Deferred Tax AS-22: Journal Entries & Computation Guide 2026

Deferred tax is one of those concepts that sounds intimidating in theory but becomes clear the moment you walk through a real example. If your company follows Indian Accounting Standard 22 (AS-22) — which applies to all companies not yet on Ind AS — you are required to account for the tax effect of timing differences between your book profit and your taxable profit. Getting this wrong distorts your P&L and misrepresents your net tax position on the balance sheet.

This guide walks you through exactly how to compute deferred tax, which differences create it, how to pass the journal entries, and what goes where on the balance sheet — all with realistic Indian rupee examples your clients can follow without a postgraduate in accounting.

Why Accounting Profit Differs from Taxable Income

Your financial statements are prepared under the Companies Act 2013, following Indian Accounting Standards. Your tax return is filed under the Income Tax Act 1961 (now restructured as the Income Tax Act 2025 effective from FY 2026-27). These two frameworks measure income differently — which means the tax you show in your P&L will rarely match the tax you actually pay to the government.

These gaps fall into two buckets.

Temporary Differences

Temporary differences reverse over time. The most common example is depreciation. Under the Companies Act, a manufacturing company might depreciate a ₹50 lakh machine over 10 years using the straight-line method — ₹5 lakh per year. Under the Income Tax Act, the same machine attracts a Written Down Value (WDV) depreciation rate of 15%, meaning ₹7.5 lakh in Year 1 and progressively less each year as the book value falls. In Year 1, the income-tax depreciation is ₹2.5 lakh higher than the book figure — so taxable income is ₹2.5 lakh lower than book profit. The company pays less tax today but will pay more later when IT depreciation shrinks below the book depreciation figure. This is the textbook timing difference.

Other common temporary differences include:

• Provision for doubtful debts: deductible in books when created, but allowed as a tax deduction only when the debt is actually written off
• Advance rent received: taxable in the year of receipt, but recognised as income in books only when earned
• Cash payment disallowances under Section 40A(3): expenses paid above ₹10,000 in cash are disallowed in the current year but may become deductible in a subsequent year when payment is made through proper banking channels

Permanent Differences

Permanent differences never reverse — they affect only one year's tax and then disappear. Examples: fines and penalties (deductible in books, permanently disallowed under Section 37), or exempt income like interest on tax-free bonds. AS-22 does not create deferred tax for permanent differences. Only temporary differences drive deferred tax accounting. If you ever find yourself about to create a deferred tax entry for a fine or a donation disallowance, stop — those are permanent and no deferred tax arises.

Deferred Tax Asset vs Deferred Tax Liability — What Is the Difference?

Two situations arise depending on the direction of the timing difference.

Deferred Tax Liability (DTL) arises when your taxable income is lower than your book profit in the current year — meaning you pay less tax now but will pay more in future periods. The WDV depreciation example creates a DTL. You are, in effect, taking a tax benefit today that you will give back to the government later.

Deferred Tax Asset (DTA) arises when your taxable income exceeds your book profit — meaning you pay more tax now than your accounting profit warrants, and will recover this excess in a future period when the timing difference reverses. Common examples include carried-forward business losses (Section 72 of the Income Tax Act), unabsorbed depreciation (Section 32), provisions for doubtful debts, and expenses disallowed in the current year but deductible in the next.

The recognition test — AS-22, Paragraph 15: A DTA should be recognised only when there is reasonable certainty that sufficient future taxable income will be available to absorb it. For unabsorbed depreciation and carried-forward losses specifically, AS-22 imposes a stricter threshold — virtual certainty — supported by convincing evidence such as a confirmed order book, binding long-term contracts, or a strong and consistent history of taxable profits. If that evidence is not there, the DTA must not be recognised, regardless of how optimistic management feels.

Step-by-Step Computation of Deferred Tax

The formula is:

Deferred Tax = Timing Difference × Applicable Tax Rate

The applicable rate is the corporate tax rate expected to apply when the timing difference reverses — not necessarily the current year's rate. For FY 2025-26 (AY 2026-27), the principal rates are:

• Companies under the standard regime with turnover up to ₹400 crore in PY 2023-24: 25% base rate
• Companies under the concessional regime (now codified under the Income Tax Act 2025): 22% base rate

Most CA firms use the base statutory rate without surcharge for deferred tax calculations, because surcharge rates can change year to year and introduce unnecessary volatility into the deferred tax balance. Whatever rate you choose, document it in your accounting policy note and apply it consistently. If the company plans to switch to the concessional regime in the next financial year, compute deferred tax at 22% — not 25% or 30%.

