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Corporate Financial Reporting · Income Taxes (Ind AS 12)

Deferred Tax Computation Problems under Ind AS 12

Updated 11 October 2026 · Fact-checked

Deferred tax under Ind AS 12 is found with the balance sheet method. For each asset and liability, compare the carrying amount with the tax base. The difference is a temporary difference. Multiply it by the enacted tax rate. Taxable differences give a deferred tax liability; deductible differences give a deferred tax asset.

Understand Deferred Tax Computation Problems

Accounting profit and taxable profit are not the same. Some items reach the books in one year and the tax computation in another. Deferred tax is the tax effect of that gap. It makes sure the tax expense matches the profit shown in the books.

Ind AS 12 uses the balance sheet liability method. You do not compare profit with taxable profit. You compare, for every asset and liability, the carrying amount in the balance sheet with its tax base. The tax base is the amount attributed to the item for tax purposes. For a depreciable asset, it is cost less all tax deductions allowed so far.

The difference is a temporary difference. If it will make future taxable amounts larger when the item is recovered or settled, it is a taxable temporary difference and creates a deferred tax liability (DTL). If it will give future deductions, it is a deductible temporary difference and creates a deferred tax asset (DTA). A common case: tax depreciation is faster than book depreciation, so you get a DTL. If it is slower, you get a DTA.

Provisions and disallowed expenses follow the same logic. Say you book an expense and a liability now, but tax law allows the deduction only when you pay. The liability has a tax base of nil, so the carrying amount exceeds the tax base. That is a deductible difference and a DTA. Typical Indian examples are bonus, leave encashment or statutory dues that are deductible only on payment (the old Section 43B of the Income-tax Act, 1961), and part of an expense disallowed until tax is deducted and deposited (the old Section 40(a)(ia)). Your exam will say the Income-tax Act, 2025 now applies, so read the question for what is allowed and when. Apply the principle, not the section number.

Some disallowances never reverse, such as penalties for breach of law. These are permanent differences. They create no deferred tax. They only change the effective tax rate.

Key rules to remember

Temporary difference
Temporary difference = Carrying amount − Tax base (for an asset); Tax base − Carrying amount (for a liability)
Ind AS 12 defines it as the difference between the carrying amount in the balance sheet and the tax base. Check which side is larger before deciding if it is taxable or deductible.
Tax base of a depreciable asset
Tax base = Cost − Cumulative tax depreciation
This is the amount deductible against future taxable income as the asset is recovered.
Tax base of a liability (provision)
Tax base = Carrying amount − Amount deductible in future periods
If the full amount is deductible only on payment, the tax base is nil.
Taxable temporary difference
Asset: Carrying amount > Tax base. Liability: Carrying amount < Tax base. Result: DTL
Example: tax depreciation faster than book depreciation.
Deductible temporary difference
Asset: Carrying amount < Tax base. Liability: Carrying amount > Tax base. Result: DTA
Example: provision not yet allowed for tax. A DTA is recognised only if future taxable profit is probable.
Deferred tax balance
Deferred tax = Temporary difference × Enacted or substantively enacted tax rate
Use the rate expected to apply when the asset is recovered or the liability settled. The rate and tax base may depend on the expected manner of recovery (for example, sale or use).
Deferred tax for the year
Deferred tax charge or income = Closing net DTL (or DTA) − Opening net DTL (or DTA)
Total tax expense = Current tax + Deferred tax charge (or − deferred tax income).

How to solve Deferred Tax Computation Problems questions

Use the same sequence for every deferred tax numerical. It keeps your working clean and easy for the examiner to mark.

  1. 1List every asset and liability affected: fixed assets, provisions, unpaid statutory dues, disallowed expenses, receivables and so on.
  2. 2For each item, write the carrying amount as per books at the year end.
  3. 3Write the tax base as per the facts given. For assets: cost less cumulative tax depreciation. For liabilities: carrying amount less the amount deductible in future.
  4. 4Find the temporary difference. Mark each as taxable (DTL) or deductible (DTA). Drop permanent differences, such as penalties never allowed.
  5. 5Multiply each difference by the enacted tax rate given in the question. If the rate depends on how the asset will be recovered, use the rate for the expected manner.
  6. 6Check the recognition test for DTAs: is future taxable profit probable? State your assumption in one line. Also state that DTA and DTL are offset only if the offset conditions are met.
  7. 7Get the closing net balance. Subtract the opening balance to get the deferred tax charge or income for the year.
  8. 8Add current tax to deferred tax to get total tax expense. Pass the journal entry and state the balance sheet presentation.

