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

Timing Differences and Permanent Differences under AS 22

Updated 10 October 2026 · Fact-checked

Under AS 22, accounting income and taxable income differ for two reasons. A timing difference originates in one period and reverses in later periods, such as depreciation or section 43B items. A permanent difference originates in one period and never reverses, such as a disallowed expense. Only timing differences create deferred tax.

Understand Timing Differences and Permanent Differences

Accounting income is the profit in your statement of profit and loss. Taxable income is the figure computed under the tax laws. They are rarely equal. AS 22 says the gap arises because items of revenue and expense in the books may differ from those considered for tax, and because the amount of an item may differ between the two.

AS 22 sorts every such gap into two types. A timing difference originates in one period and is capable of reversal in one or more later periods. The period in which an item is included in taxable income does not match the period in which it is included in accounting income. The total over the life of the item is the same. Only the period differs.

A permanent difference originates in one period and does not reverse later. The standard's own example: if tax laws allow only a part of an item of expenditure, the disallowed amount is a permanent difference. It stays out of taxable income forever.

Why does this matter? Timing differences give rise to deferred tax assets or liabilities. AS 22 notes that an expense provided in the books but not allowed under section 43B until paid creates a timing difference that leads to a deferred tax asset. Higher tax depreciation than book depreciation creates a timing difference that leads to a deferred tax liability. Permanent differences create no deferred tax.

A timing difference is originating when it arises in the current year. It is reversing when an earlier difference unwinds. In one year, both can exist for the same asset. Your first job in any question is to classify each item correctly.

Key rules to remember

Timing difference: Originates in one period and is capable of reversal in later periods; Total effect over time is the same in books and tax. Only the period differs. Leads to deferred tax.
Permanent difference: Originates in one period and does not reverse subsequently; Example in AS 22: part of an expenditure disallowed for tax. No deferred tax arises.
Total difference: Total difference = Accounting income − Taxable income = Permanent difference + Timing difference; Take timing difference as the balancing figure after removing permanent items. Mark each as originating (O) or reversing (R).
Depreciation timing difference: Timing difference = Tax depreciation − Book depreciation; Positive means taxable income is lower than accounting income in that year (originating, deferred tax liability). Negative means reversal.
Direction of deferred tax: Taxable income lower now, higher later → deferred tax liability. Taxable income higher now, lower later → deferred tax asset; Matches AS 22 examples: excess tax depreciation gives a liability; section 43B provision not yet allowed gives an asset.

How to solve Timing Differences and Permanent Differences questions

Use this routine for any question asking you to identify, classify or compute differences between book and taxable income.

1List every item where book treatment differs from tax treatment.
2For each item ask: will the difference reverse in a later year? If yes, it is a timing difference. If no, it is permanent.
3For timing items, compute the book amount and the tax amount for the year. Their difference is the originating or reversing amount.
4Mark each timing difference as originating (O) if the gap widens this year, or reversing (R) if an earlier gap narrows.
5Reconcile: accounting income less permanent differences less or plus timing differences should give taxable income.
6State the consequence: timing differences lead to deferred tax asset or liability, permanent differences do not.
7Write one line of interpretation, for example 'the difference will reverse when the expense is paid'.

Quickest way: The reversal test

When to use it: Use in MCQs and in classification parts of long questions when time is short.

Ask one question: will this item ever be allowed or taxed in another year?
If yes, timing. If it is never allowed or never taxed, permanent.
For depreciation, compare tax and book figures. Higher tax figure means originating, lower means reversing.
For a provision or expense allowed on payment (section 43B type), it is timing and gives a deferred tax asset.
Disallowed in full or in part with no later allowance, such as a part of an expense, is permanent.

Common mistakes in Timing Differences and Permanent Differences

Treating every disallowed expense as a permanent difference.
Students link 'disallowed' with 'never allowed'.
Fix: Check whether it is allowed later. Section 43B items and payments to non-residents under section 40(a)(i) are allowed in later years when paid or tax is deducted, so they are timing differences.
Calling depreciation differences permanent.
The yearly amounts differ, so it looks like a lasting gap.
Fix: Total depreciation over the asset's life ends up the same in books and tax. Only the periods differ, so it is a timing difference.
Recognising deferred tax on permanent differences.
Students compute tax effect on the whole gap between accounting and taxable income.
Fix: Remove permanent differences first. Deferred tax is worked only on timing differences.
Mixing up originating and reversing.
Students look only at the sign of the year's difference without looking at earlier years.
Fix: Originating means a new gap is created. Reversing means an earlier gap is shrinking. Track a running balance of the cumulative difference.
Wrong direction of asset and liability.
Memorising without the logic.
Fix: Higher tax depreciation now means less tax paid now and more later, so a liability. Expense booked but not yet allowed means more tax paid now and less later, so an asset.

