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

Tax Planning for Business Reorganisation and Succession

Updated 11 October 2026 · Fact-checked

Tax planning for business reorganisation means structuring a conversion, succession, merger or demerger so that conditions are met and losses, depreciation and assets pass to the successor without tax cost. Under section 116 of the Income-tax Act, 2025, you check the entity type, the conditions, the carry-forward limit and the risk of non-compliance.

Understand Tax Planning for Business Reorganisation and Succession

A business changes form for many reasons. A proprietor may want a company for credibility. Partners may want limited liability. Two companies may merge for scale. Each change moves assets, losses and depreciation from a predecessor to a successor. The tax question is what happens to those losses and that depreciation.

Section 116 of the Income-tax Act, 2025 answers it. If its conditions are met, the accumulated loss and unabsorbed depreciation of the predecessor are deemed to be the loss and unabsorbed depreciation of the successor for the tax year of the reorganisation. Other set-off and carry-forward rules then apply as usual.

The section covers four groups of situations. Sub-section (1) covers amalgamation of specified entities: a company owning an industrial undertaking, a ship or a hotel; a banking company with a specified bank; public sector companies with each other; and an erstwhile public sector company after strategic disinvestment, within the stated time. Sub-section (6) covers demerger. Sub-section (8) covers a firm or proprietary concern succeeded by a company. Sub-section (10) covers a private or unlisted public company succeeded by an LLP.

The benefit comes with conditions. For amalgamation, sub-section (4) tests both companies. The amalgamating company must have run the business for three or more years. It must also hold continuously, as on the date of the amalgamation, at least three-fourths of the book value of the fixed assets it held two years before the amalgamation. The amalgamated company must hold at least three-fourths of the book value of the acquired assets for five years, continue the business for five years, and meet other prescribed conditions.

If a condition fails, the loss or depreciation already set off is treated as income of the successor in the year of non-compliance. So planning does not end on the date of reorganisation. It runs for years after it. Also, for reorganisations on or after 1 April 2025, sub-section (12) limits carry forward to eight tax years after the year the loss was first computed for the original predecessor.

Key rules to remember

Core rule for amalgamation: Accumulated loss + unabsorbed depreciation of amalgamating company = deemed loss and depreciation of amalgamated company; Applies to the cases in section 116(1), for the tax year of amalgamation, if section 116(4) is met.
Amalgamating company tests: Business run ≥ 3 years AND, as on the date of amalgamation, ≥ 3/4 of the book value of fixed assets held 2 years before amalgamation is still held continuously; Section 116(4)(a). Both tests must be met. The base is the assets held two years earlier, tested at the date of amalgamation.
Amalgamated company tests: Hold ≥ 3/4 of book value of acquired fixed assets for 5 years; continue the business for 5 years; meet prescribed conditions; Section 116(4)(b). The period runs from the date of amalgamation.
Demerger loss allocation: Directly relatable loss goes to resulting company; other loss is apportioned in the ratio of assets retained to assets transferred; Section 116(6). Applies to accumulated loss and unabsorbed depreciation.
Carry-forward cap: Loss carried forward for not more than 8 tax years immediately succeeding the tax year for which it was first computed for the original predecessor; Section 116(12), for amalgamations and reorganisations on or after 1 April 2025. It applies only to loss forming part of the accumulated loss, not to unabsorbed depreciation. Always note the year the loss was first computed. Only the part of the loss still within the eight-year window can be set off.
Penalty for breach: Loss or depreciation already set off = income of successor in the year of non-compliance; Section 116(5), (9) and (11).

How to solve Tax Planning for Business Reorganisation and Succession questions

Use this method for any case question on conversion, succession, amalgamation or demerger.

1Identify the predecessor and the successor, and the type of reorganisation: amalgamation, demerger, firm or proprietorship to company, or company to LLP.
2Find the sub-section of section 116 that matches. Check that the entity type fits, for example an industrial undertaking, ship or hotel in an amalgamation.
3Compute the accumulated loss and unabsorbed depreciation. Only business loss counts, and speculation loss is excluded.
4Test each condition one by one against the facts: years of business, asset holding, continuation period and prescribed conditions.
5For a demerger, split the loss into directly relatable and other parts, and apportion the other part by assets.
6Apply the eight-year cap where the reorganisation is on or after 1 April 2025.
7State the consequence of any breach and the year in which it hits.
8Conclude with the recommendation and the compliance points to monitor.

Quickest way: Four-line check for a reorganisation case

When to use it: Use when time is short and the case has several facts and numbers.

Name the entity pair and the sub-section of section 116.
List the conditions and tick or cross each one from the facts.
Compute the loss passing and apply any cap or apportionment.
Write the risk: what happens if the successor breaks a condition.

