CBDT FAQ Deep-Dive Series #6: Depreciation Transition Under Section 32 of the Income-tax Act 1961 Preserved by Section 536(2)(m) for FY 2025-26, Mapped to Section 33 and the Section 33(11) Capital Allowance Pool of the Income-tax Act 2025 for Tax Year 2026-27 – WDV Carry-Forward, Unabsorbed Depreciation, and the Practitioner Checklist Before the September 30 2026 Tax Audit
Quick Summary: Key Takeaways
- Your FY 2025-26 depreciation claim is computed under Section 32 of the Income-tax Act 1961, not the new Act. The tax audit and return you file for the year ended 31 March 2026 (due 30 September / 31 October 2026) sit fully under the 1961 framework, preserved by the Section 536 saving clause of the Income-tax Act 2025.
- Section 32 of the 1961 Act is re-enacted as Section 33 of the Income-tax Act 2025 for Tax Year 2026-27 onward. The written-down-value (WDV) method and block-of-assets pooling are retained, and the prescribed depreciation rates are substantially unchanged.
- Your closing WDV as on 31 March 2026 carries forward to Tax Year 2026-27 without any adjustment or recomputation. The opening block under the new Act equals the closing block under the old Act.
- Unabsorbed depreciation carried forward under Section 32(2) of the 1961 Act merges automatically into the opening capital allowance pool under Section 33(11) of the Income-tax Act 2025. No fresh election, no recharacterisation, and the original carry-forward clock continues.
- Section 536(2) clause (m) is the legal anchor. It preserves brought-forward losses, including depreciation-related carry-forwards, so they continue to be set off under the corresponding provisions of the 2025 Act.
This is the sixth instalment in our CBDT FAQ Deep-Dive Series on the transition from the Income-tax Act 1961 to the Income-tax Act 2025, which came into force on 1 April 2026. Earlier chapters covered the master FAQ and Section 536 saving clause, loss carry-forward continuity, capital gains transition, and transfer pricing continuity. This chapter handles the question every audit team is asking right now: which Act governs my depreciation, and what happens to my WDV and unabsorbed depreciation on the cutover?
The depreciation transition in one table
The core principle is period-based. Identify the financial year your computation relates to, then apply the Act that governs that period.
| Period | Governing Act | Depreciation provision | What you do |
|---|---|---|---|
| FY 2025-26 (year ended 31 March 2026) | Income-tax Act 1961 | Section 32 (and Section 32(2) for unabsorbed depreciation) | Compute depreciation in the tax audit and return filed in 2026 exactly as before. Nothing changes for this year. |
| Tax Year 2026-27 onward (from 1 April 2026) | Income-tax Act 2025 | Section 33 (depreciation) read with the Section 33(11) capital allowance pool | Carry your closing WDV forward as the opening block. Compute on the new Act from this year. |
| Pending assessments / appeals for FY 2024-25 and earlier | Income-tax Act 1961 | Section 32 as it stood | Preserved by Section 536. Continue under the old provisions; no reopening on account of the new Act. |
Why your FY 2025-26 depreciation still files under the 1961 Act
The Income-tax Act 2025 is in force from 1 April 2026, which corresponds to Tax Year 2026-27. The year ended 31 March 2026 is the last full year governed by the Income-tax Act 1961. Because your statutory tax audit under Section 44AB and your income-tax return for FY 2025-26 are both filed in the second half of 2026 but relate to the pre-cutover year, they are computed under the 1961 Act.
The bridge that makes this clean is the repeal-and-savings architecture in Section 536 of the Income-tax Act 2025. The general saving clause ensures that anything done, any right accrued, and any liability incurred under the 1961 Act survives the repeal. For carried-forward items specifically, clause (m) of Section 536(2) preserves brought-forward losses, including depreciation-related carry-forwards, so they continue to be carried forward and set off under the corresponding provisions of the 2025 Act. Two consequences follow that practitioners should note: the original character of the item is retained (unabsorbed depreciation does not get recharacterised as a business loss), and the carry-forward period continues to run from the original year rather than restarting.
