Under the general rules of the Income-tax Act, claiming depreciation on business assets is straightforward: if an asset is used for 182 days or more during a financial year, a company can claim full-year depreciation. If it is used for less than 182 days, depreciation is allowed at half the normal rate.

However, when a merger takes place mid-year, business assets like factories, machinery, and offices physically change hands from the transferor company to the transferee company on a specific calendar date.

Section 33(5) of the Income-tax Act, 2025 provides clear guidance on how depreciation must be calculated and divided between both companies in these cases.

2. The Aggregate Ceiling
   The first part of this rule establishes a strict cap on total tax deductions. Both companies are required to treat the assets as one continuous block and calculate the total annual depreciation as if no merger took place.
3. The Pro-Rata Split
   Once the total annual depreciation ceiling is fixed, the overall pool is sliced into two parts based strictly on the number of days each entity actually held the assets during that financial year.
   
4. Why This Rule Matters
   This proportional split ensures that a transferee company cannot rely on pocketing a windfall depreciation deduction in the immediate aftermath of a mid-year deal.

If a merger is finalized late in the financial year—for example, in February—the transferor company absorbs the vast majority of that year’s depreciation to offset its pre-merger income. The transferee company inherits only a fractional slice for the remaining months.