Tax Due Diligence in M&A Under the New Law: What Buyers Should Reassess

Introduction : India’s tax and corporate law landscape has seen significant change in the past eighteen months. The Income-tax Act, 2025 was passed by the Parliament in August 2025 and came into force on 1 April 2026, replacing the Income-tax Act, 1961 after more than six decades. At the same time, the fast-track merger route was expanded by the Ministry of Corporate Affairs, and India’s four new labour codes came into force. None of these changes occurred in a vacuum, and for a practitioner, this is the crucial context for any due diligence exercise currently underway, because a buyer’s risk management practices must be adapted to the applicable law. Prior checks grounded solely in the erstwhile Income-tax Act, merger rules, or wage definitions will necessarily leave gaps, and this blog discusses what has changed, why it matters, and how it affects the buyer’s risk profile, indemnity requirements, and closing mechanics.

A New Tax Code, But Not a New Tax Policy

The Income-tax Act, 2025 (the 2025 Act) was passed by the Parliament in August 2025 and came into force on 1 April 2026. It replaced the Income-tax Act, 1961 (the 1961 Act), a law that had remained largely unchanged for over six decades despite several amendments. The new law replaces 819 sections (and 14 schedules) that were in force under the 1961 Act with 536 sections (and 16 schedules). The government has positioned the 2025 Act as a simplification and not a revamp of India’s direct tax regime.

In substance, the 2025 Act retains most of the 1961 Act’s core capital gains and business income taxation provisions, as well as those relating to reorganisation of business. However, a due diligence practitioner should remember that the new law’s very structure, collapsing several hundred sections under new numbering, will create room for error.

Tax opinions, valuations, and contract language need to be carefully assessed for whether they make correct references to statutes as amended, and diligence teams should carefully assess what law applies to a given tax year. For example, while assessments, disputes, and filings for FY 2025-26 and earlier will be governed by the 1961 Act, FY 2026-27 and subsequent tax years will be governed by the 2025 Act. Similarly, a data room walkthrough that fails to highlight this distinction in detail could cause unwelcome surprises for a buyer.

The Loss Carry-Forward Trap

While the changes to the direct tax regime bear most closely on transaction tax diligence, it is a minor tweak that has far bigger implications. Effective from 1 April 2025, a Finance Act, 2025 amendment to Sections 72A and 72AA introduced a significant restriction on the ability of amalgamating companies to carry forward losses. In brief, where a company with accumulated losses is amalgamated with another entity, the loss carry-forward period for the successor company has been limited to eight assessment years from the year in which such loss was originally computed by the merged entity. Previously, a similar amalgamation would allow a fresh eight-year loss carry-forward period from the year of merger, effectively allowing indefinite carry-forward of losses through a series of amalgamations.

This restriction applies to amalgamations and other forms of business reorganisation that come into effect from 1 April 2025 onwards. This change to the loss carry-forward rules is effective under the 2025 Act, which came into force on 1 April 2026. Practitioners should note that although the Income-tax Act, 2025 continues to apply to assessment years beginning on or from 1 April 2026, the restriction introduced by the Finance Act, 2025 continues to apply to amalgamations taking place in FY 2026-27 onwards.

Interaction with the Fast-Track Merger Regime

The implications of this change are far greater than one might initially realise, due to the timing of another major change to company law. In September 2025, the MCA issued notifications amending the Companies Act, 2013, with effect from 1 April 2026, to extend the applicability of the fast-track merger process under Section 233 of the Companies Act, 2013 to a wider range of entities.

Unlisted companies with total borrowings, debentures, and deposits of up to 200 crores, as well as certain related-party structures such as holding-subsidiary and fellow-subsidiary structures, can now use the simplified merger procedure without seeking the approval of the National Company Law Tribunal. At first glance, this appears to be a positive development for practitioners looking to expedite reorganisation transactions, since merger-related delays in front of tribunals are a known time-suck. However, legal commentary on this amendment highlights a potential conflict with the loss carry-forward rules outlined above.

Practical Considerations for Buyers

At a practical level, a group that qualifies for the fast-track merger procedure under the Companies Act, 2013 amendments may find that the tax losses it hopes to carry forward to the merged entity have expired or are significantly reduced under the new loss carry-forward rules, due to the long period between original loss computation and merger. The relevance of this consideration is obvious, a buyer seeking to utilise loss carry-forward to reduce its effective tax rate on a target must carefully assess the merger structure’s impact on loss carry-forward entitlements.

