Financial Reporting · Ind AS 12 Income Taxes

Recognition of Tax in Profit or Loss, OCI and Equity (Ind AS 12)

Updated 5 October 2026 · Fact-checked

Under Ind AS 12, current and deferred tax follow the item that gave rise to them. Tax on items in profit or loss goes to profit or loss. Tax on items in OCI or directly in equity goes to OCI or equity. Tax on a business combination's fair value adjustments adjusts goodwill. Find where the pre-tax item sits, then book its tax in the same place.

Understand Recognition of Tax in Profit or Loss, OCI and Equity

Ind AS 12 has one governing idea for presentation: tax follows the transaction. Tax is not a separate item that always lands in profit or loss. It is booked in the same place as the transaction or event that created it.

The default is profit or loss. Most tax expense relates to profits earned in the year, so current and deferred tax are recognised as income or expense in profit or loss. The exceptions are tax arising from (a) a transaction or event recognised outside profit or loss, in OCI or directly in equity, or (b) a business combination.

If the item is in OCI, its tax goes to OCI. Examples are revaluation surplus on PPE or intangibles, remeasurement of defined benefit plans, and fair value changes on equity instruments designated at FVOCI. If the item is directly in equity, its tax goes directly to equity. Examples are an adjustment to opening retained earnings for a change in accounting policy or a correction of an error, and the equity part of a compound instrument.

On a revaluation, only the deferred tax caused by the revaluation goes to OCI. That is the revaluation surplus × the tax rate. Any other movement in the deferred tax on the asset, such as a difference between book and tax depreciation, goes to profit or loss.

Share-based payments need care. The tax deduction is often based on the intrinsic value at exercise, not on the expense booked under Ind AS 102. So the deductible amount can differ from the cumulative expense. The carrying amount of the services received is nil, and the tax base is the estimated future deduction. The difference is a deductible temporary difference, and deferred tax is recognised on it. If the estimated deduction is more than the cumulative expense, the tax on the excess goes directly to equity. The rest goes to profit or loss.

In a business combination, deferred tax on temporary differences of the acquiree's assets and liabilities at fair value is recognised in the acquisition accounting. A deferred tax liability on a fair value uplift increases goodwill (or reduces the bargain purchase gain). A deferred tax asset reduces goodwill. It does not hit profit or loss at that moment.

Key rules to remember

Core allocation rule: Tax is recognised in the same place as the underlying item: P&L, OCI or equity; Apply to both current tax and deferred tax. P&L is the default.
Revaluation surplus: Deferred tax in OCI = Revaluation surplus × Tax rate; Surplus is shown net of this deferred tax. A gain on revaluation increases the deferred tax liability. Any remaining movement in deferred tax, such as from depreciation differences, goes to P&L.
Share-based payment, estimated deduction: Estimated future tax deduction = (Intrinsic value at reporting date ÷ Total vesting period) × Service period elapsed; Use the share price at the reporting date. The carrying amount of the services received is nil, so this estimated deduction is the tax base and also the deductible temporary difference. It differs from the Ind AS 102 expense.
Share-based payment, deferred tax asset: DTA = Estimated future tax deduction × Tax rate (subject to recoverability); DTA is recognised only if taxable profit is probable. The amount through P&L is capped at cumulative expense × tax rate, with the excess to equity.
Split of the tax income: Tax to P&L = lower of (Estimated deduction, Cumulative expense) × Tax rate; Tax to equity = excess of Estimated deduction over Cumulative expense, × Tax rate; If the estimated deduction is lower than or equal to the cumulative expense, nothing goes to equity and the whole tax effect goes to P&L.
Business combination: Deferred tax on fair value adjustments is recognised at acquisition: a DTL increases goodwill (or reduces the bargain purchase gain); a DTA reduces goodwill; Changes in the acquirer's own deferred tax asset recoverability due to the combination are not part of acquisition accounting. They go to P&L.
Dividend-related tax (Ind AS 12): Income tax consequences of dividends are recognised where the past transactions or events that generated the distributable profits were recognised; Usually P&L, unless those profits came from items in OCI or equity.

How to solve Recognition of Tax in Profit or Loss, OCI and Equity questions

Use this sequence for any question on where tax is recognised. It works for revaluation, share-based payments, business combinations and policy changes.

