Deferred tax 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.
Ind AS 12 builds deferred tax on a balance sheet comparison: the carrying amount of each asset and liability against its tax base. The difference, multiplied by the expected tax rate, is the deferred tax balance, and the movement in the year is booked in profit or loss, in other comprehensive income or in equity, following the item that caused it. This guide goes through the paragraphs and then reconciles four items.
Recognise a deferred tax liability for all taxable temporary differences and a deferred tax asset for deductible temporary differences and unused losses only to the extent that taxable profit is probable (paragraphs 15, 24 and 34). Measure at the rates expected when the asset is realised or the liability settled, without discounting (paragraphs 47 and 53). Book the tax where the underlying item was booked (paragraphs 57 to 61A).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). This article also reflects the Pillar Two paragraphs inserted in Ind AS 12 by Notification No. G.S.R. 549(E) dated 13 August 2025, as printed in that compendium; other amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. Tax computations themselves belong to our income-tax guides; this article starts from the numbers they produce. Deferred tax workings are a regular part of financial statement preparation for an Ind AS company.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 5, 7, 8 | Temporary difference = carrying amount less tax base. Tax base of an asset = what is deductible against taxable benefits; of a liability = carrying amount less future deductions | An accrual allowed only on payment has a nil tax base |
| 15, 16 | Deferred tax liability for all taxable temporary differences, except initial recognition of goodwill and certain initial recognitions outside a business combination | Accelerated tax depreciation creates a liability |
| 22A | A lease's asset and liability at commencement can give equal taxable and deductible differences; the exemption does not apply | Recognise deferred tax on the right-of-use asset and the lease liability |
| 24-27 | Deferred tax asset for deductible differences to the extent taxable profit is probable | Provisions and retirement obligations deductible on payment give assets |
| 28-30 | Probability is shown by taxable differences reversing in the same period, future taxable profit, or tax planning | Future profit excludes deductions from reversing those differences (paragraph 29(a)(i)) |
| 34-36 | Asset for unused tax losses if probable; recent losses call for convincing evidence | Sufficient taxable temporary differences is one such evidence (paragraph 35) |
| 46-47, 51, 51B | Current tax at enacted rates; deferred tax at rates expected on realisation, reflecting the expected manner of recovery | A non-depreciable revalued asset takes the sale rate (paragraph 51B) |
| 53, 55, 56 | No discounting; review the asset each year | A discounted liability still gives a temporary difference on its carrying amount |
| 58-61A | Profit or loss unless the item sits in OCI or equity | A revaluation surplus carries its tax in OCI (paragraph 61A) |
| 71-76 | Offset only with a legal right to set off current tax and the same tax authority | Do not net by default |
The method
- Take the carrying amount of every asset and liability.
- Fix the tax base from the tax computation (paragraphs 7 and 8); where unclear, use the principle in paragraph 10: tax payments larger or smaller than if recovery had no tax effect.
- Classify each difference as taxable or deductible, and spot the two initial-recognition exceptions (paragraphs 15 and 24).
- Add unused tax losses and credits as a separate line (paragraph 34).
- Test probability for every asset (paragraphs 27 to 36).
- Apply the rate expected on reversal, reflecting how recovery is expected (paragraphs 47 and 51).
- Compare closing with opening and split the movement between profit or loss, OCI and equity.
- Consider offset (paragraph 74).
Uncertain tax treatments are handled by Appendix C: assume the authority examines everything it may, then, if acceptance is probable, follow the filed treatment; if not, reflect the uncertainty using the most likely amount or the expected value (paragraphs 8 to 11 of the Appendix). Companies on AS use a different model, set out in our AS 22 guide.
International tax reform (Pillar Two) is dealt with by paragraphs 4A and 88A to 88D, inserted by Notification No. G.S.R. 549(E) dated 13 August 2025. Paragraph 4A brings within the standard the income taxes arising from tax law enacted or substantively enacted to implement the Pillar Two model rules published by the OECD, including qualified domestic minimum top-up taxes, and then makes an exception: an entity neither recognises nor discloses information about deferred tax assets and liabilities related to Pillar Two income taxes. The entity discloses that it has applied the exception (paragraph 88A), shows its current tax expense or income related to Pillar Two income taxes separately (paragraph 88B) and, while the legislation is enacted or substantively enacted but not yet in effect, gives known or reasonably estimable qualitative and quantitative information about its exposure, or a statement that this is not yet known together with its progress in assessing it (paragraphs 88C and 88D). Paragraph 98M applies paragraphs 4A and 88A immediately and retrospectively, and paragraphs 88B to 88D for annual reporting periods beginning on or after 1 April 2025. The worked example below has no Pillar Two item.
Worked example
The entity and all figures in this example are invented for illustration.
