Financial Accounting · Accounting for Taxes on Income (AS 22)

How to Compute Deferred Tax under AS 22

Updated 10 October 2026 · Fact-checked

Deferred tax is the tax effect of timing differences. Compute it by finding the timing difference, multiplying the closing accumulated difference by the tax rate enacted or substantively enacted at the balance sheet date, then journalising only the change in the deferred tax balance through the Statement of Profit and Loss.

Understand Measurement and Computation of Deferred Tax

Accounting profit and taxable income are often different. Tax law may allow an expense in a different year from the one in which you charge it in your books. The standard calls the tax effect of such timing differences deferred tax. Current tax is what you expect to pay (or recover) for the period.

Measurement is about the rate. Under AS 22, current tax is measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws. Deferred tax assets and liabilities are measured using the tax rates and tax laws enacted or substantively enacted by the balance sheet date. Some government announcements have the substantive effect of enactment. In that case, you use the announced rate.

If different rates apply to different levels of taxable income, you use average rates. For companies paying tax under the minimum alternate tax provision (section 115JB of the Income-tax Act, 1961, as the standard's text states), that payment is current tax. Deferred tax on timing differences is still measured at regular tax rates, not the section 115JB rate. This applies also when you expect the differences to reverse in a year of MAT payment.

The usual examples: higher tax depreciation than book depreciation creates a deferred tax liability. An expense charged in books but allowed for tax only when paid (the standard's example is section 43B of the 1961 Act) creates a deferred tax asset. Each year you carry forward the balance at the closing rate on the closing accumulated timing difference. The charge or credit to profit and loss is simply the movement in that balance.

If the tax rate changes, you do not leave the old balance alone. You restate the whole accumulated balance at the new enacted rate. The effect of the change goes through profit and loss in the year of change.

Key rules to remember

Deferred tax balance: Deferred tax balance at year end = Accumulated timing difference at year end × Tax rate enacted or substantively enacted at balance sheet date; Use the closing accumulated difference, not only the difference arising this year.
Deferred tax charge or credit for the year: P&L effect = Closing deferred tax balance − Opening deferred tax balance; For a liability, an increase is a debit to Profit and Loss and a decrease is a credit. This also captures the effect of a rate change.
Timing difference from depreciation: Timing difference for the year = Tax depreciation − Book depreciation; Positive gives a deferred tax liability build-up; negative means reversal.
Rate to use: Rate = Enacted or substantively enacted rate at the balance sheet date (regular rate even in a MAT year); Where different rates apply to different slabs of income, use the average rate.
Current tax: Current tax = Taxable income × Applicable tax rate; Measured at the amount expected to be paid to (recovered from) the tax authorities.

How to solve Measurement and Computation of Deferred Tax questions

Follow this order for any deferred tax problem. It keeps the working clean and earns step marks.

1List each item where book treatment and tax treatment differ. Separate timing differences from permanent differences; only timing differences give deferred tax.
2For each timing difference, work out the amount arising in the year and the amount reversing, then the accumulated difference at the year end.
3Identify the rate enacted or substantively enacted at each balance sheet date. Use the regular rate, not the MAT rate, and the average rate if slabs apply.
4Multiply the accumulated difference by the rate to get the closing deferred tax liability or asset.
5Find the movement: closing balance less opening balance. If the rate changed, the opening balance is the amount carried forward at the old rate, so the movement includes the rate effect.
6Pass the journal entry: debit Profit and Loss and credit Deferred Tax Liability for an increase in liability, and the reverse for a decrease. For deferred tax assets, debit Deferred Tax Asset and credit Profit and Loss for an increase.
7Show the balance sheet figure and state whether it is a liability or an asset. Check recognition conditions for a deferred tax asset before booking it.

Quickest way: Closing balance minus opening balance

When to use it: Use this for multi-year problems with a changing tax rate, when time is short.

Write the year-end accumulated timing difference for each year in a row.
Multiply each by that year's closing rate to get the closing balance.
Subtract the previous closing balance to get the yearly debit or (credit).
Check: the sum of all yearly charges must equal the final closing balance.

Common mistakes in Measurement and Computation of Deferred Tax

Applying the rate to only the current year's timing difference instead of the accumulated difference.
Students treat each year as separate and forget the balance carried forward.
Fix: Always build the closing accumulated difference first, then apply the rate to it.
Leaving the opening deferred tax balance at the old rate when the rate changes.
Students compute tax only on the new year's difference.
Fix: Restate the full accumulated difference at the new enacted rate. The movement in the balance goes to profit and loss.
Using the MAT rate to measure deferred tax in a year when the company pays tax under the minimum alternate tax provision.
Students confuse current tax with deferred tax.
Fix: Treat the MAT payment as current tax. Measure deferred tax at regular tax rates.
Computing deferred tax on permanent differences.
Any difference between book and tax profit looks like a candidate.
Fix: Only timing differences, which reverse in later periods, create deferred tax.
Showing the whole closing balance as the year's charge.
Students forget the earlier years' entries already sit in the balance.
Fix: Journalise only the change: closing minus opening.
Reversing the debit and credit for assets and liabilities.
The direction depends on whether the balance is an asset or liability.
Fix: Liability up: debit P&L, credit DTL. Asset up: debit DTA, credit P&L. Reversals go the opposite way.

