In this work, AlGaN with a GaN cap has been etched in a cyclical process with ICP-RIE O2 plasma oxidation and wet etching in dilute HCl. The oxygen plasma ICP-RIE etching of the AlGaN at an ICP plasma power of 200 W and radio frequency bias power of 100 W led to an etch depth of ∼1.5 nm per digital cycle with increased surface roughness. The AlGaN remained unaffected by the wet etching process alone without any ICP-RIE O2 plasma oxidation, maintaining a surface roughness similar to that of the substrate. AlGaN was etched to a depth of ∼12 nm after six cycles of digital etching with an etch rate of 1.9–2.1 nm/cycle showing an improved surface roughness. The XPS analysis at each stage of the etching process reveals that the O2 plasma oxidation initially oxidizes the GaN cap and the AlGaN layer and is later effectively removed by the HCl solution. The digital etching method has proven effective in controlling etch depth and surface roughness, which are needed to fabricate AlGaN high electron mobility transistors.