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

Tax Treatment of Demerger and Slump Sale

Updated 11 October 2026 · Fact-checked

A tax-neutral demerger moves undertakings to a resulting company without tax on the demerged company or its shareholders, if statutory conditions are met. A slump sale is a lump-sum transfer of an undertaking, taxed as capital gains: sale price (deemed fair market value) minus net worth. Long-term only if held more than 36 months.

Understand Tax Treatment of Demerger and Slump Sale

Corporate restructuring changes who owns a business. Tax law asks one question: has a taxable transfer happened, and who pays on the gain? Demerger and slump sale answer it in opposite ways.

A demerger splits a company. The demerged company transfers one or more undertakings to a resulting company. The resulting company issues its shares to the shareholders of the demerged company. No cash leaves the group, so tax law gives relief if the demerger meets the prescribed conditions. The usual conditions taught are: all property and liabilities of the undertaking pass to the resulting company; they pass at book values; the resulting company issues shares to the demerged company's shareholders on a proportionate basis; shareholders holding at least three-fourths in value of shares of the demerged company become shareholders of the resulting company; and the transfer is on a going-concern basis. Confirm the exact wording in your study material before the exam.

A slump sale is different. An undertaking or division is sold for a lump sum, with no values assigned to individual assets and liabilities. It is a real sale for cash or other consideration, so gain is taxed. Under section 77 of the Income-tax Act, 2025, profit from a slump sale is chargeable as long-term capital gains. If the undertaking was held for thirty-six months or less before transfer, the gain is short-term.

The gain is computed by deeming. The net worth of the undertaking is deemed to be both the cost of acquisition and cost of improvement. The fair market value of the capital assets on the date of transfer, calculated as prescribed, is deemed to be the full value of consideration. So gain = deemed full value of consideration − net worth.

Contrast this with an itemised sale, where assets are sold separately at separate prices and each asset is taxed on its own rules (depreciable assets, stock, land and so on). A slump sale is one price for the whole going concern, taxed as one capital asset. Always check whether the question says lump sum without values for individual assets.

Key rules to remember

Capital gains on slump sale
Capital gains = Full value of consideration (deemed fair market value of the capital assets, as prescribed) − Net worth
Section 77(3): net worth is deemed to be cost of acquisition and cost of improvement. No indexation applies, as net worth stands in for cost.
Net worth
Net worth = Aggregate value of total assets − Value of liabilities (as in books)
Section 77(5)(a). Ignore any increase or decrease in asset value from revaluation.
Aggregate value of total assets
Depreciable assets: WDV of the block (section 41(1)(c)); self-generated goodwill: nil; assets fully deductible under section 46: nil; other assets: book value
Section 77(5)(b). Goodwill bought from a previous owner is not nil.
Nature of gain
Held 36 months or less: short-term. Otherwise: long-term
Section 77(1) and (2). Holding period is of the undertaking or division, not of each asset.
Accountant's report
Report in prescribed form, before the specified date in section 63, computing and certifying net worth
Section 77(4). Failure to furnish it is a compliance default.
Loss carry forward on demerger
Directly relatable to transferred undertaking: goes to resulting company. Otherwise: apportioned in the ratio of assets retained to assets transferred
Section 116(6). Covers accumulated loss and unabsorbed depreciation. Section 116(7) lets the Central Government notify conditions to ensure genuine business purposes.

How to solve Tax Treatment of Demerger and Slump Sale questions

Use this order for any question on demerger or slump sale. Provision first, then the facts, then the conclusion.

  1. 1Identify the transaction. Lump-sum transfer of an undertaking for consideration is a slump sale. Transfer to a resulting company against shares issued to shareholders is a demerger.
  2. 2For a demerger, list the conditions and tick each against the facts: transfer of all property and liabilities, book values, proportionate share issue, three-fourths shareholder test, going concern.
  3. 3If a condition fails, state that the demerger loses its tax-neutral status. Then discuss the consequences.
  4. 4For a slump sale, check the holding period of the undertaking. Thirty-six months or less is short-term. More is long-term.
  5. 5Compute net worth: assets as per section 77(5)(b), less liabilities, ignoring revaluation. Use the block WDV for depreciable assets, nil for self-generated goodwill.
  6. 6Take the deemed fair market value as full value of consideration and deduct net worth to get the gain.
  7. 7Add compliance points: the accountant's report in the prescribed form before the specified date.
  8. 8For losses, apply section 116(6): relatable losses go to the resulting company, others are apportioned by asset ratio. Then conclude.

Quickest way: Three-line slump sale computation

When to use it: Use when a numerical question gives a balance sheet of the undertaking and a sale price.

  1. Write assets: block WDV for depreciable assets, nil for self-generated goodwill, book value for the rest. Drop any revaluation uplift.
  2. Subtract liabilities to get net worth.
  3. Gain = deemed full value of consideration − net worth. Label it short-term or long-term from the holding period.

