Advanced Accounting · AS 22 Accounting for Taxes on Income

Timing Differences and Permanent Differences (AS 22)

Updated 5 October 2026 · Fact-checked

Under AS 22, a timing difference arises because accounting income and taxable income recognise an item in different periods, and it reverses later. A permanent difference never reverses. Deferred tax is created only on timing differences. To solve, compare book and tax treatment, check if it reverses, then apply the tax rate.

Understand Timing Differences and Permanent Differences

Every company has two profits. Accounting income is the profit in the statement of profit and loss. Taxable income is the profit worked out under the Income-tax Act. The two are rarely equal, because the tax law has its own rules on when an item is allowed or taxed.

A timing difference is a difference between the two incomes that arises in one period and can reverse in one or more later periods. The total expense or income over the whole life is the same in both. Only the year of recognition differs. Depreciation is the classic case: book depreciation and tax depreciation differ each year, but over the asset's life the total claim is the same.

When a timing difference starts, it is an originating difference. When it turns around and the earlier difference unwinds, it is a reversing difference. Think of it as a loan from or to the tax department: you pay less or more tax now and the balance comes back later.

A permanent difference is a difference between the two incomes that arises in one period and does not reverse later. Examples are expenses that the tax law never allows, such as penalties for breach of law, or income that is never taxable, such as exempt income. No deferred tax is recognised on permanent differences, because there is no future reversal to account for.

So the key test is one question: will this difference reverse in a later year? If yes, it is a timing difference and deferred tax arises. If no, it is a permanent difference and you ignore it for deferred tax.

Key rules to remember

Accounting income vs taxable income: Taxable income = Accounting income + permanent disallowances − exempt income + (timing items that increase taxable income now) − (timing items that reduce taxable income now). Items that increase taxable income now: expenses booked now but disallowed now (allowed later), and the excess of book depreciation over tax depreciation. Items that reduce taxable income now: the excess of tax depreciation over book depreciation, and amounts disallowed earlier that are allowed this year. Whether an item is originating or reversing is a separate question from the direction of the adjustment. Count each timing item once.; Use this to reconcile the two incomes. Keep permanent items and timing items in separate groups so nothing is counted twice. Permanent differences affect only the current tax, not deferred tax.
Deferred tax on timing differences: Deferred tax = Timing difference × Tax rate enacted or substantively enacted at the balance sheet date; Use the rate in force at the balance sheet date, not the rate at the date the difference arose.
Deferred tax liability (DTL): For each category of timing difference (for example, depreciation), net the originating and reversing differences. If the net result is that accounting income is recognised earlier than taxable income, or the tax deduction is taken earlier than the book expense → DTL for that category; Example: tax depreciation higher than book depreciation. Taxable income is lower now and higher later. Reversing differences unwind balances already created in the same category. DTL and DTA are worked out category by category. Do not net a DTL of one category against a DTA of another category in the computation. They are set off only on presentation, and only if the AS 22 set-off conditions are met.
Deferred tax asset (DTA): For each category of timing difference, net the originating and reversing differences. If the net result is that the book expense is recognised earlier than the tax deduction, or income is taxed earlier than it is booked → DTA for that category; Example: a specified expense disallowed now and allowed on payment. A DTA is recognised only if there is reasonable certainty of future taxable income against which it can be realised. Where there are unabsorbed depreciation or carried forward losses, AS 22 requires virtual certainty supported by convincing evidence.
Test for classification: Reverses in later period → timing difference. Never reverses → permanent difference; Apply this test to every item in the question before computing anything.

How to solve Timing Differences and Permanent Differences questions

Use this order for any question that asks you to identify differences or compute deferred tax from them.

1List every item where book profit and taxable profit differ. Read the question for depreciation, provisions, disallowances and exempt income.
2For each item, ask whether it will reverse in a later year. If it will, mark it as a timing difference. If not, mark it as a permanent difference.
3Drop the permanent differences from the deferred tax working. Keep them only for the current tax computation.
4For each timing difference, decide if it is originating or reversing in the current year. Originating means the gap grows. Reversing means the earlier gap shrinks.
5Decide DTA or DTL from the net originating difference. If the tax deduction comes earlier than the book expense, the net originating difference gives a DTL. If the book expense comes earlier than the tax deduction, it gives a DTA. Reversing differences unwind balances already created.
6Multiply each net timing difference by the enacted tax rate at the balance sheet date.
7Work out the closing balance, then the charge or credit for the year as the change from the opening balance. Pass the entry through the statement of profit and loss.
8Check the DTA recognition condition: reasonable certainty of future taxable income, or virtual certainty supported by convincing evidence where there are carried forward losses or unabsorbed depreciation. Write one line on it.

