Transfer the remaining tax schedule, not the original cost again
For FY 2025–26 and AY 2026–27, apply section 35DDA of the Income-tax Act, 1961. A qualifying employer payment to an employee under a voluntary-retirement scheme gives one fifth in the payment year and equal instalments in the next four previous years. A qualifying amalgamation or demerger can continue an existing schedule in the successor's hands. The transaction does not start a new five-year schedule.
Read the applicable text: Income Tax Department, consolidated 1961 Act section 35DDA Income Tax Department, 1961 Act as amended by Finance Act 2026 Income Tax Department, AY 2026–27 transition guidance.
Identify the statutory route and the undertaking
Subsection (2) applies if an Indian company entitled to the deduction transfers the qualifying undertaking before the instalment period expires to another Indian company in a scheme of amalgamation. Test the scheme against the tax definition in section 2(1B). Subsection (3) separately covers an Indian company’s qualifying undertaking transferred to another company before expiry in a demerger; test the scheme against section 2(19AA). The continuation rule applies as far as may be as if the transaction had not taken place. Document which employee payments and schedules belong to the transferred undertaking; do not move a company-wide book balance without reconciling its constituents.
Prevent double claims in the transaction year
Subsection (5) bars the predecessor identified in the applicable subsection from claiming the deduction in the year of the amalgamation, demerger or succession. Prepare mirrored computations with an agreed cutover and reconcile the scheduled amount to the eligible claimant. Do not pro-rate the single scheduled instalment by months between the parties. Check any complex scheme, statutory effective dates and tax reporting obligations on their facts. Subsection (6) disallows deduction of the same expenditure under another provision.
Distinguish a statutory reorganisation from an asset deal
A sale or an internal ledger transfer alone does not establish the statutory route. Subsection (4) covers succession to a firm or sole proprietorship by a company that meets section 47(xiii) or 47(xiv), respectively. Subsection (4A) covers succession to a private company or unlisted public company by an LLP meeting the conditions in the proviso to section 47(xiiib). Each route has its own tests. Reconcile unpaid amounts separately: the original five-year computation begins with payment under a qualifying scheme, not with a provision.
Support the return computation with a claimant-by-year schedule
Keep the scheme documents, approval or sanction evidence, undertaking list, payment dates and prior tax computations. Record predecessor and successor identifiers, payment-year cohort, earlier deductions and the remaining scheduled years. Trace the annual amount from the book-to-tax computation to the applicable return and reconcile differences between book amortisation, the tax instalment and any reported successor position. Check later years separately under the legislation applicable to those years.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Transfer three remaining instalments
A qualifying ₹50 lakh cohort was paid in FY 2023–24. Two ₹10 lakh instalments were already allowed. A qualifying amalgamation in FY 2025–26 leaves ₹30 lakh scheduled at opening; the successor's current instalment is ₹10 lakh and ₹20 lakh remains.
Illustrative example 2: Prevent a duplicate claim
Each party's draft computation includes ₹6 lakh from one transferred cohort in the transaction year. Under the qualifying assumptions, retain ₹6 lakh with the successor and remove the predecessor's ₹6 lakh; the combined claim falls from ₹12 lakh to ₹6 lakh.
Illustrative example 3: Final scheduled year
A ₹25 lakh payment cohort began in FY 2021–22 and four instalments of ₹5 lakh were allowed. A qualifying transfer before expiry in FY 2025–26 leaves one ₹5 lakh instalment for that year; the cohort then closes at zero.
Illustrative example 4: Do not revive an expired cohort
An older ₹40 lakh payment cohort started in FY 2020–21 and completed five instalments of ₹8 lakh by FY 2024–25. A scheme in FY 2025–26 does not create a sixth ₹8 lakh instalment.
Illustrative example 5: Use two original payment years
Transferred cohorts from FY 2022–23 and FY 2024–25 are ₹30 lakh and ₹45 lakh. With earlier scheduled amounts fully allowed, the current instalments are ₹6 lakh and ₹9 lakh. The successor claims ₹15 lakh on the stated facts. The FY 2022–23 cohort then has ₹6 lakh left, and the FY 2024–25 cohort has ₹27 lakh left. Track those balances separately.
Illustrative example 6: Remove the unpaid provision from the payment base
The source ledger contains ₹22 lakh for one scheme, comprising ₹18 lakh actually paid and ₹4 lakh unpaid at the relevant cut-off. The eligible payment base on the assumed facts is ₹18 lakh and its annual instalment ₹3.60 lakh, not ₹4.40 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the legal reorganisation | Scheme, operative dates and taxpayer identities |
| 2 | Verify the applicable subsection | Amalgamation or demerger conditions and approval |
| 3 | Map the transferred undertaking | Scheme schedules and employee cohort linkage |
| 4 | Verify qualifying scheme and actual payment | Scheme terms, payroll records and bank evidence |
| 5 | Reconstruct the original annual schedule | Payment dates and five-year calculation |
| 6 | Reconcile prior deductions to operative records | Filed returns, computations and orders |
| 7 | Remove expired and unpaid items | Closed cohorts and separate provision list |
| 8 | Assign current and remaining instalments | Mirrored predecessor and successor tax workpapers |
| 9 | Check other deduction lines for duplication | Book-to-tax and return cross-reference |
| 10 | Preserve and review the next-year schedule | Closing balance and statutory transition note |
Sixteen practitioner FAQs
1. Can a merger restart the five-year period?
No. Continue the existing qualifying schedule.
2. Does the scheme date replace the original payment year?
No. The original qualifying payment determines the cohort.
3. Can both companies take the same transaction-year instalment?
No. Subsection (5) bars the relevant predecessor claim.
4. Is the instalment split by number of months?
The section continues the deduction in the successor and bars the qualifying predecessor for that year; it does not prescribe a monthly split.
5. Can a book provision establish the deduction?
No. Verify the payment required by subsection (1).
6. Does every asset purchase carry the tax balance?
No. Verify the statutory reorganisation and qualifying undertaking.
7. Can an expired cohort be transferred?
There is no remaining instalment after the statutory schedule expires.
8. What if only one undertaking transfers?
Trace the eligible cohort to that undertaking; do not move unrelated amounts.
9. Is a private-company conversion to LLP covered automatically?
No. Review subsection (4A) and the conditions in the relevant proviso to section 47.
10. What if the earlier return was adjusted?
Reconcile to the operative allowance position and flag any pending dispute.
11. Does this decide employee exemption?
No. Employer deduction and employee tax require separate analyses.
12. Can the same amount also be claimed as general expenditure?
Subsection (6) prevents another deduction for the same expenditure.
13. Can the successor rely on the general ledger alone?
No. Preserve the original payment and tax cohort evidence.
14. What if several payment years overlap?
Maintain a separate schedule for each original payment year.
15. Does the 2025 Act section number govern AY 2026–27?
This return relates to FY 2025–26 under the 1961 Act; verify later years separately.
16. What is the strongest duplicate-claim control?
A signed mirrored computation that names the sole claimant for each transferred cohort and year.
Official sources
Income Tax Department, consolidated 1961 Act section 35DDA Income Tax Department, 1961 Act as amended by Finance Act 2026 Income Tax Department, AY 2026–27 transition guidance Income Tax Department, sections 2, 35DDA and 47