1Identify the underlying item. Is the pre-tax gain or loss in P&L, OCI, or directly in equity? Or is it from a business combination?
2Decide the destination. Tax follows the item. Default to P&L only if the item itself is in P&L.
3Compute current tax first, using taxable profit and the tax rate for the tax year.
4Compute the tax base and carrying amount of the asset or liability. Find the temporary difference and multiply by the enacted or substantively enacted rate.
5Compute the closing deferred tax balance and subtract the opening balance. The movement is the amount to recognise.
6Split the movement by origin. For example, the revaluation surplus × tax rate goes to OCI, and the rest, such as a depreciation difference, goes to P&L.
7For share-based payments, compare the estimated deduction with the cumulative expense. Tax on the excess goes to equity, the rest to P&L.
8Write the journal entry and state the presentation: tax expense in P&L, tax on OCI items shown in the OCI section, and tax to equity shown in the statement of changes in equity.

Quickest way: Tag, multiply, split

When to use it: Use when time is short and the question gives numbers for a single item such as a revaluation or an ESOP.

Tag the item: P&L, OCI, equity or business combination.
Multiply the amount that arises from the tagged item (for a revaluation, the surplus) by the tax rate to get the deferred tax for that item.
Send that amount to the tagged place. Split only if the question gives two parts, such as the ESOP excess or a separate depreciation difference.
For an ESOP, calculate expense × tax rate and compare with deduction × tax rate. Anything above the expense-based figure goes to equity.
Write the journal entry with the debit and credit clearly labelled.

Common mistakes in Recognition of Tax in Profit or Loss, OCI and Equity

Booking all deferred tax on revaluation surplus in profit or loss.
Students remember that tax expense sits in P&L and forget the 'follow the item' rule.
Fix: If the surplus is credited to OCI, debit the revaluation surplus (OCI) with the deferred tax on the surplus and credit the deferred tax liability.
Taking the whole temporary difference on a revalued asset, less the opening deferred tax, to OCI.
Students treat the entire movement as caused by the revaluation.
Fix: Send only revaluation surplus × tax rate to OCI. Other movements, such as depreciation differences, go to P&L.
Recognising the whole ESOP deferred tax asset in P&L.
Students assume the tax deduction equals the Ind AS 102 expense.
Fix: Compare the estimated deduction with the cumulative expense. Put tax on the excess directly in equity.
Using the grant-date fair value to estimate the tax deduction.
Students carry over the Ind AS 102 measurement basis.
Fix: When the deduction depends on share price at exercise, use the intrinsic value at the reporting date.
Adjusting profit or loss when deferred tax arises on a fair value uplift in a business combination.
Students treat the deferred tax like normal tax expense.
Fix: Recognise it as part of the acquired net assets. A deferred tax liability increases goodwill (or reduces the bargain purchase gain). A deferred tax asset reduces goodwill.
Showing OCI items net of tax without disclosing the tax effect.
Students stop at the journal entry and ignore presentation.
Fix: Show each OCI component either net of tax with the tax disclosed, or before tax with one line for the related tax.
Applying the current year tax rate to old balances without checking enactment.
Students ignore rate changes.
Fix: Use the rate enacted or substantively enacted at the reporting date. Put the effect of a rate change in the same place as the original item.

Worked examples

Example 1

Case: Veda Ltd has a factory building with carrying amount ₹80,00,000 and tax base ₹50,00,000 before revaluation at 31 March 2027. It uses the revaluation model. On that date the building is revalued to ₹1,10,00,000. Tax rate is 25%. Opening deferred tax liability on the building was ₹7,50,000. Assume no depreciation difference arises in the period, and no part of the surplus is taxable until sale. Compute the deferred tax on revaluation and state where it is recognised.

