A S BANKA ADVISORS

Quick summary: Section 536 Sub-Clause 5 of the Income-tax Act 2025 expressly preserves every loss carry-forward, depreciation, MAT credit, and AMT credit determined under the 1961 Act. The carry-forward window does NOT restart on April 1, 2026. The forfeiture gates (Sections 78, 79, 80) continue to apply year by year. For practitioners, the AY 2026-27 return cycle is the moment to lock down the loss-tranche register before the AY 2027-28 first-2025-Act set-off cycle opens.

Why every loss-carry-forward client is asking the same question right now

Across mid-tier practice files in FY 2025-26, the typical loss-carry-forward client looks like one of four profiles: an early-stage startup with three to seven years of accumulated business loss and unabsorbed depreciation, a manufacturing entity sitting on MAT credit from FY 2018-19 and FY 2019-20, a trading or HNI portfolio with short-term capital loss carried for two to three AYs against future short-term gain, or a real-estate or infrastructure entity with Section 73A specified business loss with no expiry. When the Income-tax Act 2025 replaces the 1961 Act effective April 1, 2026, every one of these clients asks the same question: do my carry-forward balances survive the cutover, or do I have to compute them afresh under the 2025 Act?

The CBDT 99-page FAQ devotes Chapter 6 to this question. The answer is yes, the balances survive, and the legal anchor is Section 536 Sub-Clause 5 of the Income-tax Act 2025. For founders and CFOs sitting on accumulated loss balances, this is a far bigger deal than the headline 2025 Act changes have made it sound.

The Section 536 Sub-Clause 5 anchor in plain reading

Section 536 of the 2025 Act is the omnibus saving clause that ports operational continuity from the 1961 Act into the 2025 Act framework. Sub-Clause 5 is the loss-and-credit anchor. Three operational consequences flow from its drafting:

1. Computation follows the 1961 Act for AY 2025-26 and earlier returns. The 1961 Act sections (28 to 44DA for business income, 45 to 55A for capital gains, 32 for depreciation, 115JAA and 115JD for credits) govern.
2. The carry-forward window runs on the 1961 Act clock. A Section 72 business loss first computed in AY 2022-23 expires after AY 2030-31. The 2025 Act does NOT introduce a shorter window for legacy losses, and it does NOT restart the clock.
3. Set-off from AY 2027-28 onwards happens against income computed under the 2025 Act framework. The 2025 Act head classifications (residence, source, computation rules) apply to AY 2027-28 income; the legacy loss is brought forward as a quantum and set off against that head-classified income.

The loss-by-loss map: which 1961 Act sections survive intact

Every tranche in this table that exists in your client file as of March 31, 2026 survives the cutover with its original section anchor and its original carry-forward window. The 1961 Act forfeiture gates (Sections 78, 79, 80) continue to apply.

The three forfeiture gates that will still bite after April 1, 2026

Section 80 (late return filing). No loss can be carried forward unless the return for the loss year was filed within the Section 139(1) due date. Late-filing forfeiture is permanent and is NOT cured by the 2025 Act cutover. A forfeited right was never determined to begin with; Section 536 has nothing to preserve. Exception: unabsorbed depreciation under Section 32(2) does NOT require timely filing to survive.

Section 79 (closely-held company ownership change). Where more than 49 percent of beneficial ownership has changed hands since the year the loss was determined, ALL accumulated loss is forfeited from the change year onwards. Section 79 is a year-by-year filter, not a one-time test. Section 536 preserves the underlying right, but Section 79 itself is also preserved under Section 536 Sub-Clause 7, and the forfeiture applies. The 2025 Act does NOT provide amnesty for closely-held-company ownership changes.

Section 78 (partnership reconstitution). Death or retirement of a partner forfeits THAT partner’s share of brought-forward loss. The forfeiture is automatic.

What this means for your startup, your manufacturing client, your HNI portfolio

Startup with three years of business loss and unabsorbed depreciation: Take a SaaS startup that has Rs 2.4 crore Section 72 business loss from AYs 2022-23, 2023-24, and 2024-25 plus Rs 80 lakh of Section 32(2) unabsorbed depreciation. Every tranche survives the cutover. The oldest tranche (AY 2022-23) expires after AY 2030-31. The depreciation has no expiry at all. If the startup turns profit-positive in FY 2025-26, the set-off cascade in AY 2026-27 starts with Section 32(2) depreciation, then Section 72 business loss in chronological order (oldest first).

