Unabsorbed depreciation refers to the amount of depreciation that a company has claimed but has been unable to fully offset against its taxable income in a financial year due to insufficient profits. This can happen when the depreciation expenses are higher than the profits earned in a financial year. The unutilized depreciation amount is referred to as unabsorbed depreciation. The Income Tax Act of 1961 allows assessees to set off any unabsorbed depreciation against any other heads of income and carry forward the remaining balance to subsequent financial years. The unabsorbed depreciation can be carried forward for an infinite number of years, and it can be adjusted against any future profits. The unabsorbed depreciation has nothing to do with the books of accounts prepared for the financial statements.

When an assessee faces unabsorbed depreciation, the first thing to do in the current year is to adjust it against the income head “Profits and Gains of Business and Profession” . Then, if business income is not sufficient to absorb the entire amount, the remaining unabsorbed portion will be carried forward to the next year and would be deemed as part of depreciation for that year. The unabsorbed depreciation can be set off against profits and gains of any business or profession carried on by the assessee and the balance, if any, against the income under any head. However, the exception to this is income under the head Salary. The time limit for carrying forward unabsorbed depreciation is not limited, unlike business loss, which has a time limit of up to 8 years.