Tag: Unabsorbed depreciation

Set-Off and Carry Forward of Losses: Business, House Property, Capital Gains and Depreciation (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 20 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A loss is set off first within the same head, then against income under other heads, then carried forward (sections 108 to 115 of the Income-tax Act, 2025).
  • House property loss: ₹2 lakh against other heads, balance for 8 years against house property income. Business loss: against any head except salary, then for 8 years against business profits. Speculation loss: 4 years, only against speculation profit. Capital loss: not against other heads; 8 years against capital gains.
  • Unabsorbed depreciation carries forward without any time limit (section 33(11)).
  • Business, capital gains and speculation losses can be carried forward only if the return of the loss year was filed by the due date (section 121); a company with a change of 51% or more in voting power loses its brought forward losses (section 119).

A loss reduces tax only if it can be set off or carried forward. The Income-tax Act, 2025 deals with this in Chapter VII (sections 108 to 121). The sections replace sections 70 to 80 of the 1961 Act.

Step 1: set off within the same head (section 108)

If the result from one source under a head (other than capital gains) is a loss, it is set off against income from any other source under the same head in the same tax year. For capital gains (section 108(2)):

  • a short-term capital loss is set off against any capital gain, short-term or long-term;
  • a long-term capital loss is set off only against long-term capital gains.

Step 2: set off against other heads (section 109)

If a head (other than capital gains) shows a loss after step 1, it is set off against income under any other head, including capital gains, with two limits:

  • a business or profession loss cannot be set off against salary (section 109(1)(a));
  • a house property loss can be set off against other heads only up to ₹2,00,000 (section 109(1)(b)).

A capital loss cannot be set off against any other head (section 109(2)).

Step 3: carry forward

Loss Carry forward Set off against Section
House property 8 tax years House property income only 110
Capital gains 8 tax years Capital gains, short-term loss against any gain, long-term loss against long-term gains 111
Business or profession (not speculation) 8 tax years Profits of any business or profession 112
Speculation business 4 tax years Profits of speculation business only 113
Specified business under section 46 Not limited in the text Profits of another specified business only 114
Specified activity (owning and maintaining race horses) 4 tax years Income from that activity only 115
Unabsorbed depreciation No time limit Added to the depreciation of the next year, effect first being given to the business loss under section 112(3) 33(11)

Order of set off: brought forward business loss is given effect first; any unabsorbed depreciation is then added to the next year’s depreciation (section 112(3)).

The eight years are counted from the year after the year in which the loss was first computed (“eight tax years immediately succeeding”).

Conditions

File the return on time (section 121)

Irrespective of anything contained in the Chapter, a loss that has not been determined in a return filed under section 263(1) cannot be carried forward and set off under sections 111(1), 112(1), 113(2), 114(2) or 115(2). That is, to carry forward a capital gains, business, speculation, specified business or specified activity loss, the return of the loss year must be filed by the due date, and the loss must be shown in it.

House property loss (section 110) and unabsorbed depreciation (section 33(11)) are not in the list of section 121.

Changes in constitution (section 119)

  • Partner leaves or dies: the firm cannot carry forward the portion of the loss proportionate to a retired or deceased partner’s share that exceeds his share of profits in the year (section 119(1)).
  • Succession of business: where a business or profession is taken over by another person other than by inheritance, only the person who incurred the loss can carry it forward (section 119(2)).
  • Change in shareholding of a company (a company in which the public are not substantially interested): the loss of an earlier year can be set off only if, on the last day of the tax year, shares carrying at least 51% of the voting power are beneficially held by the same persons who held at least 51% on the last day of the year in which the loss was incurred (section 119(3)(a)).
    - Eligible start-ups (section 140) can carry forward losses incurred in the first ten years from incorporation if all the shareholders on the last day of the loss year continue to hold their shares at the end of the current year (section 119(3)(b)).
    - The rule does not apply when the change is due to the death of a shareholder, a gift to a relative, certain amalgamations or demergers of a foreign parent, and the other cases in section 119(4).

Reorganisations

On amalgamation or demerger of specified companies, the accumulated losses and unabsorbed depreciation pass to the successor if the conditions of sections 116 to 118 are met (an industrial undertaking or a ship or hotel company amalgamated with another company, public sector company amalgamations, a firm or proprietorship succeeded by a company, and others).

New regimes and loss set-off

A person who is taxed under the new regime (section 202), or under the concessional rates for companies and co-operative societies (sections 200, 201, 203, 204), computes income without certain deductions and without set off of losses or depreciation attributable to them; those losses are deemed to have been given effect to and lapse. House property loss cannot be set off against other heads in the new regime (section 202(2)(b)(ii)). See our posts on the regime option and on corporate tax.

Examples

1. Order of set off. Tax year 2026-27, old regime. Salary ₹10,00,000, house property loss ₹2,50,000, business loss ₹3,00,000, no other income.

  • House property loss: only ₹2,00,000 can be set off against other heads, here against salary, leaving taxable salary of ₹8,00,000. The other ₹50,000 is carried forward for 8 years against house property income.
  • Business loss: cannot be set off against salary. The whole ₹3,00,000 is carried forward for 8 years against business profits, provided the return is filed by the due date.

