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.
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Open CalculatorWhat 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 |
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Biggest Advantage of Unabsorbed Depreciation: Unlike business losses (8-year cap; only against business income when carried forward), unabsorbed depreciation can be (a) carried forward for any number of years without limit and (b) set off against any income — including salary — even when carried forward. This makes it fundamentally different from and more valuable than a business loss.
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
Manufacturing Company, Pune — Heavy Machinery 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 |
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Do NOT Confuse the Two: Tax professionals sometimes incorrectly treat unabsorbed depreciation like a business loss and apply the 8-year cap. No such cap exists. Unabsorbed depreciation under Section 33(2) of the new Act has no time limit for carry forward and can be set off against any income.
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