Accounting for Taxes on explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Profit in the books and profit for tax are rarely the same. Some differences disappear for good; others reverse in later years. AS 22 makes a company account for the tax on both kinds of income: the tax payable now (current tax) and the tax effect of differences that will reverse (deferred tax). It also deals, in its newest paragraphs, with international minimum tax under the OECD Pillar Two model rules. The tax charge and the notes on it form part of the statements prepared by our books of accounts and compliance team.
Accounting Standards as on 1 April 2025 (ICAI compendium), read with the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026. Later amendments should be checked on icai.org and mca.gov.in. Companies on Ind AS apply Ind AS 12; see our deferred tax under Ind AS 12 guide. For the tax law itself, see our income-tax guides.
Tax expense is current tax plus deferred tax and goes into profit or loss (paragraphs 4.3 and 9). Deferred tax is recognised on timing differences, which originate in one period and reverse later, never on permanent differences (paragraphs 12 and 13). A deferred tax asset needs reasonable certainty of future taxable income, and where there are unabsorbed depreciation or carried forward losses, virtual certainty supported by convincing evidence (paragraphs 15 and 17). Deferred tax is measured at enacted or substantively enacted rates and is not discounted (paragraphs 21 and 24).
Who applies it
The opening note of the standard says a Micro, Small and Medium Sized non-company entity applies it for current tax requirements only (paragraphs 4.4, 9, 20, 27 and 28). Companies apply the standard as notified in the 2021 Rules; our post on Rules 1 to 5 explains who applies the standards, and the size tests are not restated here. The transitional paragraphs 33 and 34 are, according to a footnote in the notified text, relevant only for standards notified under the 2006 Rules.
The requirements, head by head
| Paragraphs | What it requires | What it means in the books |
|---|---|---|
| 4.1-4.7 | Accounting income is profit before tax; taxable income is per tax law; timing differences originate in one period and are capable of reversal later; permanent differences do not reverse | Classify every difference |
| 7, 8 | Examples: tax depreciation faster than book depreciation; unabsorbed depreciation and carried forward losses are timing differences | These give deferred tax liabilities or assets |
| 9-14 | Tax expense, current and deferred, is part of profit or loss; deferred tax is recognised for all timing differences, subject to prudence for assets; permanent differences give none | Book both parts of the tax each year |
| 15-16 | Deferred tax assets are carried forward only to the extent there is reasonable certainty of sufficient future taxable income, judged from the past record and realistic profit estimates | A forecast alone is not enough |
| 17-18 | With unabsorbed depreciation or losses, virtual certainty supported by convincing evidence; a history of recent losses is strong evidence against future income | Disclose the nature of the evidence |
| 20-25 | Current tax at the amount expected to be paid; deferred tax at enacted or substantively enacted rates; average rates where rates differ by income level; no discounting | Use the rate at the balance sheet date |
| 27-32 | Offset current tax assets and liabilities only if there is a legal right and intent to settle net; deferred tax under a separate heading, not current; break-up in notes; evidence for assets disclosed | Present separately |
Reasonable and virtual certainty. Paragraph 15 allows an asset only where there is "reasonable certainty that sufficient future taxable income will be available". The Explanation to paragraph 17 treats virtual certainty as certainty that, for all practical purposes, can be considered certain, resting on evidence available at the reporting date in concrete form, such as a binding export order whose cancellation brings heavy damages. A business plan or a projection of future profits is not enough.
Method
Compute accounting and taxable income; current tax is taxable income at the applicable rate; deferred tax for the year is the change in the cumulative timing difference at the enacted rate; tax expense is the two together, and any asset is tested for certainty.
Worked example: Ravi Metals Private Limited
The entity and all figures in this example are invented for illustration. The tax rate of 25 per cent is an assumed rate, for arithmetic only.
Ravi Metals buys a machine for 6,00,000 with no residual value. In its books it depreciates it on a straight line over three years: 2,00,000 a year. Tax depreciation, assumed for the example, is 3,00,000, 1,80,000 and 1,20,000 in the three years. Profit before depreciation and tax is 10,00,000 each year, and there are no other differences.
