Section 116 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 116 decides what happens to a company's accumulated business losses and unabsorbed depreciation when it is amalgamated or demerged, or when a firm, proprietary concern or private company is succeeded by a company or a limited liability partnership. In the listed cases the loss passes to the successor, subject to conditions, and it can be carried forward for not more than eight tax years in the cases to which sub-section (12) applies. This article reads section 116 as per the Income-tax Act, 2025 as amended by the Finance Act, 2026; later amendments, rules and notifications should be checked. For help structuring a reorganisation, see our tax planning advisory.
On a qualifying amalgamation, the accumulated loss and unabsorbed depreciation of the amalgamating company are deemed to be the amalgamated company's for the tax year of the amalgamation, but only if the conditions in sub-section (4) are met, failing which the set-off is deemed income. On a demerger, losses go to the resulting company if directly relatable, otherwise they are apportioned by asset proportion. For amalgamations and reorganisations effected on or after 1 April 2025, the transferred loss can be carried forward for not more than eight tax years.
Section 116(1): which amalgamations qualify
Where there has been an amalgamation of:
- (a) a company owning an industrial undertaking, a ship or a hotel with another company; or
- (b) a banking company referred to in section 5(c) of the Banking Regulation Act, 1949 with a specified bank; or
- (c) one or more public sector companies with one or more other public sector companies; or
- (d) an erstwhile public sector company with one or more companies, if the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation of that public sector company and the amalgamation is carried out within five years from the end of the tax year in which the restriction on amalgamation in the share purchase agreement ends,
then, irrespective of any other provision of the Act, the accumulated loss and unabsorbed depreciation of the amalgamating company are deemed to be the loss, or the allowance for unabsorbed depreciation, of the amalgamated company for the tax year in which the amalgamation was effected, and the other provisions of the Act on set-off and carry forward apply accordingly. The Banking Regulation Act, 1949 is another law; check it for clause (b).
Section 116(2) and (3): the cap and definitions for clause (d)
Sub-section (2). In an amalgamation under (1)(d), the loss and unabsorbed depreciation deemed to be the amalgamated company's must not exceed the accumulated loss and unabsorbed depreciation of the public sector company as on the date on which it ceases to be a public sector company because of the strategic disinvestment.
Sub-section (3).
| Term | Meaning |
|---|---|
| Control | As in section 2(27) of the Companies Act, 2013 |
| Erstwhile public sector company | A company which was a public sector company in earlier tax years and ceases to be so due to strategic disinvestment by the Government |
| Strategic disinvestment | Sale of shareholding by the Central Government, a State Government or a public sector company, in a public sector company or in a company, which results in (A) reduction of its shareholding to below 51% and (B) transfer of control to the buyer. The reduction applies only where the seller's shareholding exceeded 51% before the sale. The transfer of control may be effected by the Central Government, the State Government or the public sector company, or any two or all of them |
Section 116(4) and (5): the conditions and the penalty for breach
Irrespective of sub-sections (1), (2) and (3), the accumulated loss is not set off or carried forward, and the unabsorbed depreciation is not allowed, in the assessment of the amalgamated company, unless:
| Who | Condition |
|---|---|
| Amalgamating company | (i) has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for three or more years; (ii) has held continuously, as on the date of amalgamation, at least three-fourths of the book value of fixed assets held by it two years preceding the date of amalgamation |
| Amalgamated company | (i) holds continuously for a minimum of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in the scheme; (ii) continues the business of the amalgamating company for a minimum of five years from the date of amalgamation; (iii) fulfils such other conditions as may be prescribed to ensure revival of the business or that the amalgamation is for genuine business purposes |
The "other conditions" are left to the rules ("as may be prescribed"); the detail is in the Income-tax Rules, 2026.
If any condition in sub-section (4) is not complied with, the set-off of loss or allowance of depreciation made in any tax year in the hands of the amalgamated company is deemed to be the income of the amalgamated company chargeable to tax for the year in which the non-compliance occurs (sub-section (5)).
Example (invented). Oakline Hotels Ltd., which owns a hotel, is amalgamated with Sundial Holdings Ltd. Oakline has been in the hotel business for four years and has held all of its fixed assets since two years before the amalgamation. Oakline's accumulated loss is Rs. 40,00,000. Sundial holds the acquired fixed assets and continues the hotel business for five years, so the loss is deemed to be Sundial's for the tax year of the amalgamation. If Sundial stops the business in year four, the set-off already made is deemed to be Sundial's income of that year (sub-section (5)).
