CBDT FAQ Deep-Dive Series #3: Loss Carry-Forward Continuity Under Section 536 Sub-Clause 5 of the Income-tax Act 2025 – How Section 72 Business Loss, Section 32(2) Unabsorbed Depreciation, Section 115JAA MAT Credit, and Section 115JD AMT Credit Survive the April 1, 2026 Cutover

Third installment of the Tax Update India CBDT FAQ Deep-Dive Series on the Income-tax Act 2025 transition. Companion to Post 723 (CBDT 99-Page FAQ master), Post 732 (TDS Deep-Dive), and Post 737 (Section 148 Reassessment Deep-Dive). This installment opens Chapter 6 of the 99-page FAQ: loss carry-forward and credit carry-forward continuity under Section 536 sub-clause 5 of the Income-tax Act 2025.

Quick Summary

• Section 536 sub-clause 5 of the Income-tax Act 2025 expressly preserves the right to carry forward and set off losses, depreciation, MAT credit, and AMT credit determined under the Income-tax Act 1961 as if the 1961 Act continued to operate. The carry-forward years tabulated under the 1961 sections continue to run.
• Business loss carried forward under Section 72 of the 1961 Act for assessment year 2025-26 and earlier remains available for set-off for 8 assessment years following the AY in which the loss was first computed. The 2025 Act does not restart the clock.
• Speculation loss under Section 73 (4 AYs), specified business loss under Section 73A (no limit), capital loss under Section 74 (8 AYs), and loss from owning and maintaining race horses under Section 74A (4 AYs) all retain their 1961 Act carry-forward windows.
• Unabsorbed depreciation under Section 32(2) of the 1961 Act continues with no time limit. MAT credit under Section 115JAA (15 AYs) and AMT credit under Section 115JD (15 AYs) survive the cutover with the same window.
• Section 79 lock-out rules on closely-held companies, Section 80 mandatory return-filing for loss carry-forward, and the Section 78 partnership-reconstitution forfeiture each continue to apply to losses determined under the 1961 Act framework for AY 2025-26 and earlier.

Why This Deep-Dive Matters for Your Loss-Carry-Forward Clients

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 a 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. Sub-clause 5 expressly preserves any right accrued or any liability incurred under the 1961 Act in respect of loss, depreciation, MAT credit, and AMT credit. The carry-forward window tabulated under each 1961 Act section continues to run as if the 1961 Act had not been repealed. The 2025 Act does not restart the clock, does not re-characterize the loss, and does not erase the credit.

This post is the practitioner companion to Chapter 6 of the FAQ. It maps each 1961 Act loss-carry-forward and credit-carry-forward provision to the corresponding Section 536 saving anchor, tabulates the surviving carry-forward years, lays out four operational scenarios you will hit in client files, and closes with a nine-step loss-carry-forward review sprint plus a five-question FAQ for client memos.

The Section 536 Sub-Clause 5 Saving Clause: Plain Reading

The Income-tax Act 2025 was issued in CBDT Gazette Notification dated March 2026 and took effect April 1, 2026. 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. In plain reading, it says:

“The repeal of the Income-tax Act 1961 shall not affect any right to carry forward and set off, in any assessment year commencing on or after the appointed day, any loss (including unabsorbed depreciation), or any minimum alternate tax credit or alternate minimum tax credit, as the case may be, that has been determined, allowed, or quantified under the said Act in respect of any assessment year commencing before the appointed day. Such loss, depreciation, or credit shall be carried forward and set off in accordance with the provisions of this Act, as if such provisions of the said Act had continued to operate for that purpose.”

Three operational consequences flow from this drafting. First, the determination of the loss or credit 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 the computation. Second, the carry-forward window tabulated under each 1961 Act section continues to run on the 1961 Act clock. The 2025 Act does not introduce a shorter window for legacy losses. Third, the set-off in any AY commencing on or after April 1, 2026 happens against income computed under the 2025 Act framework. The 2025 Act income head classifications (residence, source, computation rules) are used for the AY 2026-27 onwards income; the legacy loss is brought forward as a quantum and set off against that head-classified income.