Common mistakes in Tax Treatment of Demerger and Slump Sale

  • Treating slump sale as the sum of gains on each asset.

    Students carry over itemised sale logic.

    Fix: Treat the undertaking as one capital asset. Use only net worth as cost and one deemed full value of consideration.

  • Including revaluation surplus in net worth.

    The balance sheet shows the revalued figure.

    Fix: Section 77(5)(a) says to ignore any change in asset value due to revaluation. Reverse it.

  • Taking book value for depreciable assets.

    Students apply the general rule for other assets.

    Fix: Use the written down value of the block of assets determined under section 41(1)(c).

  • Counting the holding period from when each asset was bought.

    Students confuse the undertaking with its assets.

    Fix: Test thirty-six months for the undertaking or division owned and held by the assessee.

  • Saying a demerger is tax-free whatever the facts.

    Students remember the label tax-neutral and skip the conditions.

    Fix: Apply each condition to the facts. Neutrality depends on all being met.

  • Giving all losses to the resulting company.

    Students assume the losses follow the undertaking.

    Fix: Only directly relatable losses go there. The rest are apportioned by the ratio of assets retained to assets transferred.

Worked examples

Example 1

Sharma Textiles Ltd sells its weaving division as a going concern for a lump sum. The division has been owned for 5 years. Book values: block WDV of depreciable assets ₹60,00,000; stock and debtors ₹40,00,000; self-generated goodwill shown at ₹10,00,000 after revaluation; liabilities ₹30,00,000. The deemed fair market value is ₹1,20,00,000. Compute the capital gain.

Show the solution
  1. It is a lump-sum transfer of an undertaking, so section 77 applies. Held for 5 years, more than 36 months, so the gain is long-term.
  2. Assets: depreciable block at WDV ₹60,00,000; other assets at book value ₹40,00,000; self-generated goodwill nil. Total ₹1,00,00,000.
  3. Net worth = ₹1,00,00,000 − ₹30,00,000 = ₹70,00,000.
  4. Gain = ₹1,20,00,000 − ₹70,00,000 = ₹50,00,000.

Answer: Long-term capital gain of ₹50,00,000. An accountant's report certifying net worth must be furnished in the prescribed form before the specified date.

Example 2

Mehta Industries Ltd demerges its pharma undertaking into Mehta Pharma Ltd. It has accumulated business loss of ₹80,00,000, of which ₹50,00,000 is directly relatable to the pharma undertaking. Of the remaining ₹30,00,000, assets retained are ₹6 crore and assets transferred are ₹4 crore. How are the losses allocated?

Show the solution
  1. Under section 116(6)(a), the directly relatable ₹50,00,000 goes to the resulting company.
  2. The balance ₹30,00,000 is apportioned under section 116(6)(b) in the ratio of assets retained to assets transferred, 6 : 4.
  3. Demerged company share = 30,00,000 × 6 ÷ 10 = ₹18,00,000.
  4. Resulting company share = 30,00,000 × 4 ÷ 10 = ₹12,00,000.
  5. Resulting company total = 50,00,000 + 12,00,000 = ₹62,00,000.

Answer: Mehta Pharma Ltd gets ₹62,00,000 and Mehta Industries Ltd keeps ₹18,00,000. The total is ₹80,00,000. Use the same method for unabsorbed depreciation.

Exam tips

  • Write the provision first, then apply facts, then conclude. Examiners reward this order.
  • In numerical questions show net worth as a separate working. Marks are given for each correct asset treatment.
  • Mention the accountant's report under section 77(4) in every slump sale answer.
  • In a demerger answer, list each condition and tick it against the facts. Do not just say it is tax-neutral.
  • When contrasting slump sale with demerger, cover consideration, shareholder position and tax outcome.

Practice questions from Taxation and Stamp Duty Aspects of Corporate Restructuring

Tax Treatment of Demerger and Slump Sale in other exams

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

Tax Treatment of Demerger and Slump Sale: frequently asked questions

What is the difference between slump sale and itemised sale?

A slump sale is a lump-sum transfer of an undertaking with no separate values for individual assets and liabilities. Gain is computed on net worth under section 77. In an itemised sale, each asset has its own price and is taxed under its own rules.

How is net worth computed for a slump sale?

Net worth is the aggregate value of total assets less liabilities as in the books. Depreciable assets are taken at block WDV, self-generated goodwill at nil, and other assets at book value. Revaluation changes are ignored.

Why is a demerger tax neutral?

There is no sale for cash. The resulting company issues shares to the shareholders of the demerged company, who keep their proportionate interest. The relief applies only if the prescribed conditions are met.

When is slump sale gain short-term?

When the undertaking or division has been owned and held by the assessee for thirty-six months or less immediately before transfer. Otherwise the gain is long-term.