A buyer in such a scenario should ask two distinct questions: whether the merger structure qualifies for the fast-track procedure under the Companies Act, 2013, and separately, whether any tax loss carry-forward entitlements will expire due to the timing of the merger. As an illustration, a Section 233 merger of a related party group under the fast-track procedure would see the loss carry-forward period cut-off at the earliest computation date of the amalgamating entities. Practitioners must note that for all mergers and reorganisations taking place on or after 1 April 2025, the restriction on loss carry-forward applies for eight assessment years from the year in which such loss was first computed by the amalgamated entity, not from the year of merger.

GAAR and Older Investments

In connection with older investment vehicles, it is worth noting that the General Anti-Avoidance Rules (GAAR) may have limited applicability in certain situations. In brief, a notification issued by the Central Board of Direct Taxes on 31 March 2026 clarifies that income accrued or arising from the transfer of investments made on or before 31 March 2017 shall be outside the ambit of the GAAR.

In other words, investments made before 1 April 2017 are protected against challenge under the GAAR. This clarification is relevant to practitioners working with older holding company structures or long-standing funds, and it may be worth obtaining a separate confirmation of this position directly from the tax authorities, rather than assuming automatic applicability.

What Diligence Questions are Actually Changing in 2026

Reviewing Loss Carry-Forward Positions : In terms of actual diligence practices, there are several areas that have changed in 2026 and may be worth asking more carefully in the current year. First, in connection to loss carry-forward entitlements for the target company, buyers may want to obtain year-wise details for every loss that carries forward, rather than relying on the current year’s balance, since the loss carry-forward period of eight years will begin from the year such loss was originally computed under the 2025 Act.

Determining the Applicable Tax Regime : Second, for tax years that fall on either side of FY 2026-27, buyers should ensure that tax assessments are being correctly made under the applicable Income-tax Act, since the 1961 Act and the 2025 Act have different section numbering.

Assessing Merger Structures and Tax Attributes : For mergers and demergers, a second question arises: whether the merger structure qualifies for the fast-track procedure under the new Companies Act, 2013 amendments. Separately, in connection to loss carry-forward, buyers should estimate the impact on loss carry-forward entitlements for each loss that carries forward from FY 2025-26 onwards, due to the restriction introduced by the Finance Act, 2025.

Indemnity Drafting and Closing Mechanics

Updating Tax Indemnities : Having undertaken the diligence, it is necessary to reflect any findings in indemnity and other contractual documentation. Tax indemnities should specifically state the applicable Income-tax Act and correct section numbering for the tax year under consideration. This is because references to the 1961 Act may be incorrect if a tax year falls under the 2025 Act, and the ambiguity could be exploited by either party in the event of a dispute.

Representations and Warranties : Additionally, in the case of targets that have built value using loss carry-forward provisions, a detailed representations and warranties provision describing the origination year for every loss carry-forward entitlement, along with an indemnity on similar terms, may be worth considering. This is because a general tax warranty may not be sufficient to address a dispute regarding the loss carry-forward period under the new tax law. In similar fashion, practitioners should consider a standalone indemnity for any exposure resulting from the Code on Wages, using the language described above.

Closing Considerations : At closing, any working capital or net liability adjustment that incorporates a tax reserve should be based on the correct Act in force for the tax year in question. Where practicable, the calculation should specify the Act in force, rather than relying on assumptions. Additionally, any closing occurring in 2026 but falling after 1 April 2026 will have to contend with the transition rules for credits, depreciation, and loss carry-forward as set out in the 2025 Act. By way of illustration, a closing that takes place in 2027 but commences operations in 2026 may involve a mixture of taxes governed by the 1961 Act and the 2025 Act, and transition rules should be carefully applied rather than assumed.

Conclusion

None of these changes directly affect high-level transaction norms, but collectively, they serve as useful reminders of the detail-oriented nature of due diligence for a complex transaction. In essence, India’s tax law has changed, but not fundamentally, and most of the changes outlined in this blog were necessitated by the introduction of the Income-tax Act, 2025 and the new merger rules. These changes, although largely technical in nature, affect the due diligence process, risk allocation in a transaction, and closing mechanics. By updating diligence checklists, addressing new technical nuances in representations and warranties, and ensuring that transaction structuring and closing assumptions are grounded in current law, a practitioner can avoid unwelcome post-closing discoveries.

Author: Vaishnavi Ariyeri, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Endnotes/ References

1. Income-tax Act, 2025 (Act No. 30 of 2025), Government of India, effective 1 April 2026- https://www.incometaxindia.gov.in

2. Income Tax Department- "FAQs on Interplay and Transition," incometaxindia.gov.in

3. SCC Online Blog, "Fast-Track Mergers and the Tax Attribute Problem under the Income-tax Act, 2025"

4. Press Information Bureau, Government of India- "MCA Widens the scope of fast-track mergers under the Companies Act, 2013"

5. SCC Online Blog- "Decoding the Ministry's Latest Clarifications: A Thematic Analysis of the Additional FAQs on the Four Labour Codes