Carrying forward losses (Sections 79 and 78)
How a change in ownership can block carried-forward losses, and the startup waiver
Carried-forward business losses are not automatically safe across an ownership change. For a closely-held company, Section 79 allows a brought-forward loss to be carried forward only if at least 51% of the beneficial voting power is held by the same persons on the last day of the loss year and the last day of the set-off year, a change of more than 49% in beneficial ownership blocks the loss. There are exceptions (death or gift to a relative, qualifying amalgamation, an IBC resolution plan, and an eligible-startup waiver). For firms and LLPs, Section 79 does not apply; instead Section 78 governs what happens when a partner leaves or the firm is succeeded.
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Section 79: the 51% beneficial-ownership test
For a company in which the public is not substantially interested (a closely-held company), a brought-forward loss can be set off in a later year only if shares carrying at least 51% of the voting power are beneficially held by the same persons on both the last day of the year the loss was incurred and the last day of the year of set-off. A change of more than 49% in beneficial ownership blocks the loss. The test is on beneficial ownership, not legal title, so shuffling shares between entities with the same ultimate owner does not trigger it.
Exceptions and the startup waiver
The loss is preserved despite an ownership change in several cases.
tipTake VC money and dilute below 51%? An eligible startup keeps its losses only if the original loss-year shareholders all stay on the cap table, even at a tiny percentage. Structure the round to keep them on.
- Change due to the death of a shareholder or a gift to a relative
- Amalgamation or demerger of a foreign parent with 51% continuity
- A resolution plan approved under the Insolvency and Bankruptcy Code 2016
- A change pursuant to a Companies Act order (oppression and mismanagement)
- Eligible startup (Section 80-IAC): loss survives dilution if all original loss-year shareholders continue to hold (any percentage), within the 10-year window
Firms and LLPs: Section 78
Section 79 is a company rule; it does not apply to partnership firms or LLPs, which are governed by Section 78. Under Section 78(1), where a partner retires or dies, the share of the brought-forward loss attributable to that partner (beyond what is set off against the partner's own share of profit) lapses and cannot be carried forward. Under Section 78(2), on succession of a business (other than by inheritance), the predecessor's loss generally cannot be carried forward by the successor, except through the specific routes such as Section 72A (amalgamation) or the Section 47 capital-gains-neutral reorganisations.
warningA partner leaving an LLP or firm can quietly lapse their share of the firm's carried-forward loss under Section 78(1). Factor this into any change in the partnership before it happens.
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Source / notes
- Income-tax Act 1961 s.79 (closely-held company, 51% beneficial-ownership continuity) (re-enacted in the Income-tax Act 2025)
- Income-tax Act 1961 s.78 (firms/LLPs: partner exit and succession)
- Income-tax Act 1961 s.72A (amalgamation loss carry-forward) + s.80-IAC startup waiver
Frequently asked questions
Can my company lose its carried-forward losses if ownership changes?+
Yes, if it is a closely-held company. Under Section 79, a brought-forward loss can be set off only if at least 51% of the beneficial voting power is held by the same persons on the last day of both the loss year and the set-off year. A change of more than 49% in beneficial ownership blocks the loss, unless an exception (such as the startup waiver) applies.
How does the startup loss-carry-forward waiver work?+
An eligible startup under Section 80-IAC keeps its carried-forward losses despite a more-than-49% ownership change, provided all the shareholders who held shares in the loss year continue to hold them (at any percentage, so dilution is fine), and the loss is within the 10-year window from incorporation. So a funded startup can take VC money and dilute, as long as the original loss-year shareholders all remain on the cap table.
Does Section 79 apply to an LLP or partnership?+
No. Section 79 is a company provision. Firms and LLPs are governed by Section 78: when a partner retires or dies, their share of the brought-forward loss can lapse under Section 78(1), and on succession of the business the predecessor's loss generally cannot pass to the successor under Section 78(2), except through routes like Section 72A. So a partner change carries its own loss-carry-forward risk.
Does an internal group restructuring trigger Section 79?+
Not if the ultimate beneficial owner is unchanged. Section 79 tests beneficial ownership, not legal title, so moving shares between entities that share the same ultimate owner does not breach the 51% continuity. But genuine third-party changes that shift more than 49% of beneficial voting power do, so map the beneficial ownership, not just the share register.
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