Loss-By-Loss Carry-Forward Map: 1961 Act Section to Surviving Carry-Forward Window

Type of loss or credit	1961 Act section	Carry-forward window (AYs)	Set-off head restriction	Section 536 anchor
Non-speculation business loss	Section 72	8 AYs from year of first computation	Profits and gains of any business or profession (any head)	Sub-clause 5
Speculation business loss	Section 73	4 AYs	Speculation profits only	Sub-clause 5
Specified business loss (Section 35AD)	Section 73A	Indefinite (no time limit)	Specified business profits only (Section 35AD class)	Sub-clause 5
Capital loss (short-term)	Section 74(1)(a)	8 AYs	Short-term or long-term capital gain	Sub-clause 5
Capital loss (long-term)	Section 74(1)(b)	8 AYs	Long-term capital gain only	Sub-clause 5
Loss from owning and maintaining race horses	Section 74A	4 AYs	Income from same activity only	Sub-clause 5
Unabsorbed depreciation	Section 32(2)	Indefinite (no time limit)	Any income head (Section 71 inter-head set-off available)	Sub-clause 5
Loss from house property	Section 71B	8 AYs	Income from house property only	Sub-clause 5
MAT credit	Section 115JAA(4)	15 AYs from year of credit	Tax under normal provisions exceeding MAT in set-off year	Sub-clause 5
AMT credit	Section 115JD(4)	15 AYs from year of credit	Tax under normal provisions exceeding AMT in set-off year	Sub-clause 5

Two ancillary 1961 Act sections also continue to apply to legacy losses through Section 536 sub-clause 5. Section 78 forfeits the share of loss of a deceased or retired partner upon partnership reconstitution; the forfeiture rule applies to losses determined under the 1961 Act when carried into AYs after April 1, 2026. Section 79 blocks loss set-off in a closely-held company where more than 49 percent of beneficial ownership has changed hands since the year the loss was determined; the 1961 Act lock-out gate continues to filter eligibility year by year. Finally, Section 80 mandates that no loss can be carried forward unless the return for the loss year was filed within the Section 139(1) due date; failed-filing forfeiture is permanent and is not cured by the 2025 Act cutover.

Four Operational Scenarios on Practitioner Files

Scenario 1: Startup with Three Years of Business Loss and Unabsorbed Depreciation

A SaaS startup files ITR-6 for AY 2025-26 (FY 2024-25) under the 1961 Act framework. Brought-forward Section 72 business loss is Rs 2.4 crore from AYs 2022-23, 2023-24, and 2024-25. Unabsorbed depreciation under Section 32(2) is Rs 80 lakh. The startup expects to become EBITDA-positive in FY 2025-26 and book taxable profit in FY 2026-27.

What happens at the cutover? The AY 2025-26 return is finalized under the 1961 Act. The Section 72 loss for AY 2024-25 is in its first carry-forward year; eligible to carry forward through AY 2032-33. The AY 2023-24 loss runs through AY 2031-32. The AY 2022-23 loss runs through AY 2030-31. Unabsorbed depreciation has no time limit. In AY 2026-27 (FY 2025-26), if profit emerges, Section 32(2) depreciation set-off comes first, then Section 72 business loss set-off in chronological order (oldest first). In AY 2027-28 (FY 2026-27), the same chronological set-off cascade continues under the 2025 Act framework. The startup does not lose a single rupee at the cutover, and the AY 2030-31 expiry on the oldest tranche is not accelerated.

Scenario 2: Manufacturing Entity with MAT Credit From FY 2018-19 and FY 2019-20

A mid-tier manufacturing company files ITR-6 for AY 2025-26. The MAT credit ledger under Section 115JAA shows Rs 1.1 crore unutilised, with Rs 60 lakh from AY 2019-20 (FY 2018-19) and Rs 50 lakh from AY 2020-21 (FY 2019-20). The 15-AY window means the AY 2019-20 tranche expires after AY 2034-35; the AY 2020-21 tranche expires after AY 2035-36.

Section 536 sub-clause 5 expressly anchors MAT credit. The carry-forward window from each year of credit is preserved. In AY 2026-27 (the first AY under the 2025 Act framework), the company computes tax under normal 2025 Act provisions, computes tax under the 2025 Act minimum alternate provisions (if applicable to the entity class), and sets off the legacy MAT credit against the excess of normal tax over minimum tax in that AY, subject to the unutilised balance. The order of set-off (oldest tranche first) is followed. The 15-AY window does not get truncated by the cutover.