How Section 32 of the 1961 Act maps to the Income-tax Act 2025
The 2025 Act consolidates the depreciation machinery that previously sat in Section 32 of the 1961 Act into a tighter structure. The depreciation machinery now sits in Section 33: normal depreciation in the main section, and the carried-forward capital allowance pool in Section 33(11).
| Concept | Income-tax Act 1961 | Income-tax Act 2025 |
|---|---|---|
| Normal depreciation on tangible and intangible assets | Section 32(1) | Section 33 |
| WDV / block-of-assets method | Section 32(1) read with Section 43(6) | Section 33 (method and block concept retained) |
| Unabsorbed depreciation carry-forward and set-off | Section 32(2) | Merged into the opening capital allowance pool under Section 33(11) |
| Continuity of brought-forward depreciation across the repeal | n/a | Section 536(2) clause (m) saving provision |
The practical headline is continuity. The WDV method survives, block-of-assets pooling survives, and the prescribed rates are substantially unchanged from the schedule that applied under the 1961 Act and the Income-tax Rules. The Central Board of Direct Taxes notified the Income-tax Rules 2026, which came into force on 1 April 2026, and issued comprehensive transition FAQs in March 2026 to confirm this continuity.
What happens to your WDV and block of assets on 31 March 2026
This is the question that most often causes panic and it has a calm answer. Your closing WDV of each block as on 31 March 2026, computed under the 1961 Act, becomes the opening WDV of that block for Tax Year 2026-27 under the 2025 Act, with no adjustment. You do not recompute history, you do not re-pool assets, and you do not lose any depreciation already claimed.
The block-of-assets concept means depreciation continues to apply to the aggregate block rather than to individual assets, exactly as before. Additions during FY 2025-26 follow the old half-rate rule (assets put to use for less than 180 days in the year get half the normal rate); additions in Tax Year 2026-27 follow the corresponding rule under the new Act.
Unabsorbed depreciation: how Section 32(2) merges into the Section 33(11) pool
Under the 1961 Act, depreciation that could not be set off in a year because of insufficient profits became unabsorbed depreciation under Section 32(2), with an indefinite carry-forward and a generous order of set-off against any head of income (other than salary). This is one of the most valuable shelter items on many corporate balance sheets.
On the cutover, the FAQ position is that unabsorbed depreciation carried forward under Section 32(2) of the old Act is automatically merged into the opening capital allowance pool under Section 33(11) of the Income-tax Act 2025 for Tax Year 2026-27 and beyond. Three points matter for your working papers:
- No separate election or recomputation is required. The merger is automatic. You simply carry the brought-forward figure into the new pool.
- The character is retained. Section 536(2)(m) ensures the brought-forward depreciation does not get reclassified as a business loss, so the favourable set-off treatment of unabsorbed depreciation continues.
- The clock continues from the original year. Because unabsorbed depreciation carries forward indefinitely, this is rarely a constraint, but the principle that the carry-forward period runs from the original year is important for any item that does have a time limit.
Additional depreciation and investment allowance: verify before you assume
For your FY 2025-26 computation under the 1961 Act, the established incentive provisions apply as they always have. Additional depreciation under Section 32(1)(iia) remains available at 20% of actual cost on new plant and machinery acquired and installed by a manufacturer or producer (with the usual half-rate restriction where the asset is used for less than 180 days, and the balance allowable in the following year). The investment allowance under Section 32AC sunset for installations after 1 April 2018, and Section 32AD was a time-limited backward-area allowance, so most assessees are no longer claiming either.
For Tax Year 2026-27 capital expenditure planning, do not assume that every incentive-style allowance continues in identical form under the 2025 Act. Normal depreciation is clearly preserved under Section 33, and the unabsorbed pool clearly continues under Section 33(11). The forward treatment of incentive allowances such as additional depreciation should be confirmed against the bare text of the Income-tax Act 2025 and the Income-tax Rules 2026 for the specific asset and year before you build it into a capex model. That verification is a five-minute task and it is exactly the kind of point a busy founder will forward to you to check.