Worked examples

Example 1

Sharma Textiles Ltd's book depreciation is ₹2,00,000 each year. Tax depreciation is ₹3,00,000 in 20x1, ₹2,00,000 in 20x2 and ₹1,00,000 in 20x3. The tax rate is 30% in all years. Compute the deferred tax liability at each year end and pass the journal entries for 20x1, 20x2 and 20x3.

Show the solution

Timing difference 20x1 = 3,00,000 − 2,00,000 = ₹1,00,000 (originating).
20x2 = 2,00,000 − 2,00,000 = nil. Accumulated difference stays ₹1,00,000.
20x3 = 1,00,000 − 2,00,000 = (₹1,00,000) (reversing). Accumulated difference becomes nil.
DTL at end of 20x1 = 1,00,000 × 30% = ₹30,000. DTL at end of 20x2 = ₹30,000. DTL at end of 20x3 = nil.
Charge 20x1 = 30,000 − 0 = ₹30,000 debit. Charge 20x2 = 30,000 − 30,000 = nil. 20x3 = 0 − 30,000 = ₹30,000 credit.
Entry 20x1: Profit and Loss A/c Dr ₹30,000 to Deferred Tax Liability A/c ₹30,000.
Entry 20x3: Deferred Tax Liability A/c Dr ₹30,000 to Profit and Loss A/c ₹30,000. No entry in 20x2.

Answer: DTL: ₹30,000 (20x1), ₹30,000 (20x2), nil (20x3). P&L: debit ₹30,000 in 20x1, nil in 20x2, credit ₹30,000 in 20x3.

Example 2

Using accumulated timing differences of ₹1,00,000 at 31 March 20x1 and ₹50,000 at 31 March 20x2, and nil at 31 March 20x3 (a deferred tax liability case), compute the DTL and P&L effect each year if the substantively enacted rates at the balance sheet dates are 40%, 35% and 38% respectively.

Show the solution

DTL at 31 March 20x1 = 1,00,000 × 40% = ₹40,000.
DTL at 31 March 20x2 = 50,000 × 35% = ₹17,500. The whole balance is restated at 35%.
DTL at 31 March 20x3 = nil × 38% = nil.
P&L 20x1 = 40,000 − 0 = ₹40,000 debit.
P&L 20x2 = 17,500 − 40,000 = (₹22,500), a credit.
P&L 20x3 = 0 − 17,500 = (₹17,500), a credit.
Check: 40,000 − 22,500 − 17,500 = nil, which equals the closing balance.

Answer: DTL: ₹40,000, ₹17,500 and nil. P&L: debit ₹40,000 in 20x1, credit ₹22,500 in 20x2, credit ₹17,500 in 20x3.

Exam tips

In a rate-change question, show the closing balance at each year's rate before the movement. Examiners award separate marks for this.
Write the journal with a one-line narration, such as deferred tax liability created on timing difference on depreciation.
State the rate rule in one line: enacted or substantively enacted at the balance sheet date, regular rate in a MAT year.
For MCQs, check whether the question asks for the closing balance or for the year's charge. They are usually different numbers.
Always do the check that yearly charges add up to the closing balance.

Practice questions from Accounting for Taxes on Income (AS 22)

Measurement and Computation of Deferred Tax in other exams

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

Measurement and Computation of Deferred Tax: frequently asked questions

Which tax rate is used to measure deferred tax under AS 22?

Use the rates and laws enacted or substantively enacted by the balance sheet date. If different rates apply to different slabs of income, use average rates. In a year of paying tax under the minimum alternate tax provision, use the regular rates for deferred tax.

What happens to deferred tax when the tax rate changes?

Restate the accumulated deferred tax balance at the newly enacted rate. The difference between the restated closing balance and the old opening balance goes to the Statement of Profit and Loss.

What is the journal entry for a deferred tax liability?

Debit Profit and Loss and credit Deferred Tax Liability for the amount of the increase. When the liability reverses, debit Deferred Tax Liability and credit Profit and Loss.

Is MAT paid treated as current tax or deferred tax?

The standard states that tax paid under the minimum alternate tax provision is current tax for the period. It does not change the rate for measuring deferred tax, which stays at the regular tax rate.