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

Deduction for Amalgamation, Demerger and VRS Expenses

Updated 11 October 2026 · Fact-checked

Under the Income-tax Act, 2025, an Indian company's expenditure wholly and exclusively for amalgamation or demerger, and amounts paid to employees under a voluntary retirement scheme, are deducted in five equal yearly instalments. The first instalment falls in the tax year of the amalgamation, demerger or payment. Section 52 governs this. Section 32 covers other business deductions.

Understand Other Deductions for Business Restructuring Expenses

Some business expenses give benefit over many years. Amalgamation costs and voluntary retirement payments are examples. The Act does not let you deduct them in one year. It spreads them evenly. This is called amortisation.

Two provisions matter here. Section 32 (Other deductions) lists items allowed when computing business income: bonus or commission to employees, interest on borrowed business capital, a capped transfer to a special reserve by specified financial entities, mark-to-market loss under ICDS, securities or commodities transaction tax, and a few more. Section 52 is the amortisation provision. Exam questions on amalgamation, demerger and VRS expenses are answered from section 52.

Under section 52(1), two items are spread over five tax years. First, expenditure incurred by an Indian company wholly and exclusively for the purposes of amalgamation or demerger of an undertaking. The initial year is the tax year in which the amalgamation or demerger takes place. Second, an amount paid to an employee in connection with voluntary retirement under a scheme. The initial year is the tax year of payment. Each instalment is 1/5 of the amount.

The same section also spreads spectrum fee and telecom licence fee over the years the spectrum or licence stays in force. Section 52(4) bars any other deduction for the amalgamation, demerger and VRS items. So you cannot claim the full amount in the year of spending and also the instalments.

If a specified business reorganisation happens before the five-year period ends, for a VRS payment, the successor continues the instalments. The predecessor gets no deduction for the year of reorganisation. Preliminary expenses on setting up a company are a separate head of deduction. They are not in section 32 or 52 as supplied. Check the Act's own provision for them and do not mix them with these two.

Key rules to remember

Amalgamation or demerger expenses
Annual deduction = Expenditure × 1/5, for five tax years
Only for an Indian company, expenditure wholly and exclusively for amalgamation or demerger of an undertaking. Starts in the tax year of the amalgamation or demerger.
VRS payment
Annual deduction = Amount paid × 1/5, for five tax years
Amount paid to an employee under a voluntary retirement scheme. Starts in the tax year of payment.
Spectrum fee or licence fee
Annual deduction = Fee ÷ number of years from the initial tax year to the year the spectrum or licence expires
Initial year is the later of the start of the telecom business and actual payment. Capital expenditure actually paid.
No double deduction
Section 52 items (amalgamation, demerger, VRS) get no deduction under any other provision
Spectrum and licence fee get no depreciation under section 33(1) to (10) once deduction under section 52 is claimed.
Reorganisation during the VRS period
Predecessor: no deduction in the year of reorganisation. Successor: continues the remaining instalments
Applies to a specified business reorganisation such as amalgamation or demerger.
Special reserve limits (section 32(e))
Transfer ≤ 20% of profits from eligible business; cumulative reserve ≤ 2 × (paid-up share capital + general reserves)
For specified entities such as banking companies and housing finance companies. No deduction on the excess.

How to solve Other Deductions for Business Restructuring Expenses questions

Use this method for any question on deductions for restructuring and similar expenses.

  1. 1Identify the expenditure. Is it amalgamation or demerger cost, a VRS payment, a spectrum or licence fee, or an item in section 32?
  2. 2Check the conditions. For amalgamation or demerger: Indian company, wholly and exclusively for the purpose. For VRS: a payment to an employee under a scheme.
  3. 3Fix the initial tax year: the year of amalgamation or demerger, or the year of payment.
  4. 4Divide the amount by five, or by the number of licence years for spectrum and licence fees, to get the instalment.
  5. 5List the deduction year by year. Check whether a reorganisation occurs during the period and shift the later instalments to the successor.
  6. 6State that no deduction is available under any other provision for amalgamation, demerger or VRS items.
  7. 7Write the conclusion with the total deduction and the unclaimed balance, if any.

Quickest way: One-fifth and year-line method

When to use it: Use it for numerical or case questions on amalgamation, demerger or VRS expenses when time is short.

  1. Write the amount and the initial tax year.
  2. Compute one-fifth and write it against each of five years.
  3. Mark any year in which a reorganisation happens and reassign the later years to the successor.
  4. Add one line of law: section 52(1) and the bar in section 52(4).

Common mistakes in Other Deductions for Business Restructuring Expenses

  • Claiming the whole amalgamation expense in the year it was incurred.

    Students treat it as ordinary revenue expenditure.

    Fix: Remember that section 52 allows only equal instalments over five tax years, and bars other deductions for it.

