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

Tax Planning for Amalgamation and Demerger under the Income-tax Act, 2025

Updated 11 October 2026 · Fact-checked

Tax planning for amalgamation and demerger means structuring a restructuring so that the transfer does not trigger tax and the accumulated losses and unabsorbed depreciation survive. Under section 116 of the Income-tax Act, 2025, these are carried forward only if the stated conditions are met and kept for the stated periods.

Understand Tax Planning for Amalgamation and Demerger

A business restructuring moves assets, liabilities and business from one company to another. If the law treated every such transfer as a sale, tax would arise on gains and the restructuring would become costly. So the tax law offers relief when specific conditions are met. This relief is called tax neutrality.

In an amalgamation, one or more companies (the amalgamating companies) merge into another (the amalgamated company) or form a new one. In a demerger, one or more undertakings of a company (the demerged company) are transferred to another company (the resulting company). The demerged company continues to exist. The amalgamating company usually does not.

This topic focuses on losses. A loss-making company has value because its losses can be set off against future profits. Section 116 of the Income-tax Act, 2025 decides whether those losses and the unabsorbed depreciation move to the successor company. The section lets the accumulated loss and unabsorbed depreciation of the amalgamating company be treated as those of the amalgamated company for the tax year of amalgamation. This applies where the amalgamation falls in one of the listed categories.

The listed categories are: a company owning an industrial undertaking, a ship or a hotel amalgamating with another company; a banking company with a specified bank; public sector companies with public sector companies; and an erstwhile public sector company in a strategic disinvestment case, within five years from the end of the tax year in which the restriction on amalgamation in the share purchase agreement ends.

Even then, the benefit is conditional. Both the amalgamating and the amalgamated company must satisfy holding and business continuity tests. If a condition is breached, the loss or depreciation already set off becomes income of the amalgamated company in the year of non-compliance. Your planning job is to check each condition before the scheme is designed, and to monitor it for five years after.

Key rules to remember

Amalgamation: eligible cases: Loss and unabsorbed depreciation of amalgamating company are deemed to be those of the amalgamated company for the tax year of amalgamation; Applies to: industrial undertaking, ship or hotel company; banking company with a specified bank; public sector companies; erstwhile public sector company in strategic disinvestment cases (section 116(1)).
Conditions on the amalgamating company: Business in which the loss arose for 3 or more years; at least ¾ of the book value of fixed assets held 2 years preceding the date of amalgamation still held continuously as on the date of amalgamation; Both tests must be met (section 116(4)(a)).
Conditions on the amalgamated company: Hold at least ¾ of book value of fixed assets acquired, and continue the business, for a minimum of 5 years from the date of amalgamation; fulfil other prescribed conditions; Section 116(4)(b). The prescribed conditions aim at business revival or a genuine business purpose.
Consequence of breach: Loss or depreciation set off earlier = income of the amalgamated company in the year of non-compliance; Section 116(5). Planning point: breach reverses the benefit already taken.
Demerger: directly relatable losses: Loss and unabsorbed depreciation directly relatable to transferred undertakings go to the resulting company; Section 116(6)(a).
Demerger: non-relatable losses: Demerged company's share : resulting company's share = assets retained by the demerged company : assets of undertakings transferred to the resulting company; Section 116(6)(b). The demerged company's share follows the assets it retained and the resulting company's share follows the assets transferred. Each company then carries forward its share.
Time limit on carry forward: Loss carried forward for not more than 8 tax years immediately succeeding the tax year in which it was first computed for the original predecessor entity; Section 116(12), for amalgamations and reorganisations effected on or after 1 April 2025.
Accumulated loss: Business loss (excluding speculation loss) that would have been eligible for carry forward and set off to the predecessor under section 112 had the amalgamation or demerger not occurred; Section 116(13)(a). Unabsorbed depreciation is defined in the same way in 116(13)(e).

How to solve Tax Planning for Amalgamation and Demerger questions

Use this order for any case question on losses in an amalgamation or demerger.

1Identify the event: amalgamation or demerger. Note who is the amalgamating, amalgamated, demerged and resulting company.
2For an amalgamation, check whether it falls in a listed category under section 116(1), such as a company owning an industrial undertaking, a ship or a hotel. If not, the section does not carry the losses over.
3Test the amalgamating company: business for 3 or more years and continuous holding of at least ¾ of book value of fixed assets held two years earlier.
4Test the amalgamated company: holding ¾ of book value of acquired fixed assets and continuing the business for 5 years, plus any prescribed conditions.
5For a demerger, classify losses as directly relatable to the transferred undertakings or not. Allocate relatable losses to the resulting company and apportion the rest in the asset ratio.
6Apply the eight-year limit where the amalgamation or reorganisation is on or after 1 April 2025, counting from the year the loss was first computed for the original predecessor.
7State the consequence of any breach, then give a conclusion with a drafting or compliance point such as monitoring asset holding for five years.

Quickest way: Four-question loss check

When to use it: Use when the exam gives limited time and asks whether losses can be carried forward after a scheme.

Is it an amalgamation in a listed category, or a demerger? If neither, stop.
Did the amalgamating company run the loss business for 3 years, and does it still hold at least ¾ of the book value of the fixed assets it held two years before amalgamation?
Will the amalgamated company hold at least ¾ of the book value of those assets and run the business for 5 years?
What is the loss, and does the 8-year window still have time? For a demerger, split relatable and non-relatable losses.