Quickest way: Reverse-or-not, then book-versus-tax direction

When to use it: Use this for MCQs and for the identification part of written answers, when you have a few minutes.

Read each item and ask only: will it reverse? If no, cross it out for deferred tax.
For items that reverse, ask who deducts first on the net originating difference. Tax first gives DTL. Books first gives DTA, subject to the recognition test.
Remember the standard pairs: higher tax depreciation gives DTL; specified expenses that the tax law allows only on actual payment (such as a bonus, or certain statutory dues, not paid by the due date) give DTA. Not every unpaid expense is disallowed, so check that the item is one of these specified expenses.
Also watch for any other disallowance that the tax law allows in a later year. If the question says an amount is disallowed now and allowed later, it is a timing difference and gives a DTA. Use the amount and the year of allowance given in the question. Do not assume a fixed percentage of disallowance from memory.
In MCQs, eliminate options that create deferred tax on penalties, fines or exempt income.
In written answers, show a small table-style list of item, type, effect, then the tax at the rate. Step marks come for classification, rate and final figure. For a DTA, add the recognition line: reasonable certainty, or virtual certainty where there are losses or unabsorbed depreciation.

Common mistakes in Timing Differences and Permanent Differences

Creating deferred tax on a permanent difference such as a penalty for breach of law or exempt income.
Students see a gap between book and tax profit and assume deferred tax follows.
Fix: Always ask if the gap reverses. If it never reverses, it affects only current tax.
Treating all depreciation difference as permanent because the rates differ.
Students focus on the different rates and forget that the total claim over the asset life is the same.
Fix: Depreciation difference is a timing difference. It originates early and reverses later as the asset is written off.
Showing a DTL when tax depreciation is lower than book depreciation.
Direction is mixed up.
Fix: Higher tax depreciation than book depreciation gives DTL. Tax depreciation lower than book depreciation gives a deductible timing difference (DTA, subject to recognition) or reverses an earlier DTL.
Ignoring that a specified expense allowed only on payment gives a DTA when it is booked but unpaid.
Students treat the unpaid amount as a plain provision and forget that the tax law allows certain expenses, such as bonus, only when paid by the stated date or on payment.
Fix: Only specified expenses (such as bonus or certain statutory dues) are allowed on payment. Not every unpaid expense is disallowed. If such a specified expense is booked but unpaid by the due date, it is disallowed now and allowed later on payment. This is a timing difference giving a DTA. State the recognition test as well.
Calling an originating difference and a reversing difference the same thing, or netting items that belong to different categories without thought.
The terms look similar.
Fix: Originating adds to the cumulative gap. Reversing reduces it. Compute the net movement for each category, then apply the tax rate.
Using the tax rate of the year the difference arose.
Students copy the earlier rate from the question and forget that a rate change also affects the opening balance.
Fix: Measure deferred tax balances at the rate enacted or substantively enacted at the balance sheet date. If the rate has changed, remeasure the opening balance at the new rate. The effect of the rate change on the opening balance goes through the statement of profit and loss.

Worked examples

Example 1

Classify each item as a timing difference or a permanent difference, and state the deferred tax effect, for a company for the year: (a) Depreciation as per books ₹4,00,000; as per tax law ₹6,00,000. (b) Penalty for breach of law ₹50,000 debited to profit and loss. (c) Bonus of ₹3,00,000 provided in books but not paid on or before the due date of filing the return for the year. It is paid after that date, in the next year, and the tax law allows bonus only in the year of payment if it is not paid by that due date. Tax rate 30%.

