Carry Forward of Losses in Amalgamation and Demerger: Income Tax Act 2025 (Sections 116, 117, 118)
When companies merge or split, the business loss and unabsorbed depreciation of the old company can move to the new one, but only in listed cases and only if conditions are met. Under the Income Tax Act, 2025, section 116 covers amalgamations, demergers and conversions of firms, proprietorships and private companies, section 117 covers certain bank and insurer mergers, and section 118 covers co-operative banks. For amalgamations and firm, proprietorship or company-to-LLP conversions on or after 1 April 2025, a transferred business loss can be carried forward for no more than eight tax years counted from the year the loss first arose.
Every rule below is taken from the Act as amended by the Finance Act, 2026, and from rule 60 of the Income-tax Rules, 2026, with the section number alongside. This is general information, not advice on a specific scheme.
What loss actually moves in an amalgamation or demerger?
Two things move. The first is the accumulated loss: the loss under the head "Profits and gains of business or profession" that the old entity could still have carried forward under section 112. Loss from a speculation business is excluded (section 116(13)(a)). The second is unabsorbed depreciation: depreciation that was due to the old entity but not yet allowed (section 116(13)(e)).
Section 112(2) is the base rule: a business loss cannot be carried forward for more than eight tax years after the year it was first computed. Section 116(12) applies the same count to a loss that has moved to a successor in an amalgamation or a firm, proprietorship or LLP conversion, and the clock does not restart. Section 116(12) does not mention demergers. For a strategic-disinvestment amalgamation, section 116(2) also caps the loss at the public sector company's accumulated loss and unabsorbed depreciation on the date it ceased to be a public sector company.
Which reorganisations does section 116 cover?
Section 116(1) lists four kinds of amalgamation (the first four rows below); the other rows come from later sub-sections. In an amalgamation under 116(1), the amalgamating company's accumulated loss and unabsorbed depreciation are treated as the amalgamated company's loss and depreciation for the tax year of the amalgamation.
| Case | Provision | What is covered |
|---|---|---|
| Industrial undertaking, ship or hotel | 116(1)(a) | A company owning an industrial undertaking, a ship or a hotel amalgamates with another company |
| Banking company | 116(1)(b) | A banking company amalgamates with a "specified bank" (SBI or a corresponding new bank) |
| Public sector companies | 116(1)(c) | One or more public sector companies amalgamate with other public sector companies |
| Strategic disinvestment | 116(1)(d) | An erstwhile public sector company amalgamates within five years from the end of the tax year in which the share purchase agreement's restriction on amalgamation ends |
| Demerger | 116(6) | Loss and depreciation of the demerged company go to the resulting company, or are split |
| Firm to company | 116(8) | Firm succeeded by a company meeting section 70(1)(zd) |
| Proprietorship to company | 116(8) | Proprietary concern succeeded by a company meeting section 70(1)(zf) |
| Company to LLP | 116(10) | Private or unlisted public company converted to an LLP meeting section 70(1)(ze) |
"Industrial undertaking" in section 116(13)(b) means an undertaking engaged in manufacture or processing of goods, computer software manufacture, power generation or distribution, telecom services, mining, or construction of ships, aircraft or rail systems.
Who gets the loss, and for how long?
What conditions must the amalgamation meet?
Section 116(4) applies despite the earlier sub-sections. The loss is not set off, and unabsorbed depreciation is not allowed, in the amalgamated company's assessment unless all of these hold.
| Who | Condition | Provision |
|---|---|---|
| Amalgamating company | Has run the business in which the loss or depreciation arose for 3 or more years | 116(4)(a)(i) |
| Amalgamating company | Has continuously held, at the amalgamation date, at least 3/4 of the book value of fixed assets it held two years before | 116(4)(a)(ii) |
| Amalgamated company | Holds at least 3/4 of the book value of the acquired fixed assets continuously for 5 years from the amalgamation | 116(4)(b)(i) |
| Amalgamated company | Continues the amalgamating company's business for 5 years from the amalgamation | 116(4)(b)(ii) |
| Amalgamated company | Meets the prescribed revival or genuine-purpose conditions (rule 60) | 116(4)(b)(iii) |
Rule 60(1) prescribes, where the amalgamated company owns an industrial undertaking of the amalgamating company: production of at least 50% of installed capacity before the end of four years from the amalgamation, and keeping that level up to the end of five years. "Installed capacity" means the capacity existing on the date of amalgamation (rule 60(3)). The company must file a certificate in Form 29, verified by an accountant, with the return for the year the level is achieved and for later years within the five-year period (rule 60(1)(b)). On application, the Central Government may relax the production level, the period, or both, having regard to genuine efforts made (rule 60(2)).
What happens if a condition is broken?
Section 116(5): the loss or depreciation set off in any earlier tax year by the amalgamated company is deemed to be its income of the year in which the non-compliance occurs, and is taxed then. Sections 116(9) and 116(11) do the same for a failed firm, proprietorship or LLP conversion.
How is loss split in a demerger?