Common mistakes in Tax Planning for Business Reorganisation and Succession

Assuming every amalgamation carries forward losses.
Students remember the benefit but not the entity list.
Fix: Check section 116(1) first. Only the listed cases qualify, such as a company owning an industrial undertaking, ship or hotel.
Testing only the amalgamated company.
The five-year conditions feel more prominent.
Fix: Test both sides. The amalgamating company needs three years of business and the asset-holding condition as well.
Ignoring what happens after the reorganisation.
Students stop at the date of amalgamation.
Fix: State that a breach makes the set-off amount income of the successor in the year of breach.
Allocating demerger loss only by asset ratio.
The ratio rule is easier to remember.
Fix: Give directly relatable loss to the resulting company first. Apportion only the rest by assets.
Treating speculation loss as part of accumulated loss.
Students read loss as any loss.
Fix: Accumulated loss means business loss, excluding speculation loss, that would have been eligible for carry forward.
Ignoring the eight-year limit.
Students remember the general eight-year rule for business loss but forget the amalgamation-specific cap.
Fix: For reorganisations on or after 1 April 2025, count eight years from the year the loss was first computed for the original predecessor.

Worked examples

Example 1

Alpha Textiles Ltd, which runs a manufacturing undertaking, amalgamates with Beta Mills Ltd in tax year 2026-27. Alpha has run the business for five years and has held all its fixed assets continuously. Beta will keep the business and the assets for six years. Alpha has an accumulated business loss of ₹40,00,000, first computed for Alpha for tax year 2024-25, and unabsorbed depreciation of ₹10,00,000. Can Beta claim them?

Show the solution

Alpha owns an industrial undertaking (manufacture of goods), so section 116(1)(a) applies.
Alpha has run the business for five years, which is at least three. Test met.
Alpha held all its fixed assets, which is at least three-fourths of book value. Test met.
Beta holds assets and continues the business for six years, which is at least five. Tests met, subject to any prescribed conditions.
The loss of ₹40,00,000 and depreciation of ₹10,00,000 are deemed to be Beta's for tax year 2026-27, the year of amalgamation.
The amalgamation is after 1 April 2025, so the eight-year cap in section 116(12) applies to the loss. It was first computed for Alpha for 2024-25, so the eight succeeding tax years are 2025-26 to 2032-33. Beta can set off the loss only up to tax year 2032-33, and any part not set off by then lapses. The cap does not apply to the unabsorbed depreciation.

Answer: Yes. Beta can claim ₹40,00,000 of loss and ₹10,00,000 of unabsorbed depreciation, provided the prescribed conditions are also met. The loss can be set off only up to tax year 2032-33, which is the end of the eight-year window counted from 2024-25.

Example 2

Gamma Ltd transfers a unit to Delta Ltd in a demerger. Gamma has an accumulated loss of ₹30,00,000 directly relatable to the transferred unit, and another loss of ₹20,00,000 not directly relatable. Assets retained by Gamma are ₹60 crore and assets transferred are ₹40 crore. How is the loss divided?

Show the solution

Under section 116(6)(a), the directly relatable loss of ₹30,00,000 goes to Delta, the resulting company.
The non-relatable loss of ₹20,00,000 is apportioned in the ratio of assets retained to assets transferred, 60 : 40.
Gamma's share is 20,00,000 × 60 ÷ 100 = ₹12,00,000.
Delta's share is 20,00,000 × 40 ÷ 100 = ₹8,00,000.
Delta's total is 30,00,000 + 8,00,000 = ₹38,00,000.

Answer: Delta gets ₹38,00,000 and Gamma keeps ₹12,00,000.

Exam tips

Quote the sub-section of section 116 that fits the entity pair before applying any condition.
Present conditions as a tick list against the facts. Examiners reward this structure.
Always add the consequence of non-compliance and the year it applies.
In demerger problems, show the split of directly relatable loss and the apportioned loss separately.
Because electives are open book, mark the sub-sections of section 116 so you can find them fast, but write the analysis in your own words.

Practice questions from Tax Planning and Business Restructuring

Tax Planning for Business Reorganisation and Succession 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 Business Reorganisation and Succession: frequently asked questions

Can losses of a proprietary concern pass to a company that takes it over?

Yes, if the company meets the conditions referred to in section 70(1)(zf). Section 116(8) then treats the accumulated loss and unabsorbed depreciation as those of the successor company. If the conditions are later breached, the set-off becomes income of the company.

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

If it fails to hold at least three-fourths of the book value of acquired fixed assets for five years, a condition under section 116(4) is broken. The set-off already made is deemed to be its income in the year of non-compliance.

Does section 116 apply to a company converting into an LLP?

It applies to a private company or unlisted public company succeeded by an LLP that meets the conditions in section 70(1)(ze). The LLP gets the loss and depreciation, and a breach makes the set-off taxable income of the LLP.

How is the loss divided in a demerger?

Loss directly relatable to the transferred undertakings goes to the resulting company. Any other loss is split between the demerged and resulting companies in proportion to the assets retained and transferred.