Worked Example: Depreciation Timing Difference

Vishwanath Engineering Pvt Ltd purchases a CNC machine for ₹40,00,000 on 1 April 2025. The company follows the standard tax regime at 25%.

In FY 2025-26, Vishwanath Engineering's taxable income is ₹1,00,000 lower than its book profit. The company pays ₹25,000 less tax to the government this year. That ₹25,000 is a future obligation — hence a Deferred Tax Liability. By around Year 6 or 7, WDV depreciation will have fallen below the SLM book depreciation, the timing difference will start reversing, and the DTL will be drawn down year by year until it is fully extinguished.

Journal Entries for Deferred Tax — With Real Examples

Entry for Creating a Deferred Tax Liability

For Vishwanath Engineering, FY 2025-26:

Deferred Tax Expense A/c            Dr.  ₹25,000
    To Deferred Tax Liability A/c            ₹25,000
(DTL on depreciation timing difference — FY 2025-26)

The ₹25,000 debit flows into the P&L as part of "Tax Expense — Deferred." The corresponding credit of ₹25,000 appears as a Deferred Tax Liability under "Non-Current Liabilities" on the balance sheet, since the reversal is expected beyond 12 months.

Entry for Creating a Deferred Tax Asset

Now suppose Vishwanath Engineering creates a provision for doubtful debts of ₹8,00,000 in FY 2025-26. This provision reduces book profit but is not allowed as a tax deduction until the debt is actually written off. So taxable income is ₹8,00,000 higher than book profit — the company pays ₹2,00,000 extra tax at 25% this year that it will recover in a future period when the debt is written off. This creates a Deferred Tax Asset.

Deferred Tax Asset A/c              Dr.  ₹2,00,000
    To Deferred Tax Benefit A/c              ₹2,00,000
(DTA on provision for doubtful debts — FY 2025-26)

Net position for FY 2025-26: DTA ₹2,00,000 minus DTL ₹25,000 = net DTA of ₹1,75,000 to be shown on the asset side of the balance sheet.

Reversing the DTA When the Event Occurs

When the bad debt is finally written off and allowed as a tax deduction two years later in FY 2027-28:

Deferred Tax Expense A/c            Dr.  ₹2,00,000
    To Deferred Tax Asset A/c               ₹2,00,000
(Reversal of DTA on bad debt written off — FY 2027-28)

Always reverse the deferred tax entry at the same amount as originally recognised. Do not recompute at the new year's tax rate unless a rate change has occurred and you are adjusting the entire opening deferred tax balance to reflect the new rate.

AS-22 vs Ind AS 12 — Key Differences You Must Know

Companies on the Ind AS path — mandatory for listed entities and companies with net worth of ₹250 crore or more — follow Ind AS 12 instead of AS-22. The fundamental approach is different:

Under Ind AS 12, a revaluation of property taken to Other Comprehensive Income (OCI) creates a temporary difference and triggers deferred tax — even though it never passed through the P&L. This broader scope often surprises companies transitioning from AS-22 to Ind AS.

If your SMB client is approaching the Ind AS threshold — net worth of ₹250 crore — plan the deferred tax recomputation 12 to 18 months in advance. All existing DTA and DTL balances need to be recalculated on a balance-sheet basis as of the transition opening date, and this often produces unexpected adjustments in the opening retained earnings.

Balance Sheet and P&L Presentation

Under AS-22 and Schedule III of the Companies Act 2013, the presentation rules are:

• Deferred Tax Asset: shown separately under "Non-Current Assets" as "Deferred Tax Assets (Net)" if the net position across all timing differences is an asset
• Deferred Tax Liability: shown under "Non-Current Liabilities" as "Deferred Tax Liabilities (Net)" if the net position is a liability; components expected to reverse within 12 months are shown under Current Liabilities
• P&L: the net charge or credit for the year is shown under "Tax Expense: Deferred Tax" as a separate line below current tax

AS-22 permits netting of DTA against DTL only when there is a legally enforceable right to set off and both relate to taxes levied by the same authority on the same entity. Do not net deferred taxes across different group entities.

