, and exclude speculation loss from accumulated loss.
7State the consequence of any breach: earlier set-off becomes income in the year of default. End with a clear recommendation.

Quickest way: Three-gate check

When to use it: Use for MCQs and short case questions asking whether a loss carries forward.

Gate 1: is the case a listed type under section 116(1)?
Gate 2: are the three-year and three-fourths conditions met on both sides, with five-year continuity?
Gate 3: has the eight-year limit run out, and is the loss a business loss (not speculation)?
If any gate fails, the loss does not pass or lapses.

Common mistakes in Tax Planning for Amalgamation, Demerger and Business Restructuring

Assuming every amalgamation passes losses to the new company.
Students remember tax neutrality and forget that section 116(1) lists specific cases.
Fix: First check whether the amalgamation is one of the listed types. Then check section 116(4).
Mixing up the three-fourths and the time periods between the two companies.
Both companies have a three-fourths asset test.
Fix: Amalgamating company: three years in business, assets held for the two years before amalgamation. Amalgamated company: five years holding and business continuity.
Allocating all demerger loss by asset ratio.
The ratio is easy to remember.
Fix: Directly relatable loss goes to the resulting company first. Only the remainder is apportioned.
Carrying inherited loss forward for a fresh eight years from the date of amalgamation.
Students restart the clock.
Fix: Count the eight years from the year the loss was first computed for the original predecessor entity.
Treating slump sale as tax neutral.
It looks like a transfer of a whole business.
Fix: Slump sale is a sale for a lump sum. Loss transfer under section 116 does not apply to it.

Worked examples

Example 1

A Ltd, which owns an industrial undertaking, amalgamates with B Ltd. A Ltd has run the business for 5 years. Two years before amalgamation its fixed assets had a book value of ₹80,00,000. On the date of amalgamation it held assets of that set worth ₹56,00,000 (book value). Can A Ltd's accumulated loss pass to B Ltd?

Show the solution

The case is a company owning an industrial undertaking amalgamating with another company, so it is listed in section 116(1)(a).
Business period: 5 years, which is at least 3 years. Condition met.
Three-fourths of ₹80,00,000 = ₹60,00,000.
Assets held continuously: ₹56,00,000, which is less than ₹60,00,000.
The asset condition in section 116(4)(a)(ii) fails.

Answer: No. A Ltd held only ₹56,00,000 against the required ₹60,00,000, so its accumulated loss and unabsorbed depreciation do not pass to B Ltd.

Example 2

X Ltd is demerged. Its accumulated business loss is ₹30,00,000, of which ₹12,00,000 is directly relatable to the transferred undertaking. Assets of the transferred undertaking are ₹40,00,000 and assets retained are ₹60,00,000. How is the loss divided?

Show the solution

Directly relatable loss ₹12,00,000 goes to the resulting company (section 116(6)(a)).
Remaining loss = ₹30,00,000 − ₹12,00,000 = ₹18,00,000.
Ratio of assets transferred : retained = 40 : 60.
Resulting company share = ₹18,00,000 × 40 ÷ 100 = ₹7,20,000.
Demerged company share = ₹18,00,000 × 60 ÷ 100 = ₹10,80,000.
Total to resulting company = ₹12,00,000 + ₹7,20,000 = ₹19,20,000.

Answer: Resulting company: ₹19,20,000. Demerged company: ₹10,80,000. Total ₹30,00,000.

Exam tips

Write the section 116(4) conditions as a short checklist and tick each against the facts given.
In numerical questions, compute three-fourths of the book value explicitly and compare it with the amount held.
For demerger, show the directly relatable loss and the apportioned loss as two separate lines.
When asked to advise, compare routes (amalgamation, slump sale, itemised sale) and give a clear recommendation with the tax effect of each.
Mention the consequence of breach: earlier set-off becomes income in the year of non-compliance.

Practice questions from Different Aspects of Tax Planning

Tax Planning for Amalgamation, Demerger and Business Restructuring in other exams

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

Tax Planning for Amalgamation, Demerger and Business Restructuring: frequently asked questions

Do losses always transfer in an amalgamation?

No. Section 116(1) lists the cases where they transfer, and section 116(4) adds conditions for both companies. If a condition is not met, the loss is not allowed in the hands of the amalgamated company.

What happens if the amalgamated company sells assets within five years?

If the three-fourths holding condition is broken, the set-off of loss or depreciation already made is treated as income of the amalgamated company for the year in which the non-compliance occurs.

How is loss divided in a demerger?

Loss directly relatable to the transferred undertaking goes to the resulting company. Loss that is not directly relatable is split in the ratio of assets retained to assets transferred.

Is there a time limit on carrying forward inherited loss?

Yes, for amalgamations or reorganisations effected on or after 1 April 2025, the loss can be carried forward for not more than eight tax years after the year it was first computed for the original predecessor entity.