Financial Reporting · Ind AS 12 Income Taxes

Deferred Tax: Temporary Differences and Tax Base (Ind AS 12)

Q: What is the difference between taxable and deductible temporary differences?

A taxable temporary difference will increase taxable profit in future and gives a DTL. A deductible temporary difference will reduce taxable profit in future and gives a DTA, subject to probable taxable profit.

Q: How do I find the tax base of an asset?

Ask how much the tax law will allow as a deduction in future against the taxable benefits from recovering the asset. If the benefits are not taxable, the tax base equals the carrying amount.

Q: Why is the tax base of a provision often nil?

When the expense is deductible only on payment, the entire carrying amount will be deductible in future. Tax base is carrying amount less that future deduction, which is nil.

Q: What is the balance sheet liability approach?

Ind AS 12 computes deferred tax from the difference between carrying amounts and tax bases of assets and liabilities. The deferred tax expense in profit or loss is the movement in those balances.

Updated 5 October 2026 · Fact-checked

Deferred tax under Ind AS 12 is tax payable or recoverable in future because of temporary differences. A temporary difference is carrying amount minus tax base. Taxable differences create a deferred tax liability; deductible differences create a deferred tax asset. Compute the tax base, find the difference, classify it, then multiply by the tax rate.

Understand Deferred Tax: Temporary Differences and Tax Base

Accounting profit and taxable profit are different numbers. The tax law and Ind AS recognise income and expenses in different periods. Ind AS 12 does not look at the profit and loss difference. It looks at the balance sheet. This is the balance sheet liability approach.

For every asset and liability, you compare two amounts. The carrying amount is the figure in the Ind AS balance sheet. The tax base is the amount the tax law attributes to that item. The gap is the temporary difference.

A taxable temporary difference will produce taxable amounts in future when the carrying amount is recovered or settled. It gives rise to a deferred tax liability (DTL). A deductible temporary difference will produce deductible amounts in future. It gives rise to a deferred tax asset (DTA), subject to the probability of future taxable profit.

The tax base of an asset is the amount that will be deductible for tax against taxable economic benefits when you recover the carrying amount. If those benefits are not taxable, the tax base equals the carrying amount. The tax base of a liability is its carrying amount less any amount that will be deductible for tax in future. For revenue received in advance, it is the carrying amount less any part that will not be taxable in future.

A quick memory aid: for an asset, carrying amount above tax base means DTL. For a liability, carrying amount above tax base means DTA. This page covers identification and classification. Recognition exceptions, measurement and tax rate changes are in the related topics.

Key rules to remember

Temporary difference: Temporary difference = Carrying amount − Tax base; Use this one definition for assets and liabilities. Then classify as taxable or deductible using the asset and liability rules below.
Tax base of an asset: Tax base of an asset = Amount deductible for tax against taxable economic benefits when the carrying amount is recovered; If the economic benefits are not taxable, the tax base equals the carrying amount. A derived form is: Tax base = Carrying amount − Future taxable amounts + Future deductible amounts. Future taxable amounts are the taxable economic benefits you will recover. Future deductible amounts are the tax deductions you will get against them.
Tax base of a liability: Tax base = Carrying amount − Amount deductible for tax in future; For revenue received in advance: Carrying amount − Revenue not taxable in future.
Asset classification: Asset: Carrying amount > Tax base → taxable difference → DTL; Carrying amount < Tax base → deductible difference → DTA; Typical case: accounting depreciation slower than tax depreciation gives a DTL.
Liability classification: Liability: Carrying amount > Tax base → deductible difference → DTA; Carrying amount < Tax base → taxable difference → DTL; Typical case: provisions deductible only when paid give a DTA.
Deferred tax amount: Deferred tax = Temporary difference × Tax rate expected to apply when the asset is realised or liability settled; Use rates enacted or substantively enacted at the end of the reporting period.
Deferred tax movement: Deferred tax expense/(income) = Closing net DTL − Opening net DTL (adjusted for items taken to OCI or equity); The balance sheet figure drives the profit and loss charge.

How to solve Deferred Tax: Temporary Differences and Tax Base questions

Use the same sequence for every question. It forces you to work from the balance sheet, which is what the examiner wants.

1List each asset and liability that has a tax treatment different from the accounting treatment.
2Write the carrying amount at the reporting date as per Ind AS.
3Work out the tax base using the definition. Ask what the tax law will allow as a deduction in future, or what part of the amount will be taxable or deductible later.
4Compute the temporary difference and classify it as taxable or deductible using the asset or liability rule.
5Check for exceptions, such as initial recognition or goodwill, and for the probability of future taxable profit for any DTA.
6Multiply by the applicable tax rate to get the DTL or DTA.
7Compute the movement over opening balance and pass the entry, taking the charge to profit or loss unless the item sits in OCI or equity.
8State the closing DTL or DTA and the effect on profit, with one line of reasoning.

Quickest way: Table of carrying amount vs tax base

When to use it: Use this for questions with several items and limited time. It also earns step marks because the working is visible.

Draw four columns on the answer sheet: Item, Carrying amount, Tax base, Difference.
Fill the first two columns for each item and compute the tax base.
Compare the figures. For an asset, carrying amount higher means DTL. For a liability, carrying amount higher means DTA.
Add a fifth column: tax at the given rate, marked DTL or DTA.
Total DTL and DTA separately, then net them only if the offset conditions are met or the question says so.