Show the solution

Item (a): depreciation differs in timing but the total over the asset life is the same. It is a timing difference. Tax depreciation exceeds book depreciation by ₹2,00,000, so the difference is originating and gives a DTL.
DTL on (a) = ₹2,00,000 × 30% = ₹60,000.
Item (b): the penalty is never allowed as a deduction. It never reverses. It is a permanent difference. No deferred tax is created.
Item (c): bonus is a specified expense. It is booked now but was not paid by the due date of filing the return for the year, so the tax law disallows it this year and allows it in the year of payment, which is next year. The disallowance reverses on payment. It is a timing difference, originating, giving a DTA.
DTA on (c) = ₹3,00,000 × 30% = ₹90,000. It has its own recognition test: it is recognised only if there is reasonable certainty of future taxable income (virtual certainty if there are carried forward losses or unabsorbed depreciation).
Show the DTL of ₹60,000 and the DTA of ₹90,000 separately, and test the DTA for recognition on its own. AS 22 allows them to be set off on presentation only if two conditions are met: the company has a legally enforceable right to set off assets against liabilities representing current tax, and the deferred tax assets and liabilities relate to taxes on income levied by the same governing taxation law.

Answer: (a) Timing difference, DTL ₹60,000. (b) Permanent difference, no deferred tax. (c) Timing difference, DTA ₹90,000, which needs its own recognition test. The DTL and the DTA are shown separately, and are set off on presentation only if the AS 22 set-off conditions are met.

Example 2

A company has accounting income of ₹10,00,000 for the year. Book depreciation is ₹3,00,000 and tax depreciation is ₹5,00,000. Fine for breach of law of ₹40,000 is debited to profit and loss. Bonus of ₹1,00,000 is provided in books but is not paid on or before the due date of filing the return for the year. The tax law therefore disallows it this year and allows it in the year of payment. The company pays it next year. Tax rate is 30%. Assume there is reasonable certainty of future taxable income, and the company has no carried forward losses or unabsorbed depreciation. Compute taxable income, current tax and the deferred tax for the year.

Show the solution

Start with accounting income: ₹10,00,000.
Add back book depreciation ₹3,00,000 and deduct tax depreciation ₹5,00,000. Net effect = −₹2,00,000. This is a timing difference.
Add back the fine ₹40,000. This is a permanent difference.
Add back the unpaid bonus ₹1,00,000. It is allowed next year on payment, so this is a timing difference.
Taxable income = 10,00,000 − 2,00,000 + 40,000 + 1,00,000 = ₹9,40,000.
Current tax = ₹9,40,000 × 30% = ₹2,82,000.
DTL on depreciation = ₹2,00,000 × 30% = ₹60,000.
DTA on bonus = ₹1,00,000 × 30% = ₹30,000. Recognition test: there is reasonable certainty of future taxable income and there are no losses or unabsorbed depreciation, so the DTA is recognised.
The DTL (depreciation) and the DTA (bonus) belong to different categories, so each is computed separately. Both go through the statement of profit and loss in the year, so the net deferred tax charge for the year = ₹60,000 − ₹30,000 = ₹30,000 (net DTL created).
The fine gives no deferred tax.

Answer: Taxable income ₹9,40,000; current tax ₹2,82,000; deferred tax charge ₹30,000 (DTL ₹60,000 less DTA ₹30,000, the DTA being recognised because future taxable income is reasonably certain). The fine is a permanent difference with no deferred tax.

Exam tips

Start every answer by classifying items as timing or permanent. Examiners give separate marks for this.
Write the reason in one line: for example, allowed on payment so it reverses. A bare label earns fewer marks.
Show tax rate and the multiplication on its own line, then state DTA or DTL.
For a DTA, add one line on the recognition test: reasonable certainty, or virtual certainty where there are carried forward losses or unabsorbed depreciation.
In MCQs, penalties, fines and exempt income are the usual permanent-difference traps.

Practice questions from AS 22 Accounting for Taxes on Income

Timing Differences and Permanent Differences in other exams

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

Timing Differences and Permanent Differences: frequently asked questions

What is the difference between a timing difference and a permanent difference?

A timing difference arises in one period and reverses in a later period, so the same total is recognised in both books and tax over time. A permanent difference never reverses. Deferred tax arises only on timing differences.

What do originating and reversing timing differences mean?

An originating difference is one that starts or increases the gap between accounting income and taxable income in the current year. A reversing difference reduces an earlier gap. Both are timing differences and both are used to compute the deferred tax movement.

Does an expense allowed only on payment give a deferred tax asset?

Yes, if the expense is booked but disallowed because it is unpaid by the tax deadline and will be allowed when paid. It is a timing difference that creates a DTA. You must also confirm that future taxable income is reasonably certain, or virtually certain where losses or unabsorbed depreciation exist.

Is depreciation a permanent difference?

No. Depreciation differences between books and tax reverse over the asset's life, so they are timing differences. Only items such as penalties or exempt income are permanent differences.