Under section 116(6), loss and unabsorbed depreciation directly relatable to the undertakings transferred go to the resulting company. What is not directly relatable is apportioned between the demerged and the resulting company in the same proportion as the assets of the undertakings are retained and transferred. Section 116(7) lets the Central Government notify conditions to ensure the demerger is for genuine business purposes.
Worked example 1: eight-year clock after an amalgamation (tax year 2026-27)
Assumptions: Alpha Ltd, an industrial undertaking, first computed a business loss of Rs 80 lakh for tax year 2023-24. It amalgamates with Beta Ltd during 2026-27, meets section 116(4), and the amalgamation is after 1 April 2025. Beta's usable years run from 2026-27 to the eighth year after 2023-24, which is 2031-32. Beta's profits before this loss:
| Tax year | Profit (Rs lakh) | Loss set off | Loss left |
|---|---|---|---|
| 2026-27 | 10 | 10 | 70 |
| 2027-28 | 15 | 15 | 55 |
| 2028-29 | 20 | 20 | 35 |
| 2029-30 | 10 | 10 | 25 |
| 2030-31 | 5 | 5 | 20 |
| 2031-32 | 10 | 10 | 10 |
Total set off is 10 + 15 + 20 + 10 + 5 + 10 = Rs 70 lakh. The remaining Rs 10 lakh cannot be carried into 2032-33 because the eight-year limit in section 116(12) has ended. This example ignores other incomes and other loss heads.
Worked example 2: demerger split
Assumptions: Gamma Ltd demerges one undertaking into Delta Ltd. Gamma's accumulated loss is Rs 90 lakh. Rs 50 lakh is directly relatable to the transferred undertaking. The undertaking's assets are Rs 30 crore (transferred) against Rs 70 crore retained by Gamma.
- Directly relatable loss: Rs 50 lakh goes to Delta (section 116(6)(a)).
- Remaining loss: 90 - 50 = Rs 40 lakh, apportioned by assets (section 116(6)(b)).
- Delta's share: 30 / (30 + 70) = 30%, so 30% of 40 = Rs 12 lakh.
- Gamma's share: 70% of 40 = Rs 28 lakh.
- Delta carries Rs 50 + 12 = Rs 62 lakh. Gamma keeps Rs 28 lakh. Check: 62 + 28 = Rs 90 lakh.
The same method applies to unabsorbed depreciation.
Worked example 3: clawback after a breach
Assumptions: an amalgamated company set off Rs 20 lakh of the amalgamating company's loss in 2026-27 and Rs 15 lakh in 2027-28. In 2029-30, within the five-year window, it sells fixed assets so that it holds less than 3/4 of the book value of the acquired assets. Under section 116(5) the Rs 35 lakh (20 + 15) set off is deemed income of 2029-30 and taxed in that year.
What about firms, proprietorships and LLPs?
A firm succeeded by a company that meets section 70(1)(zd), or a proprietary concern succeeded by a company that meets section 70(1)(zf), passes its loss and unabsorbed depreciation to the company (section 116(8)). Those conditions include that the company receives all assets and liabilities, the owners receive only shares, and the owners hold at least 50% of voting power, continuing for five years from the succession.
A private or unlisted public company converted to an LLP meeting section 70(1)(ze) passes its loss and depreciation to the LLP (section 116(10)). Section 70(1)(ze) includes limits of Rs 60 lakh turnover and Rs 5 crore assets in each of the three preceding years, a 50% profit-share floor for five years, and no payout from accumulated profit for three years.
Real-life example 1. Ravi runs a trading business as a proprietor and has carried-forward business loss. He incorporates a company, gets only shares, and keeps 60% of the voting power for five years. Section 116(8) lets the company claim his loss as its own. If he sells down to 40% in year three, section 70(1)(zf) is no longer met and section 116(9) taxes the loss already set off.
Real-life example 2. Meena and her partner convert their loss-making partnership into a company. Both become shareholders in their capital-account ratio and receive nothing else. The firm's loss and unabsorbed depreciation become the company's for the year of succession (section 116(8)), and the usual set-off rules apply.
Which bank and insurer mergers fall under section 117?
Section 117(1) applies despite section 116 and the general definition of amalgamation in section 2(6)(a) to (c). It covers:
- banking companies amalgamated with a banking institution under a Central Government scheme under section 45(7) of the Banking Regulation Act, 1949, or with a banking institution or company after a strategic disinvestment, if the amalgamation is within five years from the end of the tax year of the disinvestment;
- corresponding new banks amalgamated under a Central Government scheme under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or 1980;
- general insurance Government companies amalgamated under a scheme under section 16 of the General Insurance Business (Nationalisation) Act, 1972.
The loss and unabsorbed depreciation become the successor's for the year the scheme comes into force. Schemes brought into force on or after 1 April 2025 carry the same eight-year limit (section 117(2)). Section 117 does not itself repeat the three-year and five-year conditions of section 116(4).
How are co-operative banks treated under section 118?
On an amalgamation, the successor co-operative bank may set off the predecessor's accumulated loss and unabsorbed depreciation as if the amalgamation had not happened (section 118(1)). On a demerger, loss directly relatable to the transferred undertaking goes wholly to the resulting bank, and the rest is split in the proportion of assets distributed (section 118(2)).
