(INDIA) — Indian tax law restricts companies from carrying forward earlier business losses after ownership changes, and that rule will continue under Section 79 of the Income-tax Act, 1961 and Section 119 of the Income-tax Act, 2025, with separate relief for startups, family transfers, insolvency resolutions and some state-backed restructurings.

The restriction targets a familiar tax problem: the purchase of loss-making companies mainly to use old losses against future profits. In closely held companies, those losses can remain available only if voting power stays substantially with the same beneficial owners from the year of loss to the year of set-off.

Under Section 79, a company in which the public are not substantially interested cannot carry forward and set off earlier losses after a change in shareholding unless, on the last day of the year in which set-off is claimed, shares carrying at least 51% of voting power are beneficially held by the same persons who beneficially held at least 51% voting power on the last day of the year in which the loss was incurred. If that continuing holding falls below 51%, the set-off can fail unless an exception applies.

That continuity test sits at the center of the rule. A drop to 50% or 49% is enough to trigger trouble because the statutory threshold is “not less than 51%.”

The enquiry does not stop at the share register. Section 79 uses the standard of shares being “beneficially held,” so the tax analysis turns on who actually controls the voting power, not only whose name appears on paper.

That distinction matters in family companies and group restructurings, where legal ownership can move without a real shift in control, and where a transaction that looks neutral in form can still change beneficial voting power in substance. The Assessing Officer must examine who truly holds the voting rights.

Not every carried-forward tax item falls under the same rule. Section 79 mainly affects earlier business losses, while unabsorbed depreciation is governed separately under Section 32(2) of the 1961 Act.

That difference can alter the tax result in practice. A company may have several carried-forward amounts on its books, but the treatment depends on the nature of each amount rather than on a blanket reading of any ownership change.

The new Income-tax Act, 2025 keeps the same anti-avoidance principle but places it in Section 119, titled “Carry forward and set off of losses not permissible in certain cases.” The provision is broader than the old company-focused rule because it also covers change in constitution of a firm and succession of business or profession, while the company shareholding rule itself sits in Section 119(3).

For closely held companies, Section 119 preserves the 51% beneficial voting power continuity test. It also carries forward a set of carve-outs that can preserve losses even after changes in ownership or control.

One exception applies where voting power changes because of the death of a shareholder or a gift of shares to a relative. The law treats those events differently from a tax-driven purchase of a shell with accumulated losses, though the relationship must fall within the statutory meaning of relative and the underlying facts must support the claim.

Another relaxation covers eligible startups. Even if the 51% test is no longer met, carry-forward and set-off can still be allowed if all shareholders who held shares carrying voting power on the last day of the loss year continue to hold those shares on the last day of the set-off year. Under Section 119(3)(b) of the Income-tax Act, 2025, that relief applies where the loss was incurred during the period of ten years beginning from the year in which the company was incorporated.

The startup rule reflects the capital structure of young private companies. Funding rounds often dilute founders below 51%, but the law still allows access to old losses if the original shareholders continue to hold their shares even after new investors come in.

In insolvency cases, the law provides another route around the restriction. A change in shareholding under a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 can qualify for an exception if the National Company Law Tribunal approves the plan and the jurisdictional Principal Commissioner or Commissioner receives a reasonable opportunity of being heard.

That protection recognizes the difference between tax-loss trading and a court-supervised rescue of a distressed business. A company that changes hands in an IBC process may undergo a complete shift in control, yet the law can still preserve losses if the statutory conditions are met.

Government-backed restructuring receives separate treatment. Where the Tribunal, on an application moved by the Central Government under Section 241 of the Companies Act, 2013, suspends the Board of Directors and the Central Government appoints new directors under Section 242, a later change in shareholding under a Tribunal-approved resolution plan may escape the Section 79 restriction if the jurisdictional Principal Commissioner or Commissioner had a reasonable opportunity of being heard.

That is narrower than a general exemption for internal reorganizations or private mergers. The protection attaches to specific Government or NCLT-supervised situations, not to every restructuring carried out inside a corporate group.

Strategic disinvestment also has its own rule. Relief can remain available in cases involving an erstwhile public sector company if the ultimate holding company continues to hold, directly or through subsidiaries, at least 51% voting power after completion of strategic disinvestment.

The relief is not permanent if that threshold later slips. If the 51% condition is not met in any later year after strategic disinvestment, the normal Section 79 restriction applies for that year and the years that follow.

These provisions carry weight for non-resident Indians and foreign investors because losses shown in an Indian private company’s tax records do not automatically survive a transaction. An NRI investment in a startup, a foreign acquisition of a private company, a family share transfer, founder dilution in a funding round, a merger, a demerger, an IBC takeover or a strategic disinvestment can all change whether those losses remain usable.

Cross-border deals often focus first on valuation, control rights and exit terms. The loss carry-forward question can materially change the economics, especially where a target company’s expected future profitability depends on setting off earlier business losses.

A simple illustration shows how the rule works. A private company incurs a business loss in FY 2022-23, and on 31 March 2023 A and B together beneficially hold 60% voting power.

If the company earns profits in FY 2025-26 and wants to set off that earlier loss, A and B must still beneficially hold at least 51% voting power on the last day of FY 2025-26. If their combined beneficial voting power has fallen to 50% or lower, the continuity condition fails unless an exception saves the claim.

That example also shows why beneficial ownership records matter as much as the cap table itself. Tax authorities examining Section 79 or Section 119 will need to see who held the voting power in the loss year, who held it in the set-off year, and whether any statutory relaxation, including death, gift to a relative, startup status, IBC resolution, Tribunal-approved restructuring or strategic disinvestment, applies to the change.

Companies planning funding rounds, family settlements, acquisitions or restructurings often need to answer a short set of questions early: whether the entity is closely held, when the loss arose, when the set-off will be claimed, whether the same persons still beneficially hold at least 51% voting power, and whether the carried-forward amount is a business loss or something treated separately, such as unabsorbed depreciation under Section 32(2).

Careful documentation can shape that outcome. Shareholding schedules, voting rights, beneficial ownership records and transaction documents can become central if an Assessing Officer tests whether continuity truly exists under Section 79 or under Section 119(3) of the new law.

For startups, family businesses, closely held companies and overseas-backed ventures, the message in the Income-tax Act is direct: losses can be a tax asset, but they do not travel freely after every ownership change. Whether that asset survives will often turn on one figure, 51%, and on whether the people behind that voting power are still the same when the company finally turns profitable.