—Guide
Tax-neutral Mergers and Demergers: Conditions, Losses and Stamp Duty
The conditions that make amalgamations and demergers tax-neutral in India, carry-forward of losses, the cost and holding period for shareholders, and how stamp duty applies.
A merger or demerger that meets the tax conditions can be carried out without capital gains tax for the companies or shareholders. Missing a condition can make it taxable. This guide covers the key rules, which continue from the Income-tax Act, 1961 into the Income-tax Act, 2025 with new section numbers.
Amalgamation Conditions
- All the property and liabilities of the amalgamating company become those of the amalgamated company.
- Shareholders holding at least three-fourths in value of shares in the amalgamating company (other than shares already held by the amalgamated company) become shareholders of the amalgamated company.
If met, the transfer of assets and the shareholders' swap of shares are exempt from capital gains.
Demerger Conditions
- All the property and liabilities of the undertaking are transferred, at book values.
- The resulting company issues shares to the demerged company's shareholders proportionately.
- Shareholders holding at least three-fourths in value of shares in the demerged company become shareholders of the resulting company.
- The undertaking is transferred as a going concern.
Losses
Accumulated losses and unabsorbed depreciation of the amalgamating company can be carried forward by the amalgamated company in specified cases — broadly, companies owning industrial undertakings and some others — subject to conditions on continuing the business and holding assets. In demergers, losses relating to the undertaking move to the resulting company.
Shareholders' Cost
Shareholders' cost and holding period for new shares are carried over from their old shares, so gains are taxed only when they sell.
Stamp Duty
Stamp duty on schemes is a state subject. Most states levy duty on the NCLT order as a conveyance, often based on the value of property or shares transferred, with some caps. Where the companies hold property in several states, duty may be payable in each. Plan for it in structuring.
GST
Transfer of a business as a going concern is generally exempt from GST. Input tax credit can be transferred to the new entity using the prescribed form.
Getting Help
Think Filing structures tax-neutral restructurings and plans stamp duty and GST.