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Goods and Services Tax (GST) and Corporate Tax Planning · Corporate Tax Planning

Tax Planning for Amalgamation, Demerger and Business Reorganisation

Updated 11 October 2026 · Fact-checked

Tax planning for reorganisation means structuring an amalgamation, demerger or succession so that losses and unabsorbed depreciation pass to the new entity. Under section 116 of the Income-tax Act, 2025, they carry forward only if the stated conditions are met. Check eligibility, the holding and continuity conditions, and the time limit.

Understand Tax Planning for Amalgamation, Demerger and Business Reorganisation

A business reorganisation moves a business from one entity to another. It can be an amalgamation (two companies join), a demerger (one undertaking moves to a new company) or a succession (a firm or proprietary concern becomes a company, or a company becomes an LLP). Tax planning asks one question: can the reorganisation happen without creating avoidable tax cost, and can the old entity's tax attributes be saved?

The key attributes are accumulated loss and unabsorbed depreciation. Accumulated loss means business loss (excluding speculation loss) that would have been eligible for carry forward under section 112 had the reorganisation not happened. Unabsorbed depreciation is depreciation still not allowed to the old entity. Normally a loss belongs to the entity that suffered it. Section 116 is a special rule that lets it move.

For amalgamation, section 116(1) applies in four cases: (a) a company owning an industrial undertaking, a ship or a hotel amalgamating with another company; (b) a banking company amalgamating with a specified bank; (c) one or more public sector companies amalgamating with other public sector companies; and (d) an erstwhile public sector company amalgamating within five years from the end of the tax year in which the restriction in the strategic disinvestment share purchase agreement ends. The amalgamating company's loss and depreciation are then deemed to be those of the amalgamated company for the tax year of amalgamation.

For demerger, section 116(6) gives a clear split. Loss directly relatable to the transferred undertaking goes to the resulting company. Loss not directly relatable is apportioned in the ratio of assets retained by the demerged company and assets transferred to the resulting company. Succession cases (firm or proprietorship to company, company to LLP) are covered by section 116(8) and (10), subject to the conditions in section 70.

The benefit is never free. Conditions must be met on continuing business and asset holding, and a breach makes the earlier set-off taxable. Planning means checking these conditions before the scheme is finalised, not after.

Key rules to remember

Amalgamation: loss moves to amalgamated company
Accumulated loss + unabsorbed depreciation of amalgamating company → deemed loss/depreciation of amalgamated company for the tax year of amalgamation
Section 116(1). Only for the four listed categories. Industrial undertaking means manufacture or processing, software, power, telecom, mining, or construction of ships, aircraft or rail systems.
Conditions on the amalgamating company
Business ≥ 3 years AND ≥ ¾ of book value of fixed assets held 2 years before amalgamation still held continuously on the date of amalgamation
Section 116(4)(a). Both must be met.
Conditions on the amalgamated company
Hold ≥ ¾ of book value of fixed assets acquired, and continue the business, for ≥ 5 years from amalgamation; plus prescribed conditions
Section 116(4)(b). Prescribed conditions ensure revival or genuine business purpose.
Breach consequence
Loss/depreciation set off earlier → deemed income of the year of non-compliance
Section 116(5). Same idea in 116(9) and 116(11) for succession cases.
Demerger: loss directly relatable
Loss directly relatable to transferred undertaking → resulting company
Section 116(6)(a).
Demerger: loss not directly relatable
Apportion in ratio: assets retained by demerged company : assets transferred to resulting company
Section 116(6)(b). Government may notify conditions for genuine business purpose under 116(7).
Carry forward limit
For amalgamation or reorganisation effected on or after 1 April 2025: carry forward ≤ 8 tax years after the year the loss was first computed for the original predecessor entity
Section 116(12). The clock does not restart on amalgamation.

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

Use this order for any case-based question on reorganisation and loss carry forward.

  1. 1Identify the type of reorganisation: amalgamation, demerger, or succession of a firm, proprietorship or company.
  2. 2For amalgamation, check if it falls in one of the four categories of section 116(1). If none fits, state that the loss does not pass under section 116.
  3. 3Compute or identify the accumulated loss (business loss, not speculation loss) and unabsorbed depreciation of the predecessor.
  4. 4Test the amalgamating company's conditions: three years of business and three-fourths of fixed assets held.
  5. 5Test the amalgamated company's conditions: five years of holding three-fourths of acquired fixed assets and continuing the business.
  6. 6For demerger, split the loss: directly relatable goes to the resulting company; the rest is apportioned on asset ratio.
  7. 7Apply the eight-year limit where the reorganisation is on or after 1 April 2025.
  8. 8Conclude with the amount carried forward, who gets it, and the tax risk on breach.

Quickest way: Category, conditions, split, clock

When to use it: Use it when time is short and the question gives facts with a loss figure.

