Deferred tax is an important concept in corporate taxation and financial reporting. It arises because the Income-tax Act and the Accounting Standards (AS 22 / Ind AS 12) treat certain incomes and expenses differently. These differences create a Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL), which affect a company’s future tax payments.

This article covers the complete topic with meaning, causes, recognition, calculation, examples, and FAQs.

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1. What is Deferred Tax?

Deferred tax arises from temporary differences between:

• Accounting Income (as per Companies Act)
• Taxable Income (as per Income-tax Act)

These differences will reverse in future periods, resulting in either:

• Deferred Tax Asset (DTA) – Future tax saving
• Deferred Tax Liability (DTL) – Future tax payment

Deferred tax does not arise from permanent differences such as dividend income or penalties.

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2. Deferred Tax Liability (DTL)

Meaning

A Deferred Tax Liability arises when a company pays lower tax today due to timing differences, but the tax payable will increase in the future.

In simple terms: tax saving today, tax payable later.

When Does DTL Arise?

a. Depreciation Difference

This is the most common cause.
If Income-tax Depreciation is higher than Accounting Depreciation, taxable income reduces today.
When the difference reverses in future, taxable income increases, creating a DTL.

b. Expenses Disallowed Today but Allowed Later

Example: Provision for warranty is allowed only when actually paid under Income Tax.
This results in lower tax today and higher tax later.

c. Income Recognised Earlier for Tax Purposes

Example: Advance rent taxable now but recognised in books in future periods.
This creates a DTL.

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3. Deferred Tax Asset (DTA)

Meaning

DTA arises when a company pays more tax today, but due to temporary differences, this extra tax can be adjusted against future profits.

In simple terms: extra tax today, tax saving later.

When Does DTA Arise?

a. Carry Forward of Losses or Unabsorbed Depreciation

Taxable income becomes higher today, but in future years, losses can reduce taxable income.
DTA is recognised only when there is reasonable or virtual certainty of future profits.

b. Expenses Allowed Later in Books but Allowed Immediately for Tax

Example: Preliminary expenses

• Accounting: amortised over years
• Income Tax: 100 percent allowed immediately

Difference results in DTA.

c. Provision for Doubtful Debts

Recognised as an expense in books but allowed for tax only on actual write-off.
This creates a temporary difference resulting in DTA.

d. TDS Related Disallowances

Expenses disallowed under section 40(a)(ia) due to non-deduction of TDS can be allowed later when TDS is paid.
This creates a DTA.

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4. Temporary Differences

Temporary differences are differences between the carrying amount of an asset or liability in books and its tax base. These differences reverse in future.

Type of Difference	Meaning	Result
Taxable Temporary Differences	Increase taxable income later	DTL
Deductible Temporary Differences	Reduce taxable income later	DTA

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5. Calculation of Deferred Tax

Formula:
Deferred Tax = Temporary Difference × Tax Rate

Example – DTL

• Accounting Depreciation: ₹1,00,000
• Tax Depreciation: ₹2,00,000
• Temporary Difference: ₹1,00,000
• Tax Rate: 30 percent

DTL = ₹1,00,000 × 30 percent = ₹30,000

Example – DTA

• Provision for bad debts: ₹50,000 (disallowed for tax)
• Temporary Difference: ₹50,000
• Tax Rate: 30 percent

DTA = ₹50,000 × 30 percent = ₹15,000

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6. Recognition Criteria (AS 22)

Deferred Tax Liability

Recognised for all taxable temporary differences.

Deferred Tax Asset

Recognised only when:

• There is reasonable certainty of future taxable profits
• For losses, there must be virtual certainty supported by convincing evidence

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7. Presentation in Financial Statements

Profit & Loss Statement

Shown under “Deferred Tax Expense” or “Deferred Tax Income”.

Balance Sheet

• DTA is shown under Non-Current Assets
• DTL is shown under Non-Current Liabilities

If permitted, net deferred tax may be shown when related to the same tax authority.

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8. Impact of Deferred Tax

1. Provides accurate matching of income and tax effects.
2. Smoothens profitability over years.
3. Aids in long-term tax planning.
4. Helps investors evaluate future financial performance.

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9. Practical Real-Life Examples

Scenario	Accounting Treatment	Tax Treatment	Result
Higher Income Tax Depreciation	Lower book depreciation	Higher tax depreciation	DTL
Provision for bad debts	Allowed in books	Allowed only on write-off	DTA
Advance rent	Recognised in future	Taxed now	DTL
Preliminary expenses	Spread over years	Allowed in full	DTA
Carry forward losses	Recognised in books	No tax benefit today	DTA
TDS disallowance under 40(a)(ia)	Allowed in books	Disallowed for tax until TDS paid	DTA

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10. Summary Table

Particular	Deferred Tax Asset	Deferred Tax Liability
Meaning	Future tax saving	Future tax payment
Arises When	Extra tax paid today	Less tax paid today
Basis	Deductible temporary differences	Taxable temporary differences
Tax Effect	Reduces future tax	Increases future tax
Example	Provision disallowed for tax	Higher tax depreciation

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11. FAQs

1. Is deferred tax required under the Income-tax Act?

No. Deferred tax is not defined under the Income-tax Act. It is recognised only as per Accounting Standards (AS 22) or Ind AS 12.

2. Does deferred tax apply to individuals?

Generally, no. Deferred tax applies mainly to companies, LLPs, and firms that follow accounting standards.

3. Is DTA beneficial for a company?

Yes, but only if the company expects sufficient future taxable profits to utilise the tax benefits.

4. Can DTA and DTL be netted off?

Yes, if they relate to the same tax authority and the enterprise has a legally enforceable right to set them off.

5. What are permanent differences?

These are differences that never reverse, such as penalties, donations, agricultural income, dividend income, etc.
Permanent differences do not create DTA or DTL.