Show the solution

Opening temporary difference = 80,00,000 − 50,00,000 = ₹30,00,000. Opening DTL = 30,00,000 × 25% = ₹7,50,000. This agrees with the given balance.
Revaluation surplus = 1,10,00,000 − 80,00,000 = ₹30,00,000. It is credited to OCI (revaluation surplus).
Deferred tax in OCI = Revaluation surplus × Tax rate = 30,00,000 × 25% = ₹7,50,000.
Check: closing temporary difference = 1,10,00,000 − 50,00,000 = ₹60,00,000. Closing DTL = 60,00,000 × 25% = ₹15,00,000. Movement = 15,00,000 − 7,50,000 = ₹7,50,000, which equals the OCI amount. With no depreciation difference in the period, nothing goes to P&L.
Because the surplus is in OCI, the tax on it is also in OCI.
Journal entry: Building A/c Dr ₹30,00,000 to Revaluation surplus (OCI) ₹30,00,000. Revaluation surplus (OCI) Dr ₹7,50,000 to Deferred tax liability ₹7,50,000.
Net revaluation surplus in OCI = 30,00,000 − 7,50,000 = ₹22,50,000.

Answer: Deferred tax of ₹7,50,000 (surplus ₹30,00,000 × 25%) is recognised in OCI, debited to revaluation surplus. Closing DTL is ₹15,00,000 and net OCI surplus is ₹22,50,000.

Example 2

Case: On 1 April 2026, Kiran Ltd grants share options to employees with a 3-year vesting period. The tax deduction (in the year of exercise) equals the intrinsic value of the options at exercise. At 31 March 2027 (end of year 1), the cumulative Ind AS 102 expense is ₹20,00,000. The intrinsic value of the options at that date is ₹90,00,000. Tax rate is 25%. Taxable profits are expected to be available. Compute the deferred tax asset and its split between P&L and equity.

Show the solution

Estimated future tax deduction = Intrinsic value × (service period elapsed ÷ vesting period) = 90,00,000 × 1/3 = ₹30,00,000.
The carrying amount of the services received is nil. The tax base is the estimated future deduction of ₹30,00,000. So the deductible temporary difference is ₹30,00,000.
Deferred tax asset = 30,00,000 × 25% = ₹7,50,000.
Tax effect of the cumulative expense = 20,00,000 × 25% = ₹5,00,000. This is lower than the deduction, so ₹5,00,000 goes to P&L as deferred tax income.
Excess = 7,50,000 − 5,00,000 = ₹2,50,000. This equals (30,00,000 − 20,00,000) × 25%. It goes directly to equity.
Journal entry: Deferred tax asset Dr ₹7,50,000 to Deferred tax income (P&L) ₹5,00,000 and to Equity (share-based payment reserve) ₹2,50,000.

Answer: DTA is ₹7,50,000. ₹5,00,000 is credited to P&L and ₹2,50,000 is credited directly to equity.

Exam tips

Start every answer with the rule in one line: tax follows the underlying item. Examiners reward this clear provision-facts-conclusion structure.
For ESOP questions, always compare the estimated deduction with the cumulative expense. Show both numbers and the excess.
Give the journal entry, not just the amount. State the debit side, such as revaluation surplus or P&L.
In business combination questions, say clearly that deferred tax on fair value adjustments changes goodwill, not P&L. A DTL increases goodwill and a DTA reduces it.
For MCQs, find the account the pre-tax item hits first. The tax destination usually follows from that alone.

Practice questions from Ind AS 12 Income Taxes

Recognition of Tax in Profit or Loss, OCI and Equity in other exams

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

Recognition of Tax in Profit or Loss, OCI and Equity: frequently asked questions

Where is tax on OCI items shown?

It is recognised in OCI along with the item. You may show each OCI component net of tax, or before tax with one aggregate line for the related tax. The tax on each component must be disclosed.

Why does an ESOP create deferred tax if the expense is non-cash?

The tax authority may allow a deduction later, usually on exercise. The expense is booked earlier under Ind AS 102, so the carrying amount of the services is nil while the tax base is the estimated future deduction. This gives a deductible temporary difference. A deferred tax asset follows if taxable profit is probable.

When does tax on an ESOP go to equity?

It goes to equity when the estimated future deduction is more than the cumulative Ind AS 102 expense. The tax on the excess is credited directly to equity. The tax on the amount up to the expense goes to P&L.

Does deferred tax in a business combination affect profit?

Not at the acquisition date. Deferred tax on acquired assets and liabilities is part of the net assets recognised. A deferred tax liability increases goodwill or reduces the bargain purchase gain, and a deferred tax asset reduces goodwill. Later movements follow the normal rules: they go to P&L unless they relate to items recognised in OCI or equity.