Common mistakes in Tax Planning for Amalgamation and Demerger

Assuming every amalgamation carries forward losses.
Students remember the conditions but forget that section 116(1) lists specific categories.
Fix: First confirm the case is one of the four listed categories before testing conditions.
Applying the 5-year holding test to the amalgamating company.
The two sets of conditions look alike.
Fix: Amalgamating company: 3 years of business, and at least ¾ of the book value of fixed assets held two years preceding the date of amalgamation still held continuously on that date. Amalgamated company: 5 years of holding and continuing business.
Apportioning all demerger losses by asset ratio.
Students remember the ratio and forget the first rule.
Fix: Directly relatable losses go to the resulting company. Only non-relatable losses are apportioned.
Saying the loss is lost forever on breach.
The consequence is misread.
Fix: Under section 116(5), the set off or depreciation already claimed is deemed income of the amalgamated company in the year of non-compliance.
Ignoring the eight-year limit.
Students think losses move over with a fresh period.
Fix: For schemes on or after 1 April 2025, the period runs from the year the loss was first computed for the original predecessor, so a fresh clock is not available.

Worked examples

Example 1

Sundaram Textiles Ltd, which runs a manufacturing unit, has had business losses for 4 years. It amalgamates into Kaveri Industries Ltd on 1 October 2026. Sundaram has held continuously, as on the date of amalgamation, at least three-fourths of the book value of the fixed assets it held two years preceding that date. Advise whether the losses move to Kaveri and what Kaveri must do.

Show the solution

Provision: section 116(1) covers a company owning an industrial undertaking. Manufacture or processing of goods is an industrial undertaking under section 116(13)(b). So the case is in a listed category.
Effect: Sundaram's accumulated loss and unabsorbed depreciation are deemed to be Kaveri's for the tax year of amalgamation, and the usual set-off and carry-forward rules then apply.
Amalgamating company tests: it has run the loss business for 4 years (3 or more is needed) and has held continuously at least three-fourths of the book value of the fixed assets it held two years before the amalgamation. Both tests pass.
Amalgamated company tests: Kaveri must hold at least ¾ of the book value of the acquired fixed assets and continue the business for 5 years from the date of amalgamation, and meet any prescribed conditions.
Time limit: because the amalgamation is after 1 April 2025, the loss can be carried forward for at most 8 tax years after the year it was first computed for Sundaram.
Compliance point: if Kaveri breaches any condition, the loss or depreciation set off becomes its income in the year of breach.

Answer: Yes, the losses pass to Kaveri because Sundaram owns an industrial undertaking and meets the 3-year business test and the ¾ book value asset test. Kaveri must keep ¾ of the book value of the acquired assets and continue the business for 5 years. Losses are limited to the 8-year window. A breach makes the earlier set off taxable.

Example 2

Meghdoot Ltd demerges its retail undertaking into Dhanush Retail Ltd. Total accumulated loss is ₹90,00,000, of which ₹40,00,000 is directly relatable to the retail undertaking. The balance is not directly relatable. Assets of the undertakings transferred are ₹3,00,00,000 and assets retained by Meghdoot are ₹6,00,00,000. Compute the loss each company carries forward.

Show the solution

Assets: transferred ₹3,00,00,000 and retained ₹6,00,00,000 (₹6 crore). Total is ₹9,00,00,000.
Directly relatable loss of ₹40,00,000 goes to Dhanush, under section 116(6)(a).
Non-relatable loss = ₹90,00,000 − ₹40,00,000 = ₹50,00,000.
Apportion under section 116(6)(b): Meghdoot's share follows assets retained and Dhanush's share follows assets transferred, so the ratio is 6 : 3 = 2 : 1.
Meghdoot share = ₹50,00,000 × 2 ÷ 3 = ₹33,33,333 (rounded).
Dhanush share = ₹50,00,000 × 1 ÷ 3 = ₹16,66,667 (rounded).
Dhanush total = ₹40,00,000 + ₹16,66,667 = ₹56,66,667. Check: ₹33,33,333 + ₹56,66,667 = ₹90,00,000.

Answer: Meghdoot carries forward about ₹33,33,333 and Dhanush Retail about ₹56,66,667. The total equals the original ₹90,00,000.

Exam tips

Write the section 116 provision first, then apply the facts, then conclude. Examiners reward this order in case-based answers.
Always list the conditions for the amalgamating and the amalgamated company separately. Mixing them costs marks.
In demerger questions, show the split of relatable and non-relatable loss in a small working before the ratio.
Mention the 8-year limit and the consequence of breach in any loss question on a post-April 2025 scheme.
End with a practical compliance point, such as tracking asset holding for 5 years after the scheme.

Practice questions from Tax Planning and Business Restructuring

Tax Planning for Amalgamation and Demerger 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 and Demerger: frequently asked questions

What is the difference between amalgamation and demerger under income tax?

In an amalgamation, one or more companies merge into another and the amalgamating company usually ceases. In a demerger, one or more undertakings move to a resulting company and the demerged company continues. Section 116 treats their losses differently: amalgamation passes losses to the amalgamated company under conditions, while demerger splits them between the demerged and resulting companies.

Are losses carried forward in every amalgamation?

No. Section 116(1) applies to listed cases, such as a company owning an industrial undertaking, a ship or a hotel, a banking company with a specified bank, and certain public sector company cases. Conditions on both companies must also be met.

How long can losses be carried forward after an amalgamation?

For amalgamations or reorganisations effected on or after 1 April 2025, the loss can be carried forward for not more than eight tax years immediately after the year in which it was first computed for the original predecessor entity.

What happens if the amalgamated company breaks a condition?

The set off of loss or allowance of depreciation already made is deemed to be income of the amalgamated company chargeable to tax in the year in which the non-compliance occurs.