Corporate Restructuring, Valuation and Insolvency · Taxation and Stamp Duty Aspects of Corporate Restructuring

Tax Neutrality of Mergers and Amalgamations under Income-tax Act, 2025

Updated 11 October 2026 · Fact-checked

A tax neutral amalgamation is one where the transfer of assets by the amalgamating company, and of shares by its shareholders, is not treated as a transfer, so no capital gains tax arises. Section 70(1)(e) and (f) of the Income-tax Act, 2025 give this relief if the amalgamated company is an Indian company and shareholders get shares in it.

Understand Tax Neutrality of Mergers and Amalgamations

A merger moves assets from one company to another. Normally, a transfer of a capital asset triggers capital gains tax. If every merger did that, tax would make most mergers too costly. The law therefore gives relief. This relief is called tax neutrality: the restructuring happens, but the tax event is deferred, not taxed now.

Under the Income-tax Act, 2025, section 67 charges capital gains on transfer. Section 70 lists transactions that are not regarded as transfer, so section 67 does not apply to them. Two clauses matter most for amalgamation: clause (e) for the company and clause (f) for the shareholder.

Clause (e) covers the transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company. The condition is that the amalgamated company is an Indian company. So if Alpha Ltd merges into Beta Ltd, an Indian company, Alpha pays no capital gains tax on handing over its assets.

Clause (f) covers the shareholder. A shareholder of the amalgamating company gives up shares and receives shares of the amalgamated company. No capital gains arise if two conditions are met: the transfer is in consideration of allotment of shares in the amalgamated company, and the amalgamated company is an Indian company. There is an exception: the relief does not apply where the shareholder is itself the amalgamated company.

The relief is not limited to domestic deals. Clauses (g) and (h) cover amalgamation of foreign companies that hold shares in an Indian company, if at least 25% of the shareholders of the amalgamating foreign company continue as shareholders of the amalgamated foreign company, and the transfer attracts no capital gains tax in the country of incorporation of the amalgamating company. Clause (h) applies this to a foreign company's shares deriving substantial value from Indian company shares, referred to in section 9(10)(a).

Remember that this page deals with the neutrality of the transfer. Carry forward of losses, and the cost and holding period of assets, are separate topics.

Key rules to remember

Company-level relief (section 70(1)(e)): Transfer of capital asset by amalgamating company to amalgamated company in a scheme of amalgamation + amalgamated company is an Indian company ⇒ not a transfer; The only stated condition is that the amalgamated company is Indian. The amalgamating company can be Indian or foreign on the text of this clause.
Shareholder-level relief (section 70(1)(f)): Transfer of shares in amalgamating company + consideration is allotment of shares in amalgamated company + amalgamated company is Indian ⇒ not a transfer; Exception: relief does not apply where the shareholder itself is the amalgamated company.
Foreign amalgamation of Indian shares (section 70(1)(g)): Shares in an Indian company held by amalgamating foreign company, moved to amalgamated foreign company + at least 25% of shareholders of amalgamating foreign company remain shareholders + no capital gains tax in country of incorporation of amalgamating company ⇒ not a transfer; Both conditions must be met. 25% is a minimum count of shareholders, as the clause is worded.
Foreign amalgamation of indirect Indian assets (section 70(1)(h)): Shares of a foreign company (section 9(10)(a)) deriving value substantially from shares of an Indian company + 25% shareholder continuity + no tax on capital gains in country of incorporation ⇒ not a transfer; Same two conditions as clause (g), applied to the foreign company's shares.
Effect of section 70: Section 67 shall not apply to the transactions listed in section 70(1); Neutrality works by taking the transaction outside the capital gains charge.
Banking company amalgamation (section 70(1)(i)): Transfer of capital asset by a banking company to a banking institution under a scheme of amalgamation sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949 ⇒ not a transfer; A separate bank-specific clause. Do not confuse it with clause (e).

How to solve Tax Neutrality of Mergers and Amalgamations questions

Use this method for any question asking whether an amalgamation, or a related share swap, attracts capital gains tax.

1Identify the transaction: is it a scheme of amalgamation, a demerger, a conversion or a simple sale? Only a scheme of amalgamation brings clauses (e) to (h) into play.
2Name the taxpayer whose gain you are testing: the amalgamating company (transferor of assets) or the shareholder (transferor of shares).
3For the company, check clause (e): is the amalgamated company an Indian company?
4For the shareholder, check clause (f): is the consideration an allotment of shares in the amalgamated company, and is that company Indian? Check whether the shareholder is itself the amalgamated company.
5Check for cash or other consideration. If the shareholder receives cash, the allotment-of-shares condition is not met for that part, so apply the text carefully and say so.
6For foreign amalgamations, test clause (g) or (h): 25% shareholder continuity and no capital gains tax in the foreign country.
7State the conclusion in one line: 'not regarded as transfer under section 70(1)(...), so section 67 does not apply and no capital gains arise.'
8Add a practical point: scheme sanction by the Tribunal, and the shareholder's later sale of the new shares, which will be tested afresh.

Quickest way: Two questions, then foreign test

When to use it: Use for short-answer or MCQ-style case questions where you must decide quickly whether capital gains arise on an amalgamation.

Ask: is it a scheme of amalgamation and is the amalgamated company Indian? If no, relief under (e) and (f) fails.
Ask: did the shareholder receive only shares of the amalgamated company? If yes, relief under (f) holds.
If both companies are foreign and hold Indian shares, ask: 25% shareholders continuing and no foreign tax on the gain?
Write the clause number and the words 'not regarded as transfer' in your conclusion.