2. Unabsorbed depreciation. Profit before depreciation ₹3,00,000, depreciation ₹5,00,000: ₹3,00,000 is allowed, ₹2,00,000 is carried forward with no time limit.

3. Late return. Business loss of ₹4,00,000 in tax year 2026-27, return filed on 15/12/2027 (belated). Under section 121, the loss cannot be carried forward, because the return was not under section 263(1). It could still have been set off in 2026-27 against other income (not salary).

Practical points

  • Always file the return on time in a loss year, even if no tax is due.
  • Show the loss in the loss schedules of the return, by year of origin.
  • Track expiry: the 8 year clock runs from the year the loss was computed.
  • A company should watch the 51% shareholding test at each change in ownership.

Frequently asked questions

In what order are losses set off?

First against other income under the same head in the same year (section 108), then against income under other heads, subject to the limits (section 109), and the balance is carried forward (sections 110 to 115).

Can a business loss be set off against salary?

No. A loss under Profits and gains of business or profession cannot be set off against salary income (section 109(1)(a)). It can be set off against other heads, such as house property, capital gains or other sources.

For how long can a business loss be carried forward?

For eight tax years immediately after the year in which it was first computed, against profits of any business or profession (section 112). A speculation loss can be carried forward for four years, only against speculation profits (section 113).

Does unabsorbed depreciation lapse?

No. It is added to the depreciation allowable in the next year and so on, without a time limit (section 33(11)).

Do I need to file the return on time to carry forward a loss?

For losses under sections 111, 112, 113, 114 and 115 (capital gains, business, speculation, specified business and specified activity), yes: a loss not determined in a return filed under section 263(1) by the due date cannot be carried forward and set off (section 121).

What happens to a company’s losses if the shareholding changes?

For a company in which the public are not substantially interested, a loss of an earlier year cannot be set off against the income of a year in which the shareholders holding 51% of the voting power on the last day of the loss year no longer hold that 51% on the last day of the current year. Eligible start-ups have an exception (section 119(3)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Depreciation Under the Income-tax Act 2025: Rates, Block of Assets, Additional Depreciation and Carry Forward (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 17 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Depreciation under section 33 is allowed on buildings, machinery, plant and furniture and on intangible assets such as patents and licences, at a percentage of the written down value (WDV) of the block of assets (Rule 25 and Appendix I).
  • Key rates: residential buildings 5%, other buildings 10%, furniture 10%, plant and machinery 15%, motor cars 15%, buses, lorries and taxis on hire 30%, computers and software 40%, intangibles 25%.
  • An asset put to use for less than 180 days in the year gets half the rate, and new plant and machinery for manufacture or power generation can get additional depreciation of 20% (section 33(8) and (9)), which the new regime for individuals does not allow.
  • Unabsorbed depreciation is carried forward without a time limit and added to the next year’s depreciation (section 33(11)); land and goodwill are not depreciable.

Depreciation is a deduction in computing business or professional income for the wear and tear of assets. It is governed by section 33 of the Income-tax Act, 2025 (earlier section 32), with the rates in Rule 25 and Appendix I of the Income-tax Rules, 2026. It is a tax calculation, separate from the depreciation in the company’s accounts.

What qualifies (section 33(1))

  • Tangible assets: buildings, machinery, plant and furniture.
  • Intangible assets: know-how, patents, copyrights, trademarks, licences, franchises or other similar business or commercial rights, acquired on or after 1 April 1998.
  • The asset must be owned (wholly or partly) by the assessee and used wholly and exclusively for the business or profession.

Not depreciable: land and goodwill of a business or profession. If an asset is used only partly for the business, depreciation is restricted to a fair proportion (section 33(3)(b)).

Depreciation is allowed whether or not you claim it, so the written down value is reduced by the depreciation allowable each year (section 33(7)).

Block of assets and written down value

Assets of the same class with the same rate form a block. Depreciation is a percentage of the written down value of the block (section 33(3)(a)):

WDV = opening WDV + cost of assets bought in the year - sale proceeds of assets sold - depreciation of the year.

Half rate (section 33(4)): if an asset is acquired during the year and used for less than 180 days in that year, the depreciation on it is 50% of the prescribed rate.

Renovation of a leased building (section 33(6)): capital expenditure on a structure or renovation of a leased or occupied building is treated as a building owned by the assessee.

Rates (Rule 25 and Appendix I)

Block Rate on WDV
Buildings mainly for residence (other than hotels and boarding houses) 5%
Other buildings 10%
Purely temporary erections such as wooden structures 40%
Furniture and fittings, including electrical fittings 10%
Machinery and plant (general) 15%
Motor cars (other than those used on hire) 15%
Motor buses, lorries and taxis used on hire 30%
Aeroplanes and aero engines 40%
Computers, including computer software 40%
Containers of glass or plastic used as refills 40%
Energy saving devices, pollution control equipment, certain life saving medical equipment and certain other listed items 40%
Know-how, patents, copyrights, trademarks, licences, franchises (intangibles) 25%

“Buildings” include roads, bridges, culverts, wells and tubewells. A building is “mainly residential” if at least two thirds of its built-up area is used for residence. Assets that the table does not list separately, such as air conditioners, televisions, inverters and mobile phones, fall in the general class of machinery and plant at 15%; a laptop or desktop is a computer at 40%. Check the specific entries for special equipment.