The balance sheet disclosure note must show the movement schedule:

Maintain this schedule throughout the year — not just at March 31. Auditors will ask for it, and reconstructing it after the fact from memory is error-prone.

Common Mistakes to Avoid

1. Creating deferred tax on permanent differences. Fines, penalties, and donations disallowed under Section 80G are permanent — they never reverse. If you create a deferred tax entry on a penalty disallowance, you are overstating assets or understating liabilities.

2. Recognising DTA on losses without sufficient evidence. A startup with three consecutive years of losses cannot simply recognise a DTA on those losses because it expects to be profitable eventually. You need specific, convincing evidence — a signed supply agreement, a confirmed infrastructure contract, documented growth projections backed by real data. Without virtual certainty, the DTA must not be recognised, and any previously recognised DTA must be reversed when circumstances change.

3. Using the current year's rate when the reversal year's rate differs. If your client is planning to opt into the concessional tax regime under the Income Tax Act 2025 from FY 2026-27 (22% base rate), the deferred tax should be computed at 22%, not at the current 25% or 30%. Using the wrong rate creates a deferred tax balance that will require a correction in the year of reversal — generating unexplained P&L movement.

4. Omitting the reversal when the triggering event occurs. When the doubtful debt is written off, the DTA must be reversed in the same period. Forgetting this inflates net assets permanently and understates current-year tax expense — two errors that compound over time.

5. Netting DTA and DTL without meeting the conditions. The right of set-off must be legally enforceable, not merely assumed. If your entity has both a DTA on losses and a DTL on depreciation, you may offset them only if both arise in the same tax jurisdiction for the same legal entity.

6. Confusing MAT credit with Deferred Tax Asset. Minimum Alternate Tax (MAT) credit — excess tax paid under MAT provisions that is recoverable when the company moves to the normal computation in a future year — is a separate line item under "Current Assets" or "Non-Current Assets" on the balance sheet. It is not the same as a deferred tax asset and must not be combined with it.

7. Not disclosing the nature of each timing difference. Schedule III requires you to disclose the major components of deferred tax by nature — depreciation, doubtful debts, carry-forward losses, etc. A single line saying "Deferred Tax Asset: ₹12,00,000" without breakdown is an incomplete disclosure that will attract audit observations.

Key Takeaways

• Deferred tax arises because the Companies Act and the Income Tax Act measure income differently. AS-22 requires you to account for these differences so your P&L reflects the true tax cost of the year's economic activity.
• Only temporary differences create deferred tax — ones that will reverse in future years. Permanent differences such as fines, penalties, and exempt income do not give rise to deferred tax.
• A DTL arises when you pay less tax today and will pay more later (e.g., WDV depreciation exceeds book depreciation). A DTA arises when you pay more tax today and will recover it later (e.g., provision for doubtful debts not yet deductible).
• The DTA recognition test has two levels: reasonable certainty for most timing differences, and the stricter virtual certainty for carry-forward losses and unabsorbed depreciation.
• Use the tax rate expected to apply in the year of reversal — if the company plans to switch to the concessional regime, compute at 22% base rate, not at the current year's rate.
• Ind AS 12 uses a balance-sheet approach broader than AS-22 — if your client is approaching ₹250 crore net worth, begin the transition planning at least a year early.

How corpus Helps

Maintaining deferred tax schedules manually — across multiple clients, each with different asset classes, depreciation methods, provisions, and tax regimes — consumes significant time every financial year-end. corpus tracks fixed asset registers for each client entity and applies both Companies Act Schedule II depreciation and Income Tax WDV rates in parallel, computing the timing difference for every asset automatically. At year-end closure, the deferred tax computation is pre-populated from the asset register; you apply the recognition test for DTA, override where needed, and post the journal entry directly within corpus.

The movement schedule required for the Schedule III balance sheet note is generated automatically from the posted entries — broken down by component, year-on-year, with opening and closing balances. When your statutory auditor requests the deferred tax workings, you have a complete, auditable schedule ready in minutes, not hours of reconstructed spreadsheet work.

Every client's deferred tax history is stored, versioned, and tied to the balance sheet — so year-over-year comparisons, rate-change adjustments, and CARO reporting are handled without the risk of manual errors creeping into a model that nobody touched since last March.

Start managing deferred tax the right way across your entire client portfolio — explore corpus at corpusindia.in.