Common mistakes in Tax Neutrality of Mergers and Amalgamations

Saying the amalgamated company must be a public or listed company.
Students mix in conditions from other clauses, such as clause (ze) on conversion to an LLP.
Fix: For clauses (e) and (f) the only entity condition is that the amalgamated company is an Indian company.
Applying relief to the shareholder when cash is received.
Students focus on the company-level exemption and forget clause (f) needs consideration by allotment of shares.
Fix: Check the form of consideration. Relief in clause (f) is tied to allotment of shares in the amalgamated company.
Applying clause (f) where the shareholder is the amalgamated company itself.
The exception is short and easy to miss in the clause.
Fix: Note the words 'except when the shareholder itself is the amalgamated company'. In that case the clause does not give relief.
Mixing the 25% test with the 75% test.
Clauses (g) and (h) on amalgamation use 25%, while clauses (l) and (m) on demerger use 75% by value.
Fix: Link 25% to amalgamation and 75% in value to demerger of foreign companies.
Treating the exemption as a permanent waiver of tax.
The words 'not regarded as transfer' suggest the matter ends there.
Fix: Say the relief applies to the amalgamation transfer only. Later sale of the allotted shares is a fresh transaction to be examined.
Quoting the old section numbers of the Income-tax Act, 1961.
Notes and coaching material written before 2026 use the old Act.
Fix: For June 2027 onwards, cite section 70 of the Income-tax Act, 2025 and section 67 for the charge.

Worked examples

Example 1

Sigma Ltd and Tara Ltd are Indian companies. Under a Tribunal-sanctioned scheme of amalgamation, Sigma Ltd merges into Tara Ltd. Sigma's shareholder, Mr. Rao, holds 10,000 shares in Sigma and receives 5,000 shares of Tara Ltd in exchange. Advise whether capital gains arise for Sigma Ltd and for Mr. Rao.

Show the solution

Provision: section 67 charges capital gains on transfer. Section 70(1) lists transactions not regarded as transfer, to which section 67 does not apply.
Company level: clause (e) covers transfer of a capital asset in a scheme of amalgamation by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company. Sigma transfers assets to Tara, which is Indian. The condition is met.
Shareholder level: clause (f) covers transfer by a shareholder of shares in the amalgamating company, if consideration is allotment of shares in the amalgamated company and that company is Indian. Mr. Rao receives only Tara shares, and Tara is Indian. Mr. Rao is not the amalgamated company.
Conclusion: both transfers are not regarded as transfer.

Answer: No capital gains arise for Sigma Ltd under section 70(1)(e) or for Mr. Rao under section 70(1)(f), because section 67 does not apply to these transfers.

Example 2

Zenith Holdings Inc. and Apex Holdings Inc. are foreign companies. Zenith holds shares in an Indian company, Bharat Ltd. Under a scheme of amalgamation, Zenith merges into Apex and Bharat's shares pass to Apex. 30% of Zenith's shareholders continue as Apex shareholders. The transfer attracts no capital gains tax in Zenith's country of incorporation. Is the transfer of Bharat's shares taxable in India?

Show the solution

Provision: section 70(1)(g) covers transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company.
Condition 1: at least 25% of the shareholders of the amalgamating foreign company must continue as shareholders of the amalgamated foreign company. Here 30% continue, which is not less than 25%. Met.
Condition 2: the transfer must not attract tax on capital gains in the country where the amalgamating company is incorporated. Here no such tax arises. Met.
Conclusion: both conditions are satisfied, so the transfer is not regarded as transfer and section 67 does not apply.
Practical point: keep the foreign tax position documented, because condition 2 depends on the foreign law.

Answer: The transfer of Bharat Ltd's shares is not regarded as a transfer under section 70(1)(g), so no capital gains tax arises in India on it.

Exam tips

Write the clause numbers: section 70(1)(e) for the company and (f) for the shareholder. Examiners reward the provision-analysis-conclusion order.
Always state the 'Indian company' condition explicitly. It is the one condition both clauses share.
In foreign amalgamation questions, tick both conditions separately: 25% continuity and no foreign capital gains tax.
Because the paper is written and case-based, add one practical line, such as keeping the scheme order and valuation record on file for tax assessment.

Practice questions from Taxation and Stamp Duty Aspects of Corporate Restructuring

Tax Neutrality of Mergers and Amalgamations in other exams

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

Tax Neutrality of Mergers and Amalgamations: frequently asked questions

What is tax neutrality in a merger?

It means the merger itself does not trigger capital gains tax. Under section 70 of the Income-tax Act, 2025, the transfer of assets and the exchange of shares in an amalgamation are not regarded as transfer, so section 67 does not apply.

Which section gives capital gains exemption on amalgamation in the Income-tax Act, 2025?

Section 70(1)(e) covers the transfer of assets by the amalgamating company. Section 70(1)(f) covers the shareholder's exchange of shares. Both need the amalgamated company to be an Indian company.

Is cash paid to shareholders in a merger covered by the exemption?

Clause (f) requires the transfer to be in consideration of allotment of shares in the amalgamated company. Cash is not such an allotment, so you should say that the relief in clause (f) is tied to share consideration and examine any cash part separately.

Does tax neutrality apply to foreign company mergers?

Yes, in limited cases. Clauses (g) and (h) cover amalgamation of foreign companies holding Indian shares, if at least 25% of the shareholders continue and the transfer attracts no capital gains tax in the foreign country.