  • Starting the five years from the tax year after the payment.

    Students assume the deduction starts the next year.

    Fix: The initial year is the tax year of the amalgamation or demerger, or of the VRS payment. The first instalment is in that year.

  • Applying section 52 to expenditure by a non-company or a foreign company.

    The words Indian company are overlooked.

    Fix: Check that the amalgamation or demerger expenditure is incurred by an Indian company and is wholly and exclusively for that purpose.

  • Letting the predecessor claim in the year of reorganisation for a VRS payment.

    Students miss section 52(6).

    Fix: The predecessor gets nothing in the reorganisation year. The successor continues the remaining instalments.

  • Treating section 32 as the section for amalgamation expenses.

    The topic is described as other deductions, so the headings blur.

    Fix: Section 32 lists bonus, interest, special reserve, STT and similar items. Amalgamation, demerger and VRS amortisation is in section 52.

  • Claiming depreciation as well as section 52 on spectrum or licence fee.

    The fee is capital expenditure, so depreciation seems natural.

    Fix: Once section 52 deduction is claimed and allowed, depreciation under section 33(1) to (10) is not allowed on it.

Worked examples

Example 1

Aarav Textiles Ltd, an Indian company, incurs ₹10,00,000 wholly and exclusively for the amalgamation of an undertaking. The amalgamation takes place in the tax year 2027-28. Compute the deduction for each year and the total.

Show the solution
  1. The expenditure is by an Indian company, wholly and exclusively for amalgamation. Section 52(1), Table Sl. No. 1 applies.
  2. The initial tax year is the year of amalgamation, 2027-28.
  3. Instalment = ₹10,00,000 × 1/5 = ₹2,00,000.
  4. Deduction: 2027-28, 2028-29, 2029-30, 2030-31 and 2031-32, ₹2,00,000 in each.
  5. Under section 52(4)(b), no deduction under any other provision is allowed for this expenditure.

Answer: ₹2,00,000 a year for five tax years, from 2027-28 to 2031-32, total ₹10,00,000.

Example 2

Kaveri Industries Ltd pays ₹25,00,000 to employees under a voluntary retirement scheme in tax year 1. In tax year 3, the company is amalgamated with another Indian company, Meru Ltd. How is the deduction allowed?

Show the solution
  1. The VRS payment falls under section 52(1), Table Sl. No. 2. The initial year is tax year 1, the year of payment.
  2. Instalment = ₹25,00,000 × 1/5 = ₹5,00,000 a year over five tax years.
  3. The amalgamation of an Indian company is a specified business reorganisation and it occurs within the five years.
  4. Under section 52(6)(b), Kaveri gets no deduction for tax year 3, the year of reorganisation. It claims ₹5,00,000 in each of tax years 1 and 2.
  5. Under section 52(6)(a), Meru Ltd continues as Kaveri would have. It claims ₹5,00,000 in each of tax years 3, 4 and 5.
  6. Check: 2 + 3 = 5 instalments × ₹5,00,000 = ₹25,00,000.

Answer: Kaveri: ₹5,00,000 each in tax years 1 and 2 (₹10,00,000). Meru Ltd: ₹5,00,000 each in tax years 3, 4 and 5 (₹15,00,000). Total ₹25,00,000.

Exam tips

  • Quote section 52(1) and the five-year rule for amalgamation, demerger and VRS. Name the Indian company condition.
  • Keep section 32 and section 52 apart in your answer. Name the right section for each item.
  • For reorganisation questions, always cover section 52(6): predecessor loses the year of reorganisation and the successor continues.
  • Show a year-wise table in text form with the instalment, then the total, to earn the computation marks.
  • If preliminary expenses are asked, state the rule without borrowing the five-year wording unless the question's provision says so.

Practice questions from Tax Planning and Business Restructuring

Other Deductions for Business Restructuring Expenses in other exams

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

Other Deductions for Business Restructuring Expenses: frequently asked questions

Is amalgamation expense deductible in one year?

No. Under section 52 of the Income-tax Act, 2025, an Indian company's expenditure wholly and exclusively for amalgamation or demerger is deducted in five equal instalments. The first falls in the tax year in which the amalgamation or demerger takes place.

How is a VRS payment deducted?

An amount paid to an employee under a voluntary retirement scheme is allowed in five equal instalments. The first instalment is in the tax year of payment. No other provision allows a further deduction for it.

What happens to a VRS deduction if the company is amalgamated midway?

The predecessor gets no deduction for the tax year in which the reorganisation takes place. The successor entity continues to claim the remaining instalments as the predecessor would have.

Is section 32 the section for amalgamation expenses?

No. Section 32 deals with other deductions such as bonus, interest on borrowed capital, special reserve transfers and securities transaction tax. Amalgamation, demerger and VRS amortisation is in section 52.