| Working | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Profit before depreciation and tax | 10,00,000 | 10,00,000 | 10,00,000 |
| Accounting depreciation | 2,00,000 | 2,00,000 | 2,00,000 |
| Accounting income | 8,00,000 | 8,00,000 | 8,00,000 |
| Tax depreciation | 3,00,000 | 1,80,000 | 1,20,000 |
| Taxable income | 7,00,000 | 8,20,000 | 8,80,000 |
| Current tax at 25 per cent | 1,75,000 | 2,05,000 | 2,20,000 |
| Timing difference for the year (tax less book depreciation) | 1,00,000 originates | (20,000) reverses | (80,000) reverses |
| Cumulative timing difference | 1,00,000 | 80,000 | nil |
| Deferred tax liability at the year end (25 per cent) | 25,000 | 20,000 | nil |
| Deferred tax charge or (credit) for the year | 25,000 | (5,000) | (20,000) |
| Tax expense (current plus deferred) | 2,00,000 | 2,00,000 | 2,00,000 |
| Year | Entry | Debit | Credit |
|---|---|---|---|
| 1 | Tax expense Dr | 2,00,000 | |
| To Provision for current tax | 1,75,000 | ||
| To Deferred tax liability | 25,000 | ||
| 2 | Tax expense Dr | 2,00,000 | |
| Deferred tax liability Dr | 5,000 | ||
| To Provision for current tax | 2,05,000 | ||
| 3 | Tax expense Dr | 2,00,000 | |
| Deferred tax liability Dr | 20,000 | ||
| To Provision for current tax | 2,20,000 |
Check. Each year's entry balances (2,00,000 = 1,75,000 + 25,000; 2,05,000 = 2,00,000 + 5,000; 2,20,000 = 2,00,000 + 20,000). Tax expense is 25 per cent of accounting income of 8,00,000 in every year, as it should be when there are only timing differences. The deferred tax liability is built to 25,000, falls to 20,000 and ends at nil, because total tax depreciation (3,00,000 + 1,80,000 + 1,20,000) equals the cost, 6,00,000, equal to total book depreciation (3 x 2,00,000).
The 2026 Pillar Two paragraphs: two positions
Pillar Two refers to the OECD model rules on international minimum tax. AS 22 now carries an exception for deferred tax related to it. The same paragraphs exist in two forms, and you must know which applies to your entity.
| Point | Entities other than companies (ICAI compendium text) | Companies (Companies (Accounting Standards) Rules, 2021) |
|---|---|---|
| Where it appears | Paragraph 2A and paragraphs 32A to 32D are headed "for Entities other than Companies"; paragraph 35 likewise | Inserted by G.S.R. 169(E) of 10 March 2026: paragraph 2A after paragraph 2, paragraphs 32A to 32D after paragraph 32, paragraph 35 after paragraph 34 |
| Paragraph 2A | No recognition or disclosure of deferred tax assets and liabilities related to Pillar Two income taxes | Same wording |
| Paragraphs 32A, 32B | Disclose that the exception was applied; disclose current Pillar Two tax expense separately | Same wording |
| Paragraphs 32C, 32D | Disclose exposure where legislation is enacted but not yet in effect; qualitative and quantitative information, which may be an indicative range | Same wording |
| Who need not apply 32C and 32D | A Micro, Small and Medium-sized non-company entity | A Small and Medium-sized Company |
| Effective date (paragraph 35) | 2A and 32A immediately and retrospectively; 32B to 32D for annual periods beginning on or after 1 April 2024; no interim disclosure for periods ending on or before 31 March 2025 | 2A and 32A immediately and retrospectively; 32B to 32D for annual periods beginning on or after 1 April 2025; no interim disclosure for periods ending on or before 31 March 2026 |
Neither text sets a rate or a threshold; this article gives none. The company position and the relaxations are explained in our rule post. For the idea of deferred tax in a shorter form, see what is deferred tax.
Common mistakes
- Recognising deferred tax on a permanent difference.
- Carrying a deferred tax asset on carried forward losses on the strength of a business plan alone.
- Discounting deferred tax, which the standard does not allow (paragraphs 24 and 25).
- Quoting the wrong Pillar Two effective date for the kind of entity.
Need help with deferred tax?
If your accounts need current tax, deferred tax and the supporting working worked out, or you need to decide whether an asset on losses can be carried, our team can prepare the computation and the notes. See our books of accounts and compliance service and send us the tax computation and the fixed asset register.
Key takeaways
- Tax expense is current tax plus deferred tax.
- Deferred tax arises on timing differences only.
- An asset needs reasonable certainty; with losses or unabsorbed depreciation, virtual certainty with convincing evidence.
- Use enacted or substantively enacted rates; do not discount.
- Pillar Two paragraphs exist for companies (by G.S.R. 169(E)) and for other entities (in the ICAI text) with different effective-date years.
Read next
- Accounting Standards in India: the list from AS 1 to AS 29
- AS 20 Earnings Per Share: basic and diluted
- Rules 1 to 5 of the Companies (Accounting Standards) Rules, 2021
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.