Practitioner checklist before the 30 September 2026 tax audit
- Freeze the 31 March 2026 block-wise WDV. Reconcile your fixed asset register to the depreciation schedule and lock the closing WDV of every block. This figure becomes your opening figure under the new Act.
- Apply the half-rate rule on FY 2025-26 additions. Tag every asset put to use for less than 180 days in FY 2025-26 and apply half the normal rate; carry the balance correctly.
- Quantify additional depreciation under Section 32(1)(iia). Identify eligible new plant and machinery for manufacturers, claim the 20%, and carry any 180-day balance to the next year.
- Schedule unabsorbed depreciation separately. Maintain the Section 32(2) brought-forward figure on its own line so the merger into the Section 33(11) pool is auditable.
- Confirm clause (m) treatment in your set-off working. Document that the brought-forward depreciation retains its character and continues under Section 536(2)(m).
- Map your Tax Year 2026-27 opening blocks now. Prepare the opening WDV schedule under the 2025 Act so the first quarter advance-tax computation under the new Act is correct.
- Verify forward incentive allowances against the bare Act. Before committing additional depreciation or any allowance to a TY 2026-27 model, confirm the position under the Income-tax Act 2025 and Rules 2026.
- Update the Form 3CD clauses. Ensure the depreciation clauses of the tax audit report reconcile to the fixed asset register and the carried-forward figures, and that the period-correct Act is cited.
Frequently Asked Questions
Does the Income-tax Act 2025 change my depreciation rates?
No. The prescribed depreciation rates are substantially unchanged. Section 33 of the 2025 Act retains the WDV method and block-of-assets pooling, and the rate schedule continues the position under the 1961 Act and the Income-tax Rules.
Which Act do I use for the tax audit I am filing in 2026?
For FY 2025-26 (year ended 31 March 2026), use the Income-tax Act 1961, Section 32. The new Act applies from Tax Year 2026-27. Your 2026 audit and return relate to the pre-cutover year and are computed under the old Act.
Do I lose my unabsorbed depreciation when the old Act is repealed?
No. Unabsorbed depreciation under Section 32(2) of the 1961 Act merges automatically into the opening capital allowance pool under Section 33(11) of the 2025 Act, and Section 536(2)(m) preserves its character and carry-forward. Nothing is lost on the cutover.
Do I need to recompute my WDV under the new Act?
No. The closing WDV of each block as on 31 March 2026 becomes the opening WDV for Tax Year 2026-27 without adjustment. There is no recomputation of historical depreciation.
Is additional depreciation still available under the new Act?
For FY 2025-26, additional depreciation under Section 32(1)(iia) of the 1961 Act applies as before. For Tax Year 2026-27 onward, confirm the specific treatment of incentive allowances against the bare text of the Income-tax Act 2025 and the Income-tax Rules 2026 before relying on it in a capex model.
Disclaimer
This article is published by Tax Update India for general information and educational purposes only. It is not legal, tax, or professional advice. The transition between the Income-tax Act 1961 and the Income-tax Act 2025 involves period-specific treatment, and the application to your facts depends on the financial year, the asset, and the assessee. Verify the relevant sections, rules, and CBDT FAQs against the primary source before acting, and consult a qualified professional for advice on your specific situation.
Plan your depreciation cutover with confidence
If your team is preparing FY 2025-26 tax audits and mapping opening blocks for Tax Year 2026-27 under the new Act, the time to get the WDV freeze and the unabsorbed depreciation merger right is now, well before the 30 September 2026 deadline. Schedule a Strategy Session with our team to walk through your fixed asset register, your carry-forward schedules, and your transition working papers. Getting the cutover right once is far cheaper than fixing it in assessment.
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