Corporate Financial Reporting · Income Taxes (Ind AS 12)

Deferred Tax Liability and Taxable Temporary Differences under Ind AS 12

Updated 11 October 2026 · Fact-checked

A deferred tax liability (DTL) is tax payable in future periods on taxable temporary differences. Under Ind AS 12 you recognise a DTL for all taxable temporary differences, except initial recognition of goodwill and certain initial recognition cases. For each item, compare carrying amount with tax base, apply the tax rate, then test the exceptions.

Understand Deferred Tax Liabilities and Taxable Temporary Differences

Accounting profit and taxable profit differ. Some differences are permanent. Others are temporary differences: they arise because an asset or liability has a carrying amount that differs from its tax base, and they reverse over time.

A taxable temporary difference will create taxable amounts in future when the carrying amount of the asset is recovered or the liability settled. For an asset, this typically means the carrying amount is higher than the tax base. The tax you will pay on that future taxable amount is the deferred tax liability. Paragraph 15 says a DTL is recognised for all taxable temporary differences, except in the cases below.

Paragraph 18 lists how such differences arise: assets and liabilities fair valued in a business combination with no tax adjustment, assets revalued with no equivalent tax adjustment, goodwill arising in a business combination, a tax base on initial recognition that differs from the carrying amount (for example non-taxable government grants related to assets), and investments in subsidiaries, branches, associates and joint arrangements whose carrying amount differs from the tax base.

There are two exceptions under paragraph 15. First, no DTL arises from the initial recognition of goodwill. Second, no DTL arises from the initial recognition of an asset or liability in a transaction that (i) is not a business combination, (ii) at the time of the transaction affects neither accounting profit nor taxable profit, and (iii) at the time of the transaction does not give rise to equal taxable and deductible temporary differences. All three conditions must hold.

The goodwill exception covers only the initial difference. Paragraph 21B gives an example: goodwill of Rs. 100 is tax deductible at 20% a year from the year of acquisition. Tax base is Rs. 100 at initial recognition and Rs. 80 at year end. If the carrying amount stays at Rs. 100, a taxable temporary difference of Rs. 20 arises. It does not relate to initial recognition, so a DTL is recognised on it.

For investments in subsidiaries, branches, associates and joint arrangements, paragraph 39 requires a DTL on all taxable temporary differences unless both conditions hold: the investor can control the timing of reversal, and it is probable the difference will not reverse in the foreseeable future. A parent usually controls its subsidiary's dividend policy, so it often does not recognise a DTL on undistributed profits it will not distribute (paragraph 40). An investor in an associate does not control it, so it recognises a DTL unless an agreement says profits will not be distributed (paragraph 42).

Key rules to remember

Taxable temporary difference (asset): Carrying amount of asset − Tax base of asset > 0; A positive result means a taxable temporary difference, subject to the exceptions.
Deferred tax liability: DTL = Taxable temporary difference × Tax rate; Use the rate expected to apply when the liability is settled, based on rates enacted or substantively enacted by the reporting date.
General rule (para 15): Recognise a DTL for all taxable temporary differences, except goodwill initial recognition and the three-condition initial recognition exception; The three conditions: not a business combination; affects neither accounting nor taxable profit; no equal taxable and deductible differences.
Investments in subsidiaries, branches, associates, joint arrangements (para 39): No DTL only if (a) investor controls timing of reversal AND (b) reversal is not probable in the foreseeable future; Both conditions must be met. If either fails, recognise the DTL.
Associates (para 42): DTL recognised unless an agreement requires that the associate's profits will not be distributed in the foreseeable future; The investor does not control the associate's dividend policy.

How to solve Deferred Tax Liabilities and Taxable Temporary Differences questions

Use this sequence for any DTL question. It keeps the exceptions from being missed.

1List each asset and liability and write its carrying amount and tax base.
2Find the difference. For an asset, carrying amount above tax base is a taxable temporary difference.
3Check the paragraph 15 exceptions: is it initial recognition of goodwill, or an initial recognition case meeting all three conditions?
4If the item is an investment in a subsidiary, branch, associate or joint arrangement, apply paragraph 39 (and paragraph 42 for an associate).
5Multiply the remaining taxable temporary difference by the applicable tax rate.
6Compare the closing DTL with the opening DTL. The movement is the deferred tax expense or income for the year.
7Write the journal entry or disclosure and state the reason for any item excluded.

Quickest way: Three-question filter

When to use it: Use when a question has several items and little time. It works for most MCQs.

Is carrying amount of the asset higher than its tax base (or liability lower)? If no, there is no taxable difference.
Is it goodwill at initial recognition, or a non-business-combination transaction with no profit impact and no equal offsetting differences? If yes, no DTL.
Is it an investment in a subsidiary, branch, associate or joint arrangement? Check control of timing plus no reversal. Then DTL = difference × rate.

