Section 116 Income Tax Act 2025: Can Losses Be Carried Forward After Amalgamation?
Section 116 explains when accumulated business losses and unabsorbed depreciation may pass to a successor following an amalgamation, demerger or qualifying business reorganisation. The benefit is conditional, not automatic.
Updated: 10 November 2026 | Statutory reference: Income-tax Act, 2025, section 116
Which amalgamations qualify under Section 116(1)?
Subject to the further conditions in the section, accumulated loss and unabsorbed depreciation of an amalgamating company are treated as the corresponding loss or depreciation allowance of the amalgamated company in the tax year of amalgamation in the following cases:
- A company owning an industrial undertaking, ship or hotel amalgamates with another company.
- A banking company covered by section 5(c) of the Banking Regulation Act, 1949 amalgamates with a specified bank.
- One or more public sector companies amalgamate with one or more other public sector companies.
- An erstwhile public sector company amalgamates with another company or companies where the strategic-disinvestment share purchase agreement restricted immediate amalgamation and the amalgamation takes place within five years from the end of the tax year in which that restriction ends.
For the strategic-disinvestment category, section 116(2) limits the eligible loss and depreciation to the amounts standing at the date the company ceased to be a public sector company because of strategic disinvestment. Section 116(3) defines relevant terms including control, erstwhile public sector company and strategic disinvestment.
What conditions apply to an amalgamation?
Conditions for the amalgamating company: Section 116(4)(a)
- It must have carried on the business in which the loss arose or depreciation remained unabsorbed for at least three years.
- On the amalgamation date, it must have continuously held at least three-fourths of the book value of fixed assets held two years before that date.
Conditions for the amalgamated company: Section 116(4)(b)
- It must continuously hold for at least five years from amalgamation at least three-fourths of the book value of the fixed assets acquired from the amalgamating company.
- It must continue the amalgamating company's business for at least five years.
- It must meet other prescribed conditions relating to revival or genuine business purpose.
Consequence of breach: Under section 116(5), losses or depreciation previously set off or allowed in the amalgamated company's assessment are deemed taxable income in the tax year of non-compliance.
How are losses treated on demerger? Section 116(6)-(7)
Losses and unabsorbed depreciation directly relatable to an undertaking transferred in a demerger follow that undertaking to the resulting company. Amounts not directly relatable are divided between the demerged and resulting companies in the proportion of the assets retained and transferred, respectively. The Central Government may notify conditions to ensure a genuine business purpose.
What happens when a firm, proprietorship or company converts?
Section 116(8)-(9): When a firm or proprietary concern is succeeded by a company satisfying section 70(1)(zd) or 70(1)(zf), respectively, qualifying accumulated loss and unabsorbed depreciation are treated as those of the successor company. If the required conditions are later breached, previously utilised amounts become taxable income in the year of breach.
Section 116(10)-(11): Similar treatment applies where a private company or unlisted public company is succeeded by a limited liability partnership meeting section 70(1)(ze), with a corresponding recapture rule for non-compliance.
Does amalgamation restart the eight-year loss period?
No, for transactions covered by section 116(12). Where an amalgamation under sub-section (1) or a reorganisation under sub-section (8) or (10) takes place on or after 1 April 2025, qualifying accumulated losses transferred to a successor cannot be carried forward beyond eight tax years immediately succeeding the tax year in which the loss was first computed for the original predecessor entity. A later merger or conversion does not restart the clock.
This particular eight-year rule concerns the accumulated loss. Unabsorbed depreciation is separately governed by the applicable depreciation provisions; do not assume the same eight-year limit applies to it.
Important statutory definitions: Section 116(13)
Practical illustrations
Example 1: Business continuity after amalgamation
Company A has eligible accumulated business losses and amalgamates into Company B. If the transaction qualifies under section 116(1) and both companies satisfy the applicable asset-holding, business-history, continuation and prescribed requirements, Company B may claim the eligible loss subject to the statutory carry-forward rules. Failure to continue the business for the required five years can trigger recapture under section 116(5).
Example 2: Losses allocated on demerger
A demerged company has an eligible loss of Rs. 20 lakh directly attributable to the transferred undertaking. Subject to the applicable statutory conditions, that loss follows the undertaking to the resulting company. A separate common loss not directly relatable must be apportioned by the statutory asset proportion, not allocated arbitrarily.
Example 3: Original loss year remains relevant
An eligible loss first computed for the original predecessor for tax year 2026-27 is transferred in a qualifying amalgamation in tax year 2028-29. Under section 116(12), the loss period is counted from tax year 2026-27, not from the amalgamation year; it cannot extend beyond the eight immediately succeeding tax years.
Relationship with the Income-tax Act, 1961
Section 116 broadly corresponds to section 72A of the Income-tax Act, 1961. For historic losses and transitions, also examine the repeal and savings provisions in section 536 of the 2025 Act and the relevant Income Tax Department guidance. The legal position depends on the original loss year and the timing and nature of the reorganisation.
Frequently asked questions
Can every company transfer its tax losses through a merger?
No. Section 116 applies to specified transactions and imposes qualifying conditions. A merger alone does not guarantee loss transfer.
What is the minimum business-continuation period?
For amalgamations governed by section 116(4), the amalgamated company must continue the amalgamating company's business for at least five years.
Does a demerger transfer all losses to the resulting company?
No. Directly attributable losses follow the transferred undertaking; non-attributable amounts are apportioned according to the statutory asset ratio.
Does the eight-year period restart after amalgamation?
No. For transactions within section 116(12), the period runs from the tax year in which the original predecessor entity first computed the loss.
Can unabsorbed depreciation also transfer?
Yes, in qualifying transactions and subject to applicable conditions. Its treatment must be distinguished from the time limit on accumulated business losses.
Statutory text and further reading
This educational explanation summarises the statutory scheme. Review the enacted text, subsequent amendments, notified rules and facts of the transaction before claiming relief.