Manufacturer with MAT credit from FY 2018-19 and FY 2019-20: A Rs 1.1 crore MAT credit ledger split Rs 60 lakh (AY 2019-20) plus Rs 50 lakh (AY 2020-21) preserves its 15-AY window. The AY 2019-20 tranche stays alive through AY 2034-35; the AY 2020-21 tranche through AY 2035-36. In AYs 2027-28 onwards, set-off is against the excess of normal tax over minimum tax computed under the 2025 Act framework, subject to the unutilised balance.

HNI portfolio with capital losses: Rs 47 lakh of short-term capital loss split across AYs 2023-24 and 2024-25, plus Rs 8 lakh long-term capital loss from AY 2024-25. Both Section 74 tranches survive their 8-AY windows. Head-restriction is preserved (long-term loss only against long-term gain). For AY 2026-27 returns, set-off follows the 1961 Act rule because FY 2025-26 income is still 1961 Act per Section 536 Sub-Clause 4. AY 2027-28 onwards: set-off against capital gain computed under the 2025 Act.

Why advisory clients are getting this wrong without help

Three failure modes show up most often in client conversations on this topic:

Failure mode 1: Founders assume the 8-AY window restarts. Nothing in Section 536 restarts a clock. A loss first computed in AY 2022-23 still expires after AY 2030-31. If a founder is planning a fundraise in FY 2026-27 expecting to use accumulated loss for tax shield on future profits, the expiry math has to account for the 1961 Act clock, not a fresh 8-year window.

Failure mode 2: Closely-held companies ignore Section 79. If your cap table is shifting in FY 2025-26 or FY 2026-27 (down rounds, secondary exits, founder exit, ESOP exercises that push promoter holding below 51 percent), Section 79 forfeits the entire accumulated loss from the year of change onwards. Section 536 does NOT save you here. Map the shareholding history before any change is signed, not after.

Failure mode 3: Late-filed returns are silently disqualified. If a client filed an AY 2024-25 return after the Section 139(1) due date and then booked a business loss, the carry-forward right was never created. Section 536 preserves rights that have been determined; it cannot revive what was never determined. The fix is upstream: file every loss-year return on time, no exceptions.

Nine-step loss-carry-forward review sprint your firm should run now

1. Pull the latest available ITR (AY 2025-26 or AY 2024-25) and download Schedule CFL (carry-forward loss) and Schedule UD (unabsorbed depreciation) for every loss-carry-forward client.
2. Tabulate every loss tranche by year of computation, section, quantum, and expiry AY. One spreadsheet per client portfolio.
3. For every closely-held company, build a shareholding history table. Apply the Section 79 test year by year. Flag any beneficial-ownership change exceeding 49 percent.
4. For every partnership and LLP, verify Section 78 reconstitution history. Recompute partner-share-of-loss if any partner has retired or died.
5. For every company-to-LLP conversion under Section 47(xiiib), maintain the 5-year condition tracking sheet. Flag any breach immediately.
6. For every amalgamation, demerger, or restructuring file, prepare a Section 72A/72AA/72AB continuity memo.
7. For every entity with MAT or AMT credit, prepare a credit-tranche table with year of credit and expiry AY. The 15-AY clock continues.
8. Document in a client memo (one per loss-carry-forward client) that Section 536 Sub-Clause 5 preserves the right, citing the section number and FAQ chapter.
9. File the review tracker in the AY 2026-27 working papers folder so it carries forward into the AY 2027-28 cycle when 2025 Act income first applies.

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If you are managing a loss carry-forward portfolio for a startup, an MAT credit balance for a manufacturer, a closely-held company facing an ownership change, an LLP conversion under Section 47(xiiib), or an amalgamation file under Section 72A, the Income-tax Act 2025 cutover demands a fresh review of every tranche before the AY 2026-27 return cycle closes. A S Banka Advisors Private Limited works with founders, CFOs, and mid-tier practices on Section 536 saving-clause memos, loss-tranche tracking sheets, MAT credit utilisation models, and Section 79 forfeiture mapping.

Talk to an Expert — CA Adityavikram Banka, Director, A S Banka Advisors Private Limited.

Disclaimer: This article provides general information based on the CBDT 99-page FAQ on the Income-tax Act 2025 and the cited 1961 Act and 2025 Act provisions. It is not legal or tax advice. For client-specific carry-forward computations, set-off cascades, Section 79 mapping, MAT credit utilisation models, or AY 2027-28 transition planning, consult a qualified tax practitioner familiar with your loss and credit history.