Sections 35DD and 35DDA: Amortisation of Amalgamation, Demerger and VRS Expenditure
Sections 35DD and 35DDA of the Income-tax Act, 1961 provided five-year deductions for specified expenditure connected with amalgamation or demerger and for payments made under voluntary retirement schemes. From 1 April 2026, the Income-tax Act, 2025 is in force, but eligible unexpired deductions arising under these repealed provisions continue under the transition rules.
Section 35DD: expenditure on amalgamation or demerger
Meaning. Section 35DD dealt with amortisation of expenditure incurred by an Indian company wholly and exclusively for the purposes of amalgamation or demerger of an undertaking. For qualifying expenditure incurred on or after 1 April 1999, the deduction was spread equally over five successive previous years, starting with the year in which the amalgamation or demerger took place.
Main conditions under former Section 35DD
The assessee had to be an Indian company; the expenditure had to be incurred wholly and exclusively for the amalgamation or demerger of an undertaking; and one-fifth of qualifying expenditure was deductible in each of five successive previous years. The same expenditure could not also be deducted under another provision of the 1961 Act.
The provision therefore operated as an amortisation rule rather than allowing the entire qualifying cost in one year. Whether a particular professional, legal, advisory or other transaction cost satisfies the statutory test depends on its nature and its direct connection with the amalgamation or demerger.
Section 35DDA: expenditure under a voluntary retirement scheme
Meaning. Section 35DDA dealt with expenditure incurred by an assessee by way of payment of a sum to an employee in connection with voluntary retirement under a voluntary retirement scheme. One-fifth of the amount paid was deductible in computing business profits for the year of payment, and the balance was deductible in equal instalments over the next four previous years.
Transfer or reorganisation during the five-year period
The former provision also contained continuity rules where the relevant undertaking was transferred before the five-year deduction period ended. Subject to the statutory conditions, the remaining deduction could follow the undertaking to the amalgamated company, resulting company or specified successor on qualifying reorganisation.
These continuity rules covered amalgamation, demerger, qualifying succession of a firm or proprietary concern by a company, and qualifying succession of a private company or unlisted public company by a limited liability partnership. The predecessor was not allowed the deduction for the year in which the relevant amalgamation, demerger or succession took place where the statutory successor rule applied.
Section 35DD and Section 35DDA: key differences
| Point | Section 35DD | Section 35DDA |
|---|---|---|
| Nature of expenditure | Expenditure wholly and exclusively for amalgamation or demerger of an undertaking | Payment to an employee in connection with voluntary retirement under a VRS |
| Eligible assessee | Indian company | Assessee incurring qualifying VRS expenditure |
| Deduction period | Five successive previous years | Year of payment plus four immediately succeeding previous years |
| Annual deduction | One-fifth of qualifying expenditure | One-fifth of qualifying expenditure |
| Double deduction | Not permitted | Not permitted |
What happens after the Income-tax Act, 2025 came into force?
The Income-tax Act, 2025 came into force on 1 April 2026. Accordingly, Sections 35DD and 35DDA should now be read as provisions of the repealed Income-tax Act, 1961 when dealing with expenditure and deduction rights originating under that Act.
Importantly, the transition rule protects an eligible deduction that would have continued under former Sections 35DD or 35DDA. If the conditions of the former provision are satisfied, the deduction continues for a tax year beginning on or after 1 April 2026 and is treated as part of the corresponding deferred revenue expenditure allowance under the 2025 Act.
This means repeal does not, by itself, extinguish the remaining instalments of a valid five-year amortisation that began under the 1961 Act.
Simple examples
Example: former Section 35DD
If an Indian company incurred Rs. 10,00,000 of qualifying amalgamation expenditure in a year governed by former Section 35DD, the statutory method allowed Rs. 2,00,000 per year over five successive previous years, subject to all conditions. Any eligible balance extending beyond 1 April 2026 is dealt with under the transition rule of the 2025 Act.
Example: former Section 35DDA
If an assessee paid Rs. 25,00,000 as qualifying VRS expenditure under former Section 35DDA, the statutory method spread the deduction at Rs. 5,00,000 per year over five years, beginning with the year of payment, subject to the provision and the applicable transition rules.
Practical points before claiming the deduction
Keep the amalgamation, demerger or VRS scheme documents, board and regulatory records where applicable, invoices, employee-wise payment evidence and accounting records supporting the expenditure. For deductions crossing 1 April 2026, identify the original provision, the amount already allowed, the remaining instalments and the corresponding treatment under the Income-tax Act, 2025.
This page is a general statutory guide. Tax treatment depends on the facts, the year involved and satisfaction of the applicable conditions.