Scenario 3: HNI Portfolio with Short-Term and Long-Term Capital Loss

An individual taxpayer files ITR-2 for AY 2025-26 (FY 2024-25). Short-term capital loss carried forward under Section 74(1)(a) is Rs 35 lakh from AY 2023-24 and Rs 12 lakh from AY 2024-25. Long-term capital loss carried forward under Section 74(1)(b) is Rs 8 lakh from AY 2024-25 (post-Section 112A indexation removal regime). The 8-AY window runs to AY 2031-32 and AY 2032-33 respectively.

Section 536 sub-clause 5 preserves both Section 74 tranches. The head-restriction is also preserved: short-term loss may be set off against either short-term or long-term gain; long-term loss may only be set off against long-term gain. In AY 2026-27 (FY 2025-26, still 1961 Act for the income side per Section 536 sub-clause 4), set-off against capital gain follows the 1961 Act rule. In AY 2027-28 (FY 2026-27, the first AY where income is computed under the 2025 Act), the legacy loss is set off against capital gain computed under the 2025 Act capital-gain head, subject to the same head-restriction.

Scenario 4: Closely-Held Company Triggering Section 79 Lock-Out

A closely-held private company with Rs 50 lakh of Section 72 business loss from AY 2023-24 undergoes a beneficial-ownership change in November 2025 where the original promoter ceases to hold 51 percent or more of voting power. Section 79 of the 1961 Act forfeits set-off of the AY 2023-24 loss in AY 2026-27 and beyond, because the beneficial-ownership change exceeds the Section 79 lock-out threshold.

Section 536 sub-clause 5 preserves the carry-forward right, but Section 79 is a 1961 Act ineligibility filter that applies year by year. Because Section 79 is itself preserved by Section 536 (sub-clause 7, action taken under the earlier Act, also applies), the AY 2023-24 loss is forfeited from AY 2026-27 onwards. The company cannot use the cutover to escape Section 79 forfeiture. Practitioners must flag this on every closely-held company file where ownership changes are in progress, because the forfeiture is automatic and not appealable on the substantive ground.

Ancillary Forfeiture Gates Practitioners Must Check

Gate	1961 Act section	Trigger	Effect	Practitioner check
Late return filing	Section 80	Return for loss year filed after Section 139(1) due date	Loss not eligible for carry-forward	Verify ITR filing date for every loss year in client file
Beneficial-ownership change	Section 79	Less than 51 percent of voting power retained by original holders in closely-held company	All accumulated loss forfeited from year of change onwards	Map shareholding history; flag any change exceeding 49 percent
Partnership reconstitution	Section 78	Death or retirement of partner whose share of loss was carried forward	That partner’s share of loss is forfeited	Pull partnership deed history and reconstitute share computation
Conversion of company to LLP	Section 47(xiiib) compliance	Failure to satisfy LLP conditions in any of 5 succeeding years	Loss carry-forward to LLP is reversed	Maintain LLP conditions file; track 5-year compliance window
Amalgamation / demerger	Sections 72A, 72AA, 72AB	Specified company / banking / cooperative amalgamation conditions	Loss accrues to amalgamated entity; carry-forward clock resets in amalgamation year	For every restructuring file, prepare Section 72A continuity certificate

Set-Off Cascade Under Section 72: Order of Application

When taxable income emerges in AY 2026-27 (FY 2025-26, 1961 Act) and AY 2027-28 onwards (2025 Act), the set-off cascade is the standard 1961 Act order, preserved by Section 536 sub-clause 5:

1. Current year depreciation under Section 32(1) (set off against current year income, inter-head allowed under Section 71)
2. Unabsorbed depreciation under Section 32(2) (no time limit, set off against any head)
3. Section 73A specified business loss (set off against specified business profits only)
4. Section 72 brought-forward business loss (oldest tranche first; set off against business profits only)
5. Section 73 speculation loss (set off against speculation profits only)
6. Section 74 capital loss (head-restricted; short-term against any capital gain, long-term against long-term capital gain only)
7. Section 71B house property loss (set off against house property income only)
8. Section 74A race horse loss (set off against same activity only)
9. MAT credit under Section 115JAA / AMT credit under Section 115JD (against tax payable in the year of set-off, not against income)

Nine-Step Loss Carry-Forward File Review Sprint

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

FAQs: Five Questions Practitioners Will Be Asked

Q1: My client filed AY 2024-25 ITR after the Section 139(1) due date. Can the business loss still carry forward into AY 2026-27 and beyond?

