Section 116 of the Income-tax Act, 2025 — Carry Forward and Set-off of Losses on Amalgamation or Demerger

In plain language

What Section 116 is about

When one company merges into another (an amalgamation) or splits off part of its business into a new company (a demerger), the loss-making company's unused tax losses and unabsorbed depreciation do not automatically vanish. Section 116 of the Income-tax Act, 2025 is the provision that lets the successor company inherit and use those accumulated business losses and unabsorbed depreciation — subject to strict conditions. It is the direct successor to the well-known Section 72A of the Income-tax Act, 1961, and it also folds in the treatment for co-operative bank amalgamations and business reorganisations that the old Act spread across Sections 72A, 72AA and 72AB.

The core idea: the accumulated loss and unabsorbed depreciation of the predecessor (amalgamating company, demerged company, converting firm/proprietorship/company) are deemed to be the loss and depreciation of the successor for the year in which the reorganisation takes place, so the successor can set them off against its future profits.

Who it applies to

• Amalgamation of a company owning an industrial undertaking, ship or hotel with another company.
• Amalgamation of a banking company with a specified bank, and amalgamation of co-operative banks (the erstwhile Section 72AA / 72AB cases).
• Amalgamation of one or more public sector companies, and mergers involving an erstwhile public sector company (within 5 years of strategic disinvestment).
• Demergers — where losses and depreciation directly relatable to the transferred undertaking pass to the resulting company; losses not directly relatable are apportioned in the ratio of assets retained versus transferred.
• Conversions — of a firm or sole proprietary concern into a company, or a private/unlisted public company into an LLP, that satisfy the relevant conditions.

The big change: an absolute 8-year clock

This is the most important reform, effective for any amalgamation or business reorganisation carried out on or after 1 April 2025. Earlier, when losses were passed to an amalgamated company, the eight-year carry-forward clock effectively restarted in the successor's hands. Now, under Section 116, the inherited loss can be carried forward for not more than eight tax years counted from the year the loss was first computed by the original predecessor. The successor gets only the balance of the original 8-year window — the clock is not reset. This shuts down "loss cascading" through chains of mergers.

Key conditions the parties must satisfy

The amalgamating (predecessor) company must:

• Have been engaged in the business for at least 3 years in which the accumulated loss/depreciation arose.
• Have continuously held at least 3/4th (75%) of the book value of its fixed assets for two years before the amalgamation.

The amalgamated (successor) company must:

• Hold at least 3/4th (75%) of the book value of the fixed assets acquired for a continuous period of 5 years from the date of amalgamation.
• Continue the business of the amalgamating company for at least 5 years.
• Achieve at least 50% of the installed capacity of the acquired undertaking (within 4 years) and maintain it until the end of 5 years, plus satisfy other conditions notified to ensure genuine business revival (the Rule 9C / Form 62 mechanism, with a certificate from a Chartered Accountant).

How it interacts with other sections

• General carry-forward rules (Section 112 of the 2025 Act) — a loss qualifies as "accumulated loss" only if it would otherwise have been eligible for carry-forward and set-off. Speculation-business losses are excluded.
• Demerger / reorganisation reliefs — Section 116 sits alongside the capital-gains exemptions for amalgamation and demerger, so the merger is tax-neutral both for gains and for losses.
• Set-off and carry-forward chapter — Section 116 is the special override; the ordinary rules on set-off across heads and years still govern how the inherited loss is actually used year to year.

Practical implications

• Acquirers must model the residual life of losses — a target's ₹40 crore loss that is already 6 years old only has 2 usable years left after 1 April 2025, not a fresh 8.
• Compliance is not optional. If the successor breaks a condition (sells off the fixed assets early, abandons the business, or misses the capacity target), the losses/depreciation already set off are clawed back and taxed as income in the year the breach happens.
• Documentation matters — maintain the CA certificate and the prescribed form, and keep records establishing the year each loss was first computed by the original predecessor.