Worked examples

Example 1

Classify each item as a timing difference or a permanent difference, and state whether it gives a deferred tax asset, a deferred tax liability or neither: (a) Tax depreciation is higher than book depreciation in the first year of an asset. (b) A provision for a tax liability is booked in the accounts but allowed under section 43B only when paid next year. (c) Only a part of an expenditure is allowed as a deduction under tax laws and the rest is never allowed.

Show the solution

(a) Total depreciation over the asset life is the same, only periods differ. So it is a timing difference. Tax allows more now, so taxable income is lower now and higher later. This gives a deferred tax liability.
(b) The expense is charged in books now but allowed for tax in a later year on payment. It will reverse. So it is a timing difference. Taxable income is higher now and lower later. This gives a deferred tax asset.
(c) The disallowed part is never allowed in any year. It does not reverse. So it is a permanent difference and no deferred tax arises.

Answer: (a) Timing, deferred tax liability. (b) Timing, deferred tax asset. (c) Permanent, no deferred tax.

Example 2

A company buys a machine. Book depreciation is ₹1,00,000 each year. Tax depreciation is ₹3,75,000 in year 1 and ₹2,81,000 in year 2. Income before depreciation is ₹10,00,000 each year. Compute accounting income, taxable income and the timing difference for each year, marking each as originating or reversing. Assume no other differences.

Show the solution

Year 1 accounting income = 10,00,000 − 1,00,000 = ₹9,00,000.
Year 1 taxable income = 10,00,000 − 3,75,000 = ₹6,25,000.
Year 1 timing difference = 9,00,000 − 6,25,000 = ₹2,75,000. This equals tax depreciation less book depreciation (3,75,000 − 1,00,000). Taxable income is lower, so it is originating (O).
Year 2 accounting income = 10,00,000 − 1,00,000 = ₹9,00,000.
Year 2 taxable income = 10,00,000 − 2,81,000 = ₹7,19,000.
Year 2 timing difference = 9,00,000 − 7,19,000 = ₹1,81,000. Tax depreciation is still higher than book, so it is again originating (O).
Cumulative timing difference at end of year 2 = 2,75,000 + 1,81,000 = ₹4,56,000. It reverses in later years when tax depreciation falls below book depreciation.

Answer: Year 1: accounting income ₹9,00,000, taxable income ₹6,25,000, timing difference ₹2,75,000 (O). Year 2: accounting income ₹9,00,000, taxable income ₹7,19,000, timing difference ₹1,81,000 (O). Cumulative ₹4,56,000, giving a deferred tax liability.

Exam tips

Write the definition in one line before classifying. Step marks often come from the reversal reasoning.
In MCQs on depreciation and section 43B items, the answer is almost always a timing difference. Check the direction for asset versus liability.
Present reconciliations as a small statement: accounting income, add or less permanent, add or less timing, taxable income.
Mark O and R against every timing difference in a table. It shows the examiner you understand the concept.
Do not compute deferred tax on a permanent difference. Say clearly that none arises.

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

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 timing and permanent differences in AS 22?

A timing difference originates in one period and can reverse in later periods. A permanent difference originates in one period and does not reverse. Only timing differences lead to deferred tax.

Is depreciation a timing difference or a permanent difference?

A difference between book and tax depreciation is a timing difference. It can arise from different rates, methods, calculation approach or composition of cost. Over the asset's life the total is the same, only the periods differ.

What are originating and reversing timing differences?

An originating difference arises in the current year and adds to the gap between accounting and taxable income. A reversing difference is the unwinding of earlier originating differences in a later year.

Why does a section 43B item give a deferred tax asset?

The expense is charged in the books but is not allowed for tax until it is paid. Taxable income is higher now and lower when the deduction is later allowed. That future tax saving is a deferred tax asset.