Conditions in section 118(3) match the section 116(4) pattern: predecessor in banking for three or more years and holding 3/4 of fixed assets (book value) for two years before; successor holding 3/4 of acquired fixed assets and continuing the business for five years, plus any prescribed conditions. If any condition fails, the set-off is deemed income of the successor for the year of non-compliance (section 118(5)). The year is treated as two separate tax years, before and from the reorganisation date, for set off and carry forward (section 118(6)).
What if the amalgamation happened before 1 April 2026?
A set-off already made in a tax year beginning before 1 April 2026 by an amalgamated company, successor company or successor LLP, under section 72A of the repealed 1961 Act, is not wiped out. If any condition of that old section is later not complied with, the amount set off is deemed income of the successor, chargeable under the 2025 Act, for the year of non-compliance (section 536(2)(o)). The same applies to a co-operative bank successor for set-offs under old section 72AB (section 536(2)(p)). So for a pre-2026 merger, keep monitoring the old five-year conditions.
Quick reference
| Item | Rule | Reference |
|---|---|---|
| Carry-forward limit after amalgamation or conversion on or after 1 April 2025 (not stated for demergers or section 118) | 8 tax years from the first loss year | 116(12), 117(2) |
| Amalgamating company's business age | 3 or more years | 116(4)(a)(i), 118(3)(a)(i) |
| Asset holding test | At least 3/4 of book value of fixed assets | 116(4), 118(3) |
| Business continuity and asset holding by successor | 5 years | 116(4)(b), 118(3)(b) |
| Industrial undertaking production | 50% of installed capacity before year 4, kept to year 5 | Rule 60(1)(a) |
| Certificate | Form 29 with the return | Rule 60(1)(b) |
| Breach | Set-off deemed income of the year of non-compliance | 116(5), 116(9), 116(11), 118(5) |
Common mistakes
- Assuming the eight-year clock restarts after a merger. It runs from the year the loss was first computed for the original predecessor (section 116(13)(c)).
- Treating every merger as eligible. Section 116(1) lists the cases. An amalgamation outside them is not covered by this section.
- Selling acquired assets within five years. Falling below 3/4 of book value can reverse earlier set-offs (section 116(5)).
- Forgetting Form 29. For an industrial undertaking, the accountant's certificate goes with each return in the five-year period (rule 60(1)(b)).
- Mixing up the loss categories. Speculation loss is outside accumulated loss (section 116(13)(a)).
- Ignoring the not-directly-relatable loss in a demerger. It must be apportioned by assets, not assigned freely.
Where this is in the Act
- Section 116: amalgamation, demerger, firm, proprietorship and company-to-LLP conversions
- Section 117: bank and general insurance scheme amalgamations
- Section 118: co-operative bank amalgamation and demerger
- Section 112: carry forward of business loss (eight years)
- Section 70(1)(zd), (ze), (zf): conditions for succession and conversion
- Rule 60: conditions for loss carry forward on amalgamation; Form 29
For the basic set-off and carry-forward rules, see set off and carry forward of losses, and for the transfer-side tax rules see business reorganisation and amalgamation.
For a CA advising on a scheme, the work is tracking dates: the amalgamation date, the five-year holding window, the Form 29 filing with each return. Finexo's practice management software keeps client tasks and deadlines in one place. It does not compute the loss split for you.
Frequently Asked Questions
Does a merger completed before 1 April 2026 still carry conditions?
Yes. Where a successor set off loss or depreciation before 1 April 2026 under section 72A of the repealed Act, a later breach of that section's conditions makes the set-off deemed income of the breach year under the 2025 Act (section 536(2)(o)).
Can accumulated loss be carried forward after an amalgamation?
Yes, in the cases listed in section 116(1), if the conditions in section 116(4) and rule 60 are met. The amalgamating company's accumulated loss and unabsorbed depreciation are treated as the amalgamated company's for the year of amalgamation.
For how many years can a transferred loss be carried forward?
For an amalgamation, bank or insurer scheme, or firm, proprietorship or LLP conversion on or after 1 April 2025, no more than eight tax years after the year the loss was first computed for the original predecessor (sections 116(12) and 117(2)).
What happens if the amalgamated company sells the assets within five years?
If it fails to hold at least 3/4 of the book value of acquired fixed assets for five years, the loss and depreciation already set off are deemed its income of the year of non-compliance (section 116(5)).
How is loss divided in a demerger?
Loss directly relatable to the transferred undertakings goes to the resulting company. The rest is split in proportion to the assets retained and transferred (section 116(6)).
What is Form 29 under rule 60?
It is an accountant's certificate on production particulars. An amalgamated company owning an industrial undertaking files it with its return for the year the 50% capacity level is reached and for later years within five years of amalgamation (rule 60(1)(b)).
Do co-operative banks get the same treatment?
Section 118 gives co-operative banks a parallel regime for amalgamation and demerger, with similar three-year, five-year and 3/4 asset conditions, and a clawback under section 118(5) if they fail.