40% ceiling for the new regimes (Rule 25(2)): the depreciation on any block cannot exceed 40% of the WDV for a domestic company that opts for the concessional rate under section 199(3), 200(5) or 201(2), for an individual, HUF, AOP, BOI or artificial juridical person whose income is taxed under section 202(1), and for a co-operative society that has exercised an option under section 203(5) or 204(2).

Additional depreciation (section 33(8) and (9))

For a business of manufacture or production, or generation, transmission or distribution of power, new machinery or plant acquired and installed and first put to use by the assessee gets, in addition:

  • 20% of the actual cost in the year of acquisition and use; or
  • 10% in that year if used for less than 180 days, and 10% more in the next year.

It is not allowed for ships and aircraft, plant that was used by another person before, plant installed in office premises or residential accommodation (including a guest house), office appliances, road transport vehicles, or assets whose whole cost is allowed as a deduction. An individual or HUF in the new regime cannot claim it (section 202(2)(a)(vi)).

Unabsorbed depreciation (section 33(11))

If profits before depreciation are less than the depreciation allowable:

  • depreciation is allowed to the extent of the profits (if there is a loss, none is allowed);
  • the balance is carried forward and added to the depreciation allowable in the next year, and so on, without any time limit; and
  • effect is given first to the brought-forward business loss under section 112(3).

Examples

1. Plant block. Opening WDV ₹10,00,000. In the year you buy plant for ₹2,00,000 and use it for 100 days.

  • Opening block: 15% × 10,00,000 = ₹1,50,000
  • Addition (less than 180 days): 7.5% × 2,00,000 = ₹15,000
  • Depreciation: ₹1,65,000. Closing WDV = 10,00,000 + 2,00,000 - 1,65,000 = ₹10,35,000.
  • If the plant is new and for a manufacturing business, additional depreciation of 10% × 2,00,000 = ₹20,000 is allowed this year, and ₹20,000 next year, other than for individuals in the new regime.

2. Laptop. A laptop costing ₹60,000 is bought in June and used for the rest of the year (more than 180 days). Depreciation at 40% = ₹24,000. WDV = ₹36,000. If bought in January and used for 70 days, depreciation is 20% = ₹12,000.

3. Car. A car for the proprietor’s business costs ₹10,00,000, in use throughout the year. Depreciation at 15% = ₹1,50,000. Taxis used on hire are at 30%.

4. Unabsorbed depreciation. Profit before depreciation ₹3,00,000, depreciation due ₹5,00,000. Depreciation of ₹3,00,000 is allowed and ₹2,00,000 is carried forward, to be added to next year’s depreciation.

Presumptive taxpayers

A presumptive taxpayer under section 58 is deemed to have claimed depreciation every year, and the written down value is computed on that basis (section 58(6)). No separate depreciation is claimed (see our post on presumptive taxation).

Practical points

  1. Keep a fixed asset register by block, with the date of purchase and the date of first use (for the 180 day test).
  2. Do not mix tax depreciation with the book depreciation under the Companies Act, 2013. The tax is the block system above.
  3. Sale of an asset reduces the block’s WDV; if the sale price exceeds the block’s WDV plus additions, a short-term capital gain arises, as in our post on depreciable assets.

Frequently asked questions

What are the income tax depreciation rates?

Under Appendix I to Rule 25: residential buildings 5%, other buildings 10%, temporary erections 40%, furniture and fittings 10%, plant and machinery 15%, motor cars (not on hire) 15%, buses, lorries and taxis used on hire 30%, computers including software 40%, and know-how, patents, copyrights, trademarks, licences and franchises 25%, each on the written down value of the block.

Is depreciation allowed on land?

No. Section 33(1) covers buildings, machinery, plant and furniture, and specified intangible assets. Land and goodwill are not depreciable assets.

What if I use an asset for less than 180 days?

If the asset was acquired in the year and used for less than 180 days, the deduction is 50% of the prescribed rate (section 33(4)).

What is additional depreciation?

An extra 20% of the actual cost of new plant or machinery in the year it is acquired and put to use, for a business of manufacture or production, or generation, transmission or distribution of power; 10% in that year and 10% next year if used for less than 180 days (section 33(8) and (9)). Individuals taxed in the new regime cannot claim it (section 202(2)).

Can I skip claiming depreciation?

No. Section 33(7) says the section applies whether or not you claim depreciation, so the WDV is reduced by the depreciation allowable.

What is unabsorbed depreciation?

Depreciation that cannot be set off because profits are too low. It is added to the depreciation of the next year, with no time limit, after the business loss carry forward under section 112 is given effect (section 33(11)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.