Undercutting is removing Some material from the base of gear tooth to avoid interference.
Interference in gears would basically cause material wear and removal during operation, so to intentionally remove material by undercutting before operation is a solution for this.
Here's an explanation I lifted from the net, hope it helps . . .
The profile of tooth inside the base circle is radial.If the addendum of mating gear is more than the limiting value, it interferes with the dedendum of pinion and therefore two gears get locked.
however,if a cutting rack having similar teeth is used to cut the teeth in the pinion, it will remove that portion of the pinion tooth which would have interfered with gear.
A gear having its material removed in this manner is said to
undercut and the process,
undercutting.
The profile of tooth inside the base circle is radial.If the addendum of mating gear is more than the limiting value, it interferes with the dedendum of pinion and therefore two gears get locked.
however,if a cutting rack having similar teeth is used to cut the teeth in the pinion, it will remove that portion of the pinion tooth which would have interfered with gear.
A gear having its material removed in this manner is said to
undercut and the process,
undercutting.
In a pinion with small number of teeth, this can seriously weaken the tooth.However, when the actual gear meshes with the undercut pinion,no interference occurs.
undercutting will not take place if teeth are designed to avoid interference.