Unabsorbed Depreciation Transition Under Income-tax Act 2025: Comparison, Tax Impact & Decision Framework
Unabsorbed depreciation is one of the most tax-efficient tools available to businesses — because unlike business losses, it can be carried forward indefinitely and set off against any income including salary. The Income-tax Act 2025 retains this preferential treatment but renumbers the provision. This guide covers the transition, the priority of set-off, interaction with section 115BAC (new regime), and what changes in Tax Year 2026-27.
What Is Unabsorbed Depreciation?
When a business's allowable depreciation (on plant, machinery, building, vehicles, and other depreciable assets) exceeds its business profits in a year, the excess depreciation that cannot be absorbed is called unabsorbed depreciation. Unlike a business loss, it has a privileged carry-forward treatment under the Income-tax Act.
Old Act vs New Act — Section Mapping
| Provision | Old Act (1961) | New Act (2025) |
|---|---|---|
| Depreciation allowance | Section 32(1) | Section 33(1) |
| Unabsorbed depreciation carry forward | Section 32(2) | Section 33(2) |
| No time limit on carry forward | Explicit — unlimited years | Retained — unlimited years |
| Set-off against any head of income | Yes — including salary, capital gains | Yes — retained under Section 33(2) |
| Condition of same business continuity | Not required for unabsorbed depreciation | Not required — same as old Act |
| Not available in new concessional regime | 115BAC(2) — depreciation allowed only at new rates | Chapter XX equivalent — WDV depreciation at standard rates; no enhanced/additional depreciation in new regime |
Priority Order for Set-off
The order in which depreciation claims are made against income is important:
- Current year depreciation is first set off against current year business income
- If current year business income is insufficient, it spills into other heads of income (same year)
- Remaining unabsorbed depreciation is carried forward to next year
- In the next year: (a) current year depreciation first; (b) brought-forward business losses; (c) unabsorbed depreciation from earlier years
The priority sequence means unabsorbed depreciation is set off after brought-forward business losses — but unlike business losses, it has no year limit.
Case Study: TechMfg Pvt Ltd — Using ₹1.8 Crore Unabsorbed Depreciation
TechMfg purchased plant and machinery worth ₹5 crore in Tax Year 2022-23. With 15% WDV depreciation and low initial profits, the company accumulated ₹1.8 crore of unabsorbed depreciation by Tax Year 2024-25. The company changed its majority shareholders in 2025 (no Section 87 issue for depreciation).
- Tax Year 2026-27: TechMfg earns ₹2.4 crore profit
- Current year depreciation: ₹45L
- Net business income after current depreciation: ₹1.95 crore
- Set off ₹1.8 crore unabsorbed depreciation from prior years
- Net taxable income: ₹15 lakh
- Tax saving: ₹1.8 crore × 25% (company tax rate) = ₹45 lakh tax saved
Unlike a business loss, TechMfg could carry this depreciation forward despite the change in shareholders — Section 87 (shareholding continuity) does NOT apply to unabsorbed depreciation.
Unabsorbed Depreciation in the New Concessional Regime
If a company or individual opts for the new concessional tax regime under the new Act (Chapter XX, equivalent to old Section 115BAC/115BAA):
- Depreciation is available on WDV at standard rates (standard Schedule XIV rates)
- Additional depreciation, enhanced depreciation (Section 35AD equivalent) are NOT available in the new regime
- Unabsorbed depreciation accumulated under the old regime can still be set off when opting into the new regime — but only the WDV-based balance (not the enhanced amounts)
- CBDT Circular No. 1 of 2020 (applicable under old Act) continues to govern WDV transitions under Section 536(2)(j) of the new Act
Key Differences: Unabsorbed Depreciation vs Business Loss
| Parameter | Unabsorbed Depreciation | Business Loss |
|---|---|---|
| Carry forward period | Unlimited years | 8 years |
| Set-off scope (carried forward) | Any income including salary | Only business/profession income |
| Shareholding continuity required | No | Yes (for companies — Section 87) |
| Timely ITR filing required | No — can be claimed even in late-filed returns | Yes — late ITR forfeits carry forward |
| Set-off priority | After business losses | Before unabsorbed depreciation |
Unabsorbed Depreciation — Key Takeaways
- Old Section 32(2) → New Section 33(2) — same provisions, same unlimited carry forward
- Set off against any income head including salary — even when carried forward
- No shareholding continuity condition — unlike business losses
- Timely ITR not required to preserve carry forward (unlike business losses)
- In new concessional regime: depreciation available at standard WDV rates only (no enhanced depreciation)
- Priority: current depreciation → brought-forward business losses → unabsorbed depreciation