Common mistakes in Deferred Tax: Temporary Differences and Tax Base

Computing deferred tax on the profit difference instead of the balance sheet difference.
Students remember the old income statement approach of timing differences.
Fix: Always start with carrying amount and tax base. The profit effect is only the movement in the balance.
Reversing the classification for liabilities.
The asset rule is memorised and applied mechanically to a liability.
Fix: For a liability, carrying amount greater than tax base is a deductible difference and gives a DTA. Write the rule at the top of your answer.
Taking the tax base of an expense provision as equal to its carrying amount.
Students forget that the tax deduction is allowed only on payment in some cases.
Fix: If the whole amount is deductible only when paid, the tax base is nil. Tax base = carrying amount − future deductible amount.
Treating revenue received in advance as having a tax base equal to its carrying amount.
Students ignore whether the income was already taxed.
Fix: If the revenue was taxed when received, nothing is taxable later, so the tax base is nil and the difference is deductible.
Recognising a DTA without checking future taxable profit.
Students treat a deductible difference as automatically an asset.
Fix: Recognise a DTA only to the extent it is probable that taxable profit will be available. Say this in the answer.
Using the current tax rate when a different rate applies at reversal.
The rate at the year end is assumed to stay constant.
Fix: Use the rate enacted or substantively enacted at the reporting date that will apply when the difference reverses.

Worked examples

Example 1

A Ltd bought machinery on 1 April 2025 for ₹10,00,000. Under Ind AS it is depreciated straight line over 5 years with nil residual value. For tax purposes, depreciation allowed for the year ended 31 March 2026 is ₹2,50,000. Tax rate is 25%. Compute the temporary difference and deferred tax at 31 March 2026 and state the nature.

Show the solution

Carrying amount = ₹10,00,000 − ₹2,00,000 = ₹8,00,000 (depreciation ₹10,00,000 ÷ 5 = ₹2,00,000).
Tax base = ₹10,00,000 − ₹2,50,000 = ₹7,50,000.
Temporary difference = ₹8,00,000 − ₹7,50,000 = ₹50,000.
For an asset, carrying amount is higher than tax base, so it is a taxable temporary difference.
Deferred tax liability = ₹50,000 × 25% = ₹12,500.
Check the logic: the company has already claimed more tax depreciation, so future tax deductions are lower and future tax is higher.

Answer: Taxable temporary difference of ₹50,000; DTL of ₹12,500 at 31 March 2026. Deferred tax expense of ₹12,500 is charged to profit or loss for the year.

Example 2

B Ltd has the following at 31 March 2026. (i) A provision for warranty of ₹4,00,000, deductible for tax only when the claims are paid. (ii) Interest receivable of ₹1,20,000 recognised as income in the books, taxable only when received. (iii) Revenue received in advance of ₹3,00,000, already taxed in the year of receipt. Tax rate is 25%. Assume taxable profit will be available. Compute the deferred tax on each item and the net position.

Show the solution

Item (i): liability, carrying amount ₹4,00,000. Future deductible amount is ₹4,00,000, so tax base = ₹4,00,000 − ₹4,00,000 = nil.
Deductible difference = ₹4,00,000 − nil = ₹4,00,000. DTA = ₹4,00,000 × 25% = ₹1,00,000.
Item (ii): asset, carrying amount ₹1,20,000. The interest is taxed only when received, and no amount will be deductible against that taxable receipt of ₹1,20,000. So the tax base is nil.
The carrying amount exceeds the tax base by ₹1,20,000, so the difference is taxable. DTL = ₹1,20,000 × 25% = ₹30,000.
Item (iii): liability, carrying amount ₹3,00,000. Revenue is not taxable in future because it was taxed already, so tax base = ₹3,00,000 − ₹3,00,000 = nil.
Deductible difference = ₹3,00,000. DTA = ₹3,00,000 × 25% = ₹75,000.
Total DTA = ₹1,00,000 + ₹75,000 = ₹1,75,000. Total DTL = ₹30,000.
Net = ₹1,75,000 − ₹30,000 = ₹1,45,000 net DTA, if offsetting conditions are met.

Answer: DTA of ₹1,00,000 on the warranty provision, DTL of ₹30,000 on interest receivable, DTA of ₹75,000 on advance revenue. Total DTA ₹1,75,000, DTL ₹30,000, net DTA ₹1,45,000 if offsetting is allowed.

Exam tips

Write the tax base working as a separate line. Examiners give marks for the tax base even when the final figure goes wrong.
State the asset or liability rule in one line before classifying. It signals that you know the logic.
In case scenarios, check whether the item is initially recognised, a business combination or goodwill, since exceptions may apply.
Always add a sentence on probability of future taxable profit when you recognise a DTA.
Show the movement in deferred tax balance, not only the closing balance, when opening figures are given.

Practice questions from Ind AS 12 Income Taxes

Deferred Tax: Temporary Differences and Tax Base in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Deferred Tax: Temporary Differences and Tax Base: frequently asked questions

What is the difference between taxable and deductible temporary differences?

A taxable temporary difference will increase taxable profit in future and gives a DTL. A deductible temporary difference will reduce taxable profit in future and gives a DTA, subject to probable taxable profit.

How do I find the tax base of an asset?

Ask how much the tax law will allow as a deduction in future against the taxable benefits from recovering the asset. If the benefits are not taxable, the tax base equals the carrying amount.

Why is the tax base of a provision often nil?

When the expense is deductible only on payment, the entire carrying amount will be deductible in future. Tax base is carrying amount less that future deduction, which is nil.

What is the balance sheet liability approach?

Ind AS 12 computes deferred tax from the difference between carrying amounts and tax bases of assets and liabilities. The deferred tax expense in profit or loss is the movement in those balances.