Section 116(6) and (7): demerger
Irrespective of any other provision, in a demerger the accumulated loss and the allowance for unabsorbed depreciation of the demerged company:
- (a) if directly relatable to the undertakings transferred to the resulting company, are carried forward and set off in the resulting company's hands;
- (b) if not directly relatable, are apportioned between the demerged and resulting companies in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and are carried forward and set off in the hands of the demerged or resulting company, as applicable.
Under sub-section (7) the Central Government may, by notification, specify conditions to ensure that the demerger is for genuine business purposes. What has been notified is not in the text consulted.
Example (invented). A demerged company has a loss of Rs. 10,00,000 not directly relatable to any undertaking. Assets of Rs. 60,00,000 are retained by it and Rs. 40,00,000 are transferred to the resulting company. The loss is apportioned 60:40, that is Rs. 6,00,000 to the demerged company and Rs. 4,00,000 to the resulting company.
Section 116(8) to (11): firm, proprietary concern and company conversions
| Sub-section | Case | Result |
|---|---|---|
| (8) | A firm is succeeded by a company meeting the conditions of section 70(1)(zd), or a proprietary concern is succeeded by a company meeting the conditions of section 70(1)(zf) | The accumulated loss and unabsorbed depreciation of the predecessor are deemed to be the successor company's for the tax year of the reorganisation, subject to sub-section (9) |
| (9) | Any of those conditions is not complied with | The set-off or allowance made in the successor company's hands is deemed to be its income of the year of non-compliance |
| (10) | A private company or unlisted public company is succeeded by a limited liability partnership meeting the conditions of section 70(1)(ze) | The predecessor's accumulated loss and unabsorbed depreciation are deemed to be the successor LLP's for the tax year of the reorganisation, subject to sub-section (11) |
| (11) | Any of those conditions is not complied with | The set-off or allowance in the LLP's hands is deemed to be the LLP's income of the year of non-compliance |
For the section 70 conditions see our note on section 70.
Section 116(12): eight tax years
For an amalgamation referred to in sub-section (1), or a reorganisation referred to in sub-section (8) or (10), effected on or after the 1st April, 2025, any loss that forms part of the accumulated loss of the predecessor entity and is deemed to be the successor's is carried forward for not more than eight tax years immediately succeeding the tax year for which the loss was first computed for the original predecessor entity. In the example above, if Oakline's loss was first computed in tax year 1, the loss can be carried forward by Sundial only up to tax year 9, not eight years from the amalgamation.
Section 116(13): definitions
- Accumulated loss: so much of the predecessor's loss under "Profits and gains of business or profession" (excluding speculation business loss) which would have been eligible for carry forward and set off under section 112 had the reorganisation not occurred.
- Industrial undertaking: an undertaking engaged in manufacture or processing of goods; manufacture of computer software; generation or distribution of electricity or any other form of power; telecommunication services (including radio paging, domestic satellite service, network of trunking, broadband network and internet services); mining; or construction of ships, aircraft or rail systems.
- Original predecessor entity: the predecessor entity in the first amalgamation (sub-section (1)) or first reorganisation (sub-sections (8) and (10)).
- Specified bank: the State Bank of India constituted under the State Bank of India Act, 1955, or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or 1980.
- Unabsorbed depreciation: the allowance for depreciation of the predecessor which remains to be allowed and would have been allowed had the reorganisation not occurred.
Need help with losses in a merger or demerger?
The loss only travels if the conditions are met and kept for five years, and the eight-year clock runs from the original predecessor. Our tax planning advisory team can help you test a scheme against section 116 before it is filed.
Key takeaways
- Section 116(1) covers industrial undertaking, ship and hotel companies, specified bank mergers, public sector mergers and post-disinvestment mergers.
- The conditions in sub-section (4) include three years of business, three-fourths of fixed assets, and five years of continuation by the amalgamated company.
- Breach turns the earlier set-off into income of the year of non-compliance.
- Demerger losses follow the undertaking or are apportioned by assets retained and transferred.
- For reorganisations on or after 1 April 2025, carry forward is not more than eight tax years from the year the loss was first computed for the original predecessor.
Read next
- Sections 117–118: losses in bank amalgamation and co-operative bank reorganisation
- Sections 119–120: losses not carried forward in certain cases
- Section 112: business loss carry forward
- Income-tax Act 2025 Chapter VII
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.