  1. Write the section 116 category in one line.
  2. Tick the 3-year and three-fourths tests for the amalgamating company.
  3. State the 5-year commitments for the amalgamated company.
  4. For demerger, do the ratio calculation in two lines.
  5. Add the eight-year limit and the breach consequence as the closing line.

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

  • Assuming every amalgamation carries forward losses

    Students remember tax neutrality but not that the loss rule is limited to listed categories.

    Fix: Always first match the facts to section 116(1)(a) to (d). If no match, the loss does not pass.

  • Applying the five-year test to the amalgamating company

    Mixing the two sets of conditions in section 116(4).

    Fix: Amalgamating company: three years of business and three-fourths of assets held. Amalgamated company: five years of holding and continuing business.

  • Dividing all demerger loss on asset ratio

    The ratio rule is remembered, the first limb is forgotten.

    Fix: Allocate directly relatable loss first. Only the remaining loss is apportioned.

  • Including speculation loss in the amount that moves

    Treating all loss as one pool.

    Fix: Accumulated loss is business loss excluding speculation loss, and must be eligible under section 112 for the predecessor.

  • Forgetting the eight-year limit

    It is a new rule in the 2025 Act for reorganisations on or after 1 April 2025.

    Fix: Count from the year the loss was first computed for the original predecessor entity, not from the amalgamation year.

Worked examples

Example 1

Alpha Textiles Ltd, which runs a manufacturing business, amalgamates with Beta Mills Ltd. Alpha has an accumulated business loss of ₹80,00,000 and unabsorbed depreciation of ₹20,00,000. Alpha has run the business for five years. Two years before amalgamation it held fixed assets with a book value of ₹10,00,000; on the date of amalgamation it still held assets of that kind with a book value of ₹8,50,000 from the original lot. Can Beta carry forward the losses?

Show the solution
  1. Category: Alpha owns an industrial undertaking (manufacture of goods), so section 116(1)(a) applies.
  2. Three-year test: Alpha has run the business for five years, which is more than three. Met.
  3. Asset test: three-fourths of ₹10,00,000 = ₹7,50,000. Alpha held ₹8,50,000, which is more than ₹7,50,000. Met.
  4. Result: ₹80,00,000 loss and ₹20,00,000 unabsorbed depreciation are deemed to be Beta's for the year of amalgamation, subject to Beta's own conditions.
  5. Beta must hold at least three-fourths of the book value of the acquired fixed assets and continue the business for five years, and meet any prescribed conditions.

Answer: Yes. Beta can carry forward ₹80,00,000 loss and ₹20,00,000 unabsorbed depreciation, provided it keeps the five-year commitments. Breach makes the set-off taxable as Beta's income in the year of breach.

Example 2

Gamma Ltd demerges its retail undertaking into Delta Ltd. Gamma has an accumulated business loss of ₹60,00,000, of which ₹24,00,000 is directly relatable to the retail undertaking. The rest is not directly relatable. Assets transferred to Delta are worth ₹30,00,000 and assets retained by Gamma are worth ₹70,00,000. Divide the loss.

Show the solution
  1. Directly relatable loss of ₹24,00,000 goes to Delta under section 116(6)(a).
  2. Remaining loss = ₹60,00,000 − ₹24,00,000 = ₹36,00,000.
  3. Apportion in the ratio of assets retained to assets transferred, 70 : 30, under section 116(6)(b).
  4. Gamma's share = ₹36,00,000 × 70 ÷ 100 = ₹25,20,000.
  5. Delta's share = ₹36,00,000 × 30 ÷ 100 = ₹10,80,000.
  6. Delta's total = ₹24,00,000 + ₹10,80,000 = ₹34,80,000.
  7. Check: ₹25,20,000 + ₹34,80,000 = ₹60,00,000.

Answer: Delta Ltd gets ₹34,80,000 and Gamma Ltd keeps ₹25,20,000 of the accumulated loss.

Exam tips

  • Write the section 116 sub-section against each point. It shows the examiner you know the provision.
  • Present the facts as a short table-like list: category, conditions, result, risk.
  • In a demerger problem, show the directly relatable amount first and then the apportionment.
  • Mention the eight-year limit and breach consequence even if the question does not ask.
  • Close with a practical compliance point, such as keeping an asset register to prove the three-fourths holding.

Practice questions from Corporate Tax Planning

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

Do losses always carry forward in an amalgamation?

No. Under section 116(1) the loss moves only for the listed categories, such as a company owning an industrial undertaking, a ship or a hotel. Even then the conditions in section 116(4) must be met.

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

If the conditions in section 116(4) are not met, the set-off of loss or depreciation already made is deemed to be the amalgamated company's income for the year of non-compliance, under section 116(5).

How is loss split in a demerger?

Loss directly relatable to the transferred undertaking goes to the resulting company. Other loss is apportioned in the ratio of assets retained by the demerged company to assets transferred, under section 116(6).

Is there a time limit on carrying forward the loss?

For reorganisations on or after 1 April 2025, section 116(12) limits carry forward to eight tax years after the year the loss was first computed for the original predecessor entity.