Quickest way: Reconcile-the-timing-items shortcut

When to use it: Use it when the question gives book and tax figures for a single year and asks for the deferred tax charge. It saves you from building a full balance sheet table.

  1. Take only items that reverse in a later year. Ignore permanent differences.
  2. For each item, find the originating difference of the year: book depreciation less tax depreciation, provisions made less provisions allowed.
  3. Tag each as DTL (taxable) or DTA (deductible). Excess tax depreciation and income taxable later give a DTL. Expenses booked now but allowed later give a DTA.
  4. Multiply the net movement by the tax rate. This is the deferred tax charge (net DTL increase) or income (net DTA increase) for the year.
  5. Cross-check: total tax expense should equal (PBT + permanent disallowances) × tax rate, when there is no opening deferred tax and no rate change.

Common mistakes in Deferred Tax Computation Problems

  • Treating a permanent disallowance such as a penalty as a temporary difference and creating a DTA

    Both are added back in the tax computation, so they look the same.

    Fix: Ask one question: will this amount ever be allowed as a deduction later? If never, there is no deferred tax.

  • Mixing up DTA and DTL, for example calling excess tax depreciation a DTA

    Students think of tax depreciation as a deduction, so they think of an asset.

    Fix: Compare carrying amount with tax base. For an asset, carrying amount above tax base is a taxable difference and a DTL.

  • Computing deferred tax on the difference between accounting profit and taxable profit

    This is the old income statement approach, which Ind AS 12 does not follow.

    Fix: Always work on each asset and liability: carrying amount versus tax base. Use the year's differences only as a check.

  • Charging the full closing balance to profit or loss each year

    Students forget that the closing deferred tax balance includes the opening balance.

    Fix: Take closing balance less opening balance. Only the movement goes to profit or loss (or to OCI or equity if the item sits there).

  • Using the wrong tax rate, such as the old rate or a rate not yet enacted

    The rate is stated in the question but students pick up a rate from memory.

    Fix: Use the enacted or substantively enacted rate given in the question. If the rate changes, remeasure the opening balance and show the effect separately.

  • Recognising a DTA without checking for future taxable profit

    Students treat every deductible difference as an automatic asset.

    Fix: Write the assumption that sufficient taxable profit is probable. If the question says it is not, do not recognise the DTA and disclose the unrecognised amount.

Worked examples

Example 1

Vishwa Industries Ltd bought a machine on 1 April 2025 for ₹10,00,000. Books: straight-line depreciation over 10 years, nil residual value. Tax: 15% on written down value. Tax rate is 25%. Compute the deferred tax balance at the end of the first and second years and the charge for the second year. Assume sufficient taxable profit.

Show the solution
  1. Year 1 book depreciation = ₹10,00,000 ÷ 10 = ₹1,00,000. Carrying amount = ₹9,00,000.
  2. Year 1 tax depreciation = 15% × ₹10,00,000 = ₹1,50,000. Tax base = ₹8,50,000.
  3. Carrying amount ₹9,00,000 exceeds tax base ₹8,50,000. Taxable temporary difference = ₹50,000.
  4. DTL at end of Year 1 = ₹50,000 × 25% = ₹12,500.
  5. Year 2 book depreciation = ₹1,00,000. Carrying amount = ₹8,00,000.
  6. Year 2 tax depreciation = 15% × ₹8,50,000 = ₹1,27,500. Tax base = ₹7,22,500.
  7. Taxable temporary difference = ₹8,00,000 − ₹7,22,500 = ₹77,500.
  8. DTL at end of Year 2 = ₹77,500 × 25% = ₹19,375.
  9. Deferred tax charge for Year 2 = ₹19,375 − ₹12,500 = ₹6,875.

