An amalgamation may allow accumulated business losses and unabsorbed depreciation of the amalgamating company to move to the amalgamated company. But the tax benefit does not become unconditional once the merger is completed.

Section 116 of Income-tax Act, 2025 imposes continuing obligations for up to five years after the amalgamation. A subsequent breach can result in tax benefits already claimed being brought back to tax.

The amalgamated company must continuously hold, for at least five years, 75% of the book value of the fixed assets acquired from the amalgamating company. It must also continue the amalgamating company’s business for five years. Consequently, post-merger decisions such as selling machinery, closing facilities or discontinuing business lines should be evaluated from a tax perspective before implementation.

For industrial undertakings, Rule 60 of Income-tax Rules, 2026 adds another condition: production must reach at least 50% of the installed capacity before the end of four years from the amalgamation date and remain at that level until the end of year five.

The consequence of non-compliance can be significant.

Suppose an amalgamated company inherits tax losses and sets off INR 60 crore against profits during the first three years. If a continuing condition is breached in year four, the INR 60 crore already set off can be deemed to be taxable income in that year—not merely the unused losses forfeited.

For CFOs and promoters, the takeaway is important: carry-forward of losses is not merely a condition to be checked at the time of merger. It is a tax benefit that needs to be protected for five years.