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What Is Deferred Tax

Nupur Wankhede

Learn about Deferred Tax, its meaning, types, calculation methods, and its impact on financial statements.

Deferred Tax is a concept in accounting that reflects the difference between the amount of tax a company owes in the current period and the amount that is recorded on its financial statements. This occurs due to temporary differences between accounting rules and tax rules. Understanding deferred tax is commonly associated with accurate financial reporting and tax planning.

Deferred Tax Meaning

Deferred tax refers to the taxes a company will either owe or recover in the future due to temporary differences between its accounting income and taxable income. Essentially, it reflects the taxes that are delayed due to differences in the timing of income and expense recognition for tax and accounting purposes.

What Is Deferred Tax in Accounting

In accounting, deferred tax represents the difference between tax expense recognised in the income statement and the actual tax paid or payable in the current period. This is usually due to differences in the recognition of certain items for accounting and tax purposes, like depreciation or provisions.

Types of Deferred Tax

There are two main types of deferred tax:

  • Deferred Tax Asset (DTA)

Arises when a company overpays its taxes or has deductible temporary differences. This can result in future tax benefits.

  • Deferred Tax Liability (DTL)

Deferred tax liability arises when a company has underpaid its taxes due to taxable temporary differences. This represents future tax payments.

Deferred Tax Calculation

To calculate Deferred Tax, follow these basic steps:

  1. Identify the temporary differences

    Determine the difference between the carrying value of an asset or liability for accounting purposes and its value for tax purposes

  2. Apply the tax rate

    Multiply the temporary difference by the current tax rate

  3. Calculate the deferred tax

This gives either a Deferred Tax Asset or Liability

Deferred Tax Example

For example, if a company has a temporary difference of ₹50,000 in depreciation between its financial accounting records and tax records, and the applicable tax rate is 30%, the deferred tax liability would be ₹15,000 (₹50,000 × 30%).

Why Deferred Tax Arises

Deferred tax arises because of timing differences in the recognition of revenues and expenses. Some common reasons for deferred tax include:

  • Depreciation differences

Companies may use different depreciation methods for accounting and tax purposes

  • Revenue recognition

Revenue may be recognised earlier for accounting purposes than for tax reporting

  • Provision for expenses

Certain expenses may be deductible for tax purposes but are not yet recognised for accounting purposes

Deferred Tax Liability (DTL)

Deferred Tax Liability arises when a company’s taxable income is less than its accounting income due to temporary differences. For example, accelerated depreciation for tax purposes creates a DTL, as the company will pay more taxes in the future when the depreciation benefits expire.

Deferred Tax Asset (DTA)

Deferred Tax Asset occurs when a company has paid more taxes than its accounting profit indicates, often because of deductible temporary differences. For example, if a company recognises a provision for bad debts that is not yet deductible for tax purposes, it creates a DTA.

Deferred Tax vs Tax Payable

Here's a comparison between Deferred Tax and Tax Payable:

Aspect Deferred Tax Tax Payable

Definition

Taxes that are delayed to future periods due to temporary differences

Taxes due in the current period based on taxable income

Impact on Financials

Appears as an asset (DTA) or liability (DTL) on the balance sheet

Appears as a current liability on the balance sheet

Timing

Deferred for future periods

Payable within the current period

Advantages of Deferred Tax

Some key benefits of Deferred Tax include:

  • Tax Deferral

Deferred tax allows companies to delay tax payments, improving short-term cash flow

  • Planning

It is often used in the context of future tax planning, helping manage financial strategies

  • Improved Liquidity

By deferring tax obligations, companies can enhance liquidity in the present period

Limitations of Deferred Tax

Despite its benefits, Deferred Tax has some limitations:

  • Future Obligation

DTL represents future tax obligations that need to be settled, which can affect future cash flows

  • Complexity

Calculating and tracking deferred tax can be complicated, especially when dealing with multiple temporary differences

  • Uncertainty

The tax laws and rates may change, affecting the accuracy of the deferred tax calculation

Deferred Tax in Financial Statements

Deferred tax is reported in the balance sheet under assets (DTA) or liabilities (DTL), depending on the company’s tax position. It is also reflected in the income statement as a tax expense or benefit when the temporary differences reverse over time. Proper disclosure of deferred tax ensures transparency in financial reporting.

Conclusion & Key Takeaways

Deferred Tax is a key concept in financial accounting, affecting how companies manage their tax obligations. 

The main takeaways are:

  • Deferred tax arises from temporary differences between accounting and tax income

  • It can be an asset (DTA) or a liability (DTL), depending on whether the company will pay or recover taxes in the future

  • Deferred tax helps manage future tax obligations but can introduce complexity and future obligation

Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

What is deferred tax in simple terms?

Deferred tax refers to taxes that a company will either owe or recover in the future due to differences in accounting and taxable income.

How is deferred tax calculated?

Deferred tax is calculated by identifying the temporary differences between accounting and tax income and multiplying them by the applicable tax rate.

What causes deferred tax?

Deferred tax is caused by timing differences in the recognition of revenue and expenses between accounting and tax purposes.

What is deferred tax with example?

An example of deferred tax is when a company recognises depreciation on an asset for accounting purposes but accelerates depreciation for tax purposes, creating a deferred tax liability.

What is the difference between DTA and DTL?

Deferred Tax Asset (DTA) arises when a company can recover taxes in the future, while Deferred Tax Liability (DTL) represents taxes a company will owe in the future.

Is deferred tax an asset or liability?

Deferred tax can be either an asset (DTA) or a liability (DTL), depending on whether it results in future tax savings or obligations.

Where does deferred tax appear in financial statements?

Deferred tax appears in the balance sheet as either an asset or liability and is also reflected in the income statement as a tax expense or benefit when the temporary differences reverse.

Hi! I’m Nupur Wankhede
BSE Insitute Alumni

With a Postgraduate degree in Global Financial Markets from the Bombay Stock Exchange Institute, Nupur has over 8 years of experience in the financial markets, specializing in investments, stock market operations, and project management. She has contributed to process improvements, cross-functional initiatives & content development across investment products. She bridges investment strategy with execution, blending content insight, operational efficiency, and collaborative execution to deliver impactful outcomes.

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