Common mistakes in Deferred Tax Liabilities and Taxable Temporary Differences

Recognising a DTL on goodwill at the time of acquisition.
Students see carrying amount above tax base and apply the general rule.
Fix: Paragraph 15(a) bars a DTL on initial recognition of goodwill. Recognise a DTL only on later differences that do not arise from initial recognition, as in paragraph 21B.
Applying the initial recognition exception to a business combination.
Students remember the exception but forget the first condition.
Fix: The exception requires a transaction that is not a business combination. In a business combination, deferred taxes are recognised and affect goodwill (paragraph 66).
Using only one of the two conditions for subsidiaries.
Control of dividend policy feels enough.
Fix: Paragraph 39 needs both control over timing and probability of no reversal in the foreseeable future. If the parent plans to distribute profits, recognise the DTL.
Treating an associate like a subsidiary.
Both are investments, so students copy the same answer.
Fix: An investor does not control an associate's dividends. Recognise the DTL unless an agreement bars distribution (paragraph 42).
Calculating the DTL on the whole carrying amount instead of the difference.
Students apply the tax rate to the asset value.
Fix: Apply the rate to carrying amount minus tax base only.
Ignoring the goodwill example where tax deductions reduce the tax base later.
Students think any goodwill difference is exempt forever.
Fix: The exception covers only the initial difference. Later differences from tax amortisation, with unchanged carrying amount, give rise to a DTL.

Worked examples

Example 1

Mehta Ltd acquired a business and recognised goodwill of ₹100 lakh. Under tax law, the goodwill is deductible at 20% a year of the original amount starting in the year of acquisition. At the end of the year of acquisition the carrying amount of goodwill is unchanged at ₹100 lakh. The tax rate is 25%. Compute the DTL to be recognised at year end.

Show the solution

Tax base at initial recognition = ₹100 lakh. The carrying amount equals the tax base, so no difference arises initially and the initial recognition exception is not needed.
Tax deduction in the year = 20% × ₹100 lakh = ₹20 lakh. Tax base at year end = ₹100 lakh − ₹20 lakh = ₹80 lakh.
Taxable temporary difference = ₹100 lakh − ₹80 lakh = ₹20 lakh.
This difference does not arise from initial recognition of goodwill, so paragraph 21B requires a DTL.
DTL = ₹20 lakh × 25% = ₹5 lakh.

Answer: A DTL of ₹5 lakh is recognised at year end.

Example 2

Sharma Ltd holds 100% of Verma Ltd, acquired at a cost (and tax base) of ₹50 crore. At the reporting date, the parent's share of the subsidiary's net assets in the consolidated statements, including goodwill, is ₹68 crore. The difference is due to undistributed profits. The parent controls the dividend policy and has determined the profits will not be distributed in the foreseeable future. Tax rate on the reversal is 20%. Separately, Sharma Ltd has a 30% associate, Rao Ltd, with an undistributed profit share of ₹6 crore giving a taxable temporary difference of ₹6 crore, and no agreement restricting distribution. Compute DTL to be recognised for each.

Show the solution

Subsidiary: taxable temporary difference = ₹68 crore − ₹50 crore = ₹18 crore.
Test paragraph 39: (a) the parent controls timing of reversal, yes; (b) reversal not probable in the foreseeable future, yes. Both are met.
Paragraph 40 supports this: the parent controls the dividend policy and has determined profits will not be distributed. No DTL on the subsidiary.
Associate: the investor does not control Rao Ltd's dividend policy and there is no agreement restricting distribution.
Under paragraph 42, recognise a DTL on the associate's difference.
DTL on associate = ₹6 crore × 20% = ₹1.2 crore.

Answer: No DTL on the subsidiary's ₹18 crore difference. A DTL of ₹1.2 crore is recognised on the associate.

Exam tips

In MCQs, scan for the words business combination, goodwill, initial recognition and associate. Each signals a specific paragraph rule.
Always name the exception and give the reason in written answers. Marks are often for the reasoning, not just the figure.
Show tax base and carrying amount in a small table-style list so the examiner sees the difference clearly.
For investment questions, write both paragraph 39 conditions and tick each against the case facts.
End decision questions with a one-line conclusion: DTL recognised of ₹X, or not recognised because of the stated exception.

Practice questions from Income Taxes (Ind AS 12)

Deferred Tax Liabilities and Taxable Temporary Differences 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 Liabilities and Taxable Temporary Differences: frequently asked questions

Is a deferred tax liability always recognised on a taxable temporary difference?

Almost always, but not in every case. Paragraph 15 excludes the initial recognition of goodwill and certain initial recognition cases meeting three conditions. Differences on investments in subsidiaries, branches, associates and joint arrangements follow paragraph 39.

Why is no DTL recognised on goodwill at initial recognition?

Goodwill is a residual amount in a business combination. Recognising a DTL on it would increase goodwill further, so Ind AS 12 bars it under paragraph 15(a). Paragraph 66 confirms this in the business combination context.

When can a parent skip the DTL on undistributed profits of a subsidiary?

Only when it controls the timing of reversal and it is probable the difference will not reverse in the foreseeable future. Both conditions in paragraph 39 must be met. A parent that has decided not to distribute profits meets them (paragraph 40).

Does the same relief apply to an associate?

Usually not. An investor does not control an associate's dividend policy. Unless an agreement says the profits will not be distributed in the foreseeable future, it recognises a DTL (paragraph 42).