Answer: DTL is ₹12,500 at the end of Year 1 and ₹19,375 at the end of Year 2. The deferred tax expense for Year 2 is ₹6,875.

Example 2

Kaveri Textiles Ltd has a profit before tax of ₹40,00,000 for the year. Opening deferred tax is nil. Book depreciation is ₹5,00,000 and tax depreciation is ₹7,00,000. A bonus provision of ₹3,00,000 is made and is deductible for tax only when paid. Professional fees of ₹2,00,000 were paid without deducting tax at source, so 30% of it (₹60,000) is disallowed now and allowed in a later year when tax is deposited. A penalty of ₹50,000 for breach of law is included in expenses. Tax rate is 25%. Compute current tax, deferred tax and total tax expense. Assume future taxable profit is probable and offsetting is permitted.

Show the solution
  1. Taxable profit: ₹40,00,000 + ₹5,00,000 (book depreciation) − ₹7,00,000 (tax depreciation) + ₹3,00,000 (bonus) + ₹60,000 (disallowed fees) + ₹50,000 (penalty) = ₹42,10,000.
  2. Current tax = ₹42,10,000 × 25% = ₹10,52,500.
  3. Depreciation: tax depreciation exceeds book depreciation by ₹2,00,000. Taxable temporary difference = ₹2,00,000. DTL = ₹2,00,000 × 25% = ₹50,000.
  4. Bonus: carrying amount of liability ₹3,00,000, tax base nil. Deductible temporary difference = ₹3,00,000. DTA = ₹3,00,000 × 25% = ₹75,000.
  5. Disallowed fees: deductible later, so deductible temporary difference = ₹60,000. DTA = ₹60,000 × 25% = ₹15,000.
  6. Penalty ₹50,000 is never allowed. It is a permanent difference. No deferred tax.
  7. Net deferred tax = DTA ₹90,000 − DTL ₹50,000 = net DTA ₹40,000. This is deferred tax income because opening was nil.
  8. Total tax expense = ₹10,52,500 − ₹40,000 = ₹10,12,500.
  9. Check: (₹40,00,000 + ₹50,000) × 25% = ₹10,12,500.

Answer: Current tax ₹10,52,500; deferred tax income ₹40,000 (net DTA ₹40,000); total tax expense ₹10,12,500.

Exam tips

  • Write the carrying amount and tax base in two columns. Marks go to the structure, even if one number is wrong.
  • State assumptions in one line each: tax rate used, probable future taxable profit, and offsetting. These are often easy marks.
  • In MCQs, check the direction first. Decide DTA or DTL from the carrying amount versus tax base before doing any arithmetic.
  • When a question mentions a disallowance, decide whether it reverses on payment or is permanent. The reversing ones give deferred tax. Do not rely on old section numbers; the Income-tax Act, 2025 applies, so follow the facts given.
  • If the tax rate depends on sale versus use, use the rate for the expected manner of recovery stated in the question. Show the calculation for that manner only.

Practice questions from Income Taxes (Ind AS 12)

Deferred Tax Computation Problems 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 Computation Problems: frequently asked questions

How do I calculate deferred tax under Ind AS 12 in an exam?

List each asset and liability, find its carrying amount and tax base, and take the difference. Multiply by the enacted tax rate. Then compare the closing balance with the opening balance to find the charge for the year.

When does a depreciation difference create a DTL?

It creates a DTL when tax depreciation is faster than book depreciation. The carrying amount is then higher than the tax base, so you will pay more tax in future years. If tax depreciation is slower, the result is a DTA.

Is a provision that is allowed only on payment a DTA?

Yes. The liability has a tax base of nil, so the carrying amount is higher than the tax base. That is a deductible temporary difference, which gives a DTA if future taxable profit is probable. Bonus and leave encashment often appear this way.

Do permanent disallowances create deferred tax?

No. If an expense will never be deductible, such as a penalty for breach of law, there is no future tax effect. It does not appear in deferred tax. It only makes the effective tax rate differ from the applicable rate.