Fast-Track Demergers in India: Is Tax Neutrality at Risk?

Key Takeaways

• Most restructurings need a demerger, and most demergers are done to be tax neutral.
• The fast-track route under section 233 of the Companies Act, 2013 is quicker and more predictable than an NCLT scheme, which can take two years or more.
• The Income-tax Act, 2025 defines “demerger” by reference to NCLT schemes under sections 230 to 232 only. A section 233 demerger falls outside it.
• Outside the definition, the transfer can be taxed as capital gains, losses may not carry over, and shareholders can face tax on the shares they receive.
• Fast-track mergers are less exposed, because the definition of amalgamation does not refer to the Companies Act route. For a demerger, use the NCLT route if there is time.

Why the fast track matters

NCLT schemes take time: KCM has seen schemes take more than two years. The fast-track route under section 233 needs approval from the Regional Director instead of the tribunal. It has its own paperwork, but it is predictable.

Company law keeps widening the route. Since 2025, the rules extend fast track beyond small companies and holding-subsidiary pairs to fellow subsidiaries and some unlisted companies. The Corporate Laws (Amendment) Bill, 2026 proposes to cut the shareholder approval from 90% of total shares to 75% in value of those present and voting, and the creditor approval from 90% to 75% in value. That would make fast track realistic even for listed companies.

The tax problem

A demerger is tax neutral only if it meets the definition of “demerger” in the income tax law. Under the 1961 Act that was section 2(19AA), which referred to schemes under the old sections 391 to 394, now sections 230 to 232 of the Companies Act, 2013. Whether a fast-track demerger under section 233 qualified was unclear but arguable.

The Income-tax Act, 2025 takes the argument away. It keeps the reference to NCLT schemes, and the Select Committee recorded the Ministry’s view that “tax neutrality was never provided to such demergers”. The Finance Act, 2026 did not change this.

What happens outside the definition

There has never been a proper technical analysis of how a demerger outside the definition is taxed, and that leads to odd results. In one tribunal ruling, the Reckitt Benckiser case, the demerger was held not to be tax neutral, which may have been right on the facts, but the reasoning focused on the lack of transfer of liabilities rather than on whether the business was an undertaking, and the shareholders’ new shares were treated as a dividend, as if the company had distributed its assets.

In practice, a fast-track demerger now risks:

• capital gains tax on the transfer of the undertaking in the demerged company;
• loss of the carry-forward of losses and unabsorbed depreciation in the resulting company; and
• tax arguments against shareholders on the shares they receive.

What to do instead

• Use the NCLT route if there is time. It is the safest option for a demerger.
• Use fast track for mergers. The definition of amalgamation does not refer to the Companies Act route, so a fast-track merger is less exposed. The carry-forward of losses still needs care.
• Consider other transfers. An undertaking can be transferred for consideration without being a slump sale, by assigning values to the individual assets. For example, contribute it to an LLP at a lower value and then admit the ultimate shareholders, or move out the residual business and merge the company with the target. These are not ideal, and each needs its own tax analysis.

A structuring idea: the platform company

A partial demerger can turn a listed company into a holding or “platform” company, letting investors choose between the holding company and the operating companies. Setting one up by transferring a business to a subsidiary is not always tax free. A demerger can be used instead: the main business is demerged into a subsidiary, which issues shares, such as non-voting preference shares, to the parent’s shareholders. Done through an NCLT scheme, that keeps the tax neutrality.

FAQ

Is a fast-track demerger tax neutral in India?
Not under the Income-tax Act, 2025, which defines a demerger by reference to NCLT schemes under sections 230 to 232 only.

Is a fast-track merger tax neutral?
Generally yes, because the definition of amalgamation does not depend on the Companies Act route. The carry-forward of losses needs care.

Will the Corporate Laws (Amendment) Bill, 2026 fix the tax issue?
No. It eases the company law approvals, but the tax definition is in the Income-tax Act.

How can a listed company become a holding company without tax?
One route is to demerge its main business into a subsidiary through an NCLT scheme, with the subsidiary issuing shares to the parent’s shareholders.

Talk to KCM about restructuring: contact us.

The section 233 approval changes draw on a note by CA Rachaita Warriar, KCM.

Sources and last checked: 10 November 2026

• Companies Act, 2013, sections 230 to 233; Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2025.
• Corporate Laws (Amendment) Bill, 2026, clause 69 (section 233 thresholds).
• Income-tax Act, 2025, definitions of “demerger” and “amalgamation” (formerly sections 2(19AA) and 2(1B) of the 1961 Act).
• Vinod Kothari Consultants, “Fast track demerger schemes: too fast for tax neutrality?” (July 2026): https://vinodkothari.com/2026/07/fast-track-demerger-schemes-too-fast-for-tax-neutrality/
• Reckitt Benckiser Healthcare India Private Ltd v DCIT (ITAT).
• Originally shared on LinkedIn by Suril Mehta: https://www.linkedin.com/posts/surilm_india-incometax-restructuring-share-7399902305828978688-T3jr/
• Originally shared on LinkedIn by Suril Mehta: https://www.linkedin.com/posts/surilm_previously-it-was-almost-impossible-for-share-7442501729872457729-7eUU/
• Originally shared on LinkedIn by Suril Mehta: https://www.linkedin.com/posts/surilm_itc-hotels-demerger-shareholders-to-get-share-7096887469131898881-n0c6/

This is not to be construed as legal advice. The actual advice will depend upon the facts and will have to take into consideration the case-specific facts and the anti-abuse regulations.