No. Section 80 of the 1961 Act requires that the return for the loss year be filed within the Section 139(1) due date for the loss to qualify for carry-forward under Section 72, 73, 73A, 74, or 74A. Late return filing forfeits carry-forward eligibility permanently. The Section 536 saving clause preserves rights that have been determined under the 1961 Act; a forfeited carry-forward right was never determined to begin with. The 2025 Act does not revive a forfeited 1961 Act right. Exception: unabsorbed depreciation under Section 32(2) is treated as current-year depreciation in the next year and does not require timely filing for survival, but business loss under Section 72 absolutely does.

Q2: Does the 8-AY clock for Section 72 business loss restart on April 1, 2026?

No. Section 536 sub-clause 5 expressly says the carry-forward and set-off shall be made “as if such provisions of the said Act had continued to operate for that purpose.” The 8-AY window is anchored to the year of first computation under the 1961 Act, and that anchor is preserved. A loss first computed in AY 2022-23 expires after AY 2030-31. The 2025 Act cutover on April 1, 2026 does not push the expiry further out or contract it inward.

Q3: My client has MAT credit from AY 2017-18. Does the 15-AY window survive the 2025 Act?

Yes. Section 115JAA of the 1961 Act provides a 15-AY carry-forward window from the year of MAT credit. Section 536 sub-clause 5 preserves MAT credit carry-forward and the window. An MAT credit balance from AY 2017-18 (FY 2016-17) is available for set-off through AY 2032-33. In AYs 2027-28 onwards (the 2025 Act income side), the MAT credit is set off against the excess of normal tax over MAT (computed under the 2025 Act minimum tax provisions applicable to the entity class), subject to the unutilised balance and the chronological-tranche order.

Q4: Section 79 says my closely-held company loses Section 72 loss carry-forward because of an ownership change in February 2026. Does Section 536 override Section 79?

No. Section 536 sub-clause 5 preserves the underlying right, but Section 79 is itself a forfeiture provision that operates year by year. Section 536 sub-clause 7 saves any action taken under the 1961 Act, which includes a Section 79 forfeiture that has already crystallised before the cutover. For the AY 2026-27 (FY 2025-26) return, the company computes income under the 1961 Act framework, and Section 79 forfeiture applies to the brought-forward loss. From AY 2027-28 onwards (2025 Act income side), the forfeited loss is no longer in the carry-forward ledger and cannot be revived. The 2025 Act does not provide an amnesty for closely-held-company ownership changes.

Q5: We had a Section 47(xiiib) conversion of company to LLP in FY 2023-24. The 5-year condition tracking window runs through FY 2028-29. What happens if conditions break in FY 2027-28 under the 2025 Act framework?

The 5-year condition tracking under Section 47(xiiib) is a 1961 Act test that was attached to the conversion. Section 536 sub-clause 7 preserves the conditions and the consequence of breach. If conditions break in FY 2027-28, the loss carry-forward that was originally permitted to the LLP under Section 72A(6A) is reversed; the LLP becomes liable to tax on the gain that was originally exempt under Section 47(xiiib). The 2025 Act framework recognises this 1961 Act consequence. Practitioners should maintain the 5-year condition file and report any breach in the AY of breach.

Bottom Line for Tomorrow Morning

Section 536 sub-clause 5 of the Income-tax Act 2025 is a clean, broad-spectrum saving clause for loss carry-forward and credit carry-forward. Every 1961 Act loss tranche, every unabsorbed depreciation balance, every MAT credit tranche, and every AMT credit tranche 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 1961 Act conditions (Section 47(xiiib), Section 72A, 72AA, 72AB) continue to track.

What changes is the income side from AY 2027-28 onwards: that income is computed under the 2025 Act, and the legacy loss is set off against that 2025-Act-computed income subject to head restrictions preserved by Section 536. The mechanics are identical; only the income computation framework swaps over. For the AY 2026-27 return cycle (FY 2025-26 income), the 1961 Act remains the income computation framework as well, per Section 536 sub-clause 4. The practitioner’s job in May and June 2026 is to lock down the carry-forward ledger for every client, document the Section 536 anchor in the client memo, and prepare the AY 2027-28 set-off model so that no tranche expires unnoticed.

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. Section 536 sub-clause numbering and FAQ chapter references are based on the publicly available text. 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.

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Get Expert Guidance

If you are a CA or founder managing a loss carry-forward portfolio, an MAT credit balance, a closely-held company with a recent 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. Tax Update India advisors work with 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 | Visit TaxUpdate.in for the full CBDT FAQ Deep-Dive Series and the AY 2026-27 transition library.