Sundaram Auto Components Limited has a year ending 31 March. Tax rates are assumed, for arithmetic only: 25 per cent on income from use and 20 per cent on a sale of land. The company is satisfied that the authority is the same for all items and that it has the legal right to set off current tax. Accounting profit before tax for Year 2 is Rs 40,00,000 (assumed). Amounts in rupees.
| Item | Position at 31 March Year 1 | Position at 31 March Year 2 |
|---|---|---|
| Plant | Carrying amount 90,00,000; tax base 50,00,000 | Depreciation 18,00,000 in books, 22,00,000 for tax; carrying amount 72,00,000; tax base 28,00,000 |
| Warranty provision (deductible when paid) | Carrying amount 12,00,000; tax base nil | Carrying amount 15,00,000; tax base nil |
| Land, cost 40,00,000 | Carrying amount 40,00,000; tax base 40,00,000 | Revalued to 70,00,000 (surplus to OCI); tax base unchanged |
| Brought-forward tax loss | 20,00,000 unused | 8,00,000 used; 12,00,000 unused |
Probability test (paragraphs 35 and 36). The company has a history of recent losses, so the loss asset is recognised only against convincing evidence. Net taxable temporary differences are Rs 28,00,000 at Year 1 (plant 40,00,000 less warranty 12,00,000) and Rs 59,00,000 at Year 2 (plant 44,00,000, land 30,00,000, less warranty 15,00,000). Both exceed the unused loss, so the full loss asset is recognised.
Measurement (paragraphs 47, 51B and 53). Land is not depreciated, so its liability uses the sale rate, 20 per cent. Nothing is discounted.
| Item | Difference at Year 1 (Rs) | Deferred tax at Year 1 (Rs) | Difference at Year 2 (Rs) | Deferred tax at Year 2 (Rs) | Movement, charge (credit) (Rs) |
|---|---|---|---|---|---|
| Plant (taxable) at 25% | 40,00,000 | 10,00,000 | 44,00,000 | 11,00,000 | 1,00,000 P&L |
| Land (taxable) at 20% | nil | nil | 30,00,000 | 6,00,000 | 6,00,000 OCI |
| Warranty (deductible) at 25% | 12,00,000 | (3,00,000) | 15,00,000 | (3,75,000) | (75,000) P&L |
| Unused loss at 25% | 20,00,000 | (5,00,000) | 12,00,000 | (3,00,000) | 2,00,000 P&L |
| Net deferred tax liability | 2,00,000 | 10,25,000 | 8,25,000 |
Deferred tax expense in profit or loss = 1,00,000 - 75,000 + 2,00,000 = Rs 2,25,000. Deferred tax in OCI = Rs 6,00,000 (paragraph 61A). The revaluation surplus is Rs 30,00,000 gross and Rs 24,00,000 after this tax.
Current tax. Taxable profit = accounting profit 40,00,000 + book depreciation 18,00,000 - tax depreciation 22,00,000 + warranty provision added back 3,00,000 = 39,00,000; less loss used 8,00,000 = 31,00,000. Current tax at 25 per cent = Rs 7,75,000.
| Particulars | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Current tax expense (profit or loss) | 7,75,000 | |
| To Current tax liability | 7,75,000 | |
| Deferred tax expense (profit or loss) | 2,25,000 | |
| Deferred tax charged to other comprehensive income | 6,00,000 | |
| To Net deferred tax liability | 8,25,000 | |
| Land | 30,00,000 | |
| To Revaluation surplus (OCI) | 30,00,000 |
Check. Total tax expense in profit or loss = 7,75,000 + 2,25,000 = Rs 10,00,000, which is 25 per cent of the Rs 40,00,000 profit; every difference here reverses at 25 per cent, so the reconciliation is exact. The closing net liability moves from Rs 2,00,000 to Rs 10,25,000, an increase of Rs 8,25,000 = 2,25,000 + 6,00,000.
Presentation and disclosure
Deferred tax assets and liabilities are shown net only if the offset conditions in paragraph 74 are met. For where deferred tax sits in the balance sheet, see deferred tax presentation under Ind AS 1. Paragraph 79 requires the major components of tax expense to be disclosed, and paragraph 81 adds items such as the tax relating to OCI and a numerical reconciliation between tax expense and accounting profit; interest and penalties are discussed in current tax under Ind AS 12. The standard is outlined in Ind AS 12 Income Taxes.
Common mistakes
- Taking the tax base from the books instead of the tax computation.
- Recognising a loss asset without testing the history of recent losses (paragraph 35).
- Charging deferred tax on a revaluation to profit or loss instead of OCI (paragraph 61A).
- Discounting a long-dated liability (paragraph 53 forbids it).
- Netting assets and liabilities without a legal right to set off.
- Ignoring the lease exception in paragraph 22A and skipping deferred tax on a new lease.
Need help with deferred tax?
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Key takeaways
- Deferred tax is carrying amount against tax base, then the rate.
- Liabilities are recognised in full; assets only where profit is probable.
- Recent losses need convincing evidence before a loss asset is booked.
- The tax follows the item: OCI for a revaluation, equity for equity items.
- No discounting, and a yearly review of each asset.
Read next
- Property, plant and equipment under Ind AS 16: component depreciation, revaluation and decommissioning
- ITFG clarifications on Ind AS 12, 16, 23 and 38: deferred tax, capitalisation and borrowing costs
- Deferred tax under Ind AS 1: always non-current
- AS 22: deferred tax for non-Ind AS companies
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.