Deferred Tax Liability: Meaning, Calculation & Example

Written by : Knowledge Centre Team

2026-01-10

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Deferred Tax Liability (DTL) is one of the important factors in a company's financial statement. It is a form of adjustment made at the end of the year and affects the income tax calculation of the business for the current year and the coming years.

The company's financial statement has a section on book profits. The section details are calculated as per the rules of the Companies Act. The taxable profit is calculated based on the provisions of the IT Act. Certain items are allowed or disallowed each year for tax purposes. As a result, there is a difference between the book profit and taxable profit. This difference between taxable income and accounting income can be classified into permanent differences and timing differences:

Permanent Difference: If the difference between tax income and book income cannot be reversed in subsequent years.
Temporary/Timing Difference: If the difference between tax income and book income can be reversed in the upcoming years.

This difference results in the creation of a deferred tax liability or asset.

Key Takeaways

Deferred Tax Liability (DTL) arises when tax is incurred in one year but paid in a future year due to a timing difference.
Deferred Tax Assets (DTA) represent tax overpayments that can be used to reduce future tax liabilities.
Proper DTA/DTL management helps businesses to optimise tax planning and cash flow.
Deferred tax implications vary based on accounting standards and tax regulations.
DTA/DTL should be accurately recorded for transparency in financial reporting and auditing.

What is Deferred Tax Liability With Example?

Deferred Tax Liability is created when a tax obligation is accumulated in one financial year but is due in subsequent years. It arises due to the difference in timing between when the tax was accrued and when it is due to be paid. When a company depreciates its assets differently from the IT department, a variance from the law creates a temporary discrepancy in the company's financial statements and corresponding tax reports.

To understand what deferred tax liabilities are with an example, let’s discuss instalment sales. The company is allowed to recognise full income from the instalment sale, while tax laws require companies to recognise the income when instalment payments are made. This creates a temporary positive difference and is referred to as deferred tax liability.

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What is a Deferred Tax Asset?

Deferred Tax Assets are balance sheet items that reduce a company's taxable income in the future. Such an entry may be created on the company's balance sheet when a business overpays its taxes.

The additional money the company paid gets returned as tax relief. Hence, the overpayment becomes an asset for the company.

For example, a television manufacturer estimates that 2% of the total TVs sold will come back to them for warranty repair. The company's total revenue for the year is ₹30 lakh, and the warranty expense is ₹60,000. Hence total taxable income is ₹29.4 lakh.

However, the deduction is not considered by the IT department, and hence the company will pay tax on ₹30 lakh at a 30% interest rate. However, the difference between the tax payable and the actual taxes paid (i.e., tax on ₹60,000 at 30%) is a deferred tax asset. In this example, DTA will be (30% of ₹ 60000) ₹18000.

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Deferred Tax Liability vs Deferred Tax Asset

Deferred tax liability or asset arises due to the difference in accounting principles and tax guidelines. Below is a detailed comparison between the two:

Parameters	Deferred Tax Liability	Deferred Tax Asset
What is it?	Deferred tax liabilities are taxes a company will have to pay in the future because of temporary differences in how income is taxed and reported	Recognised when timing differences are expected to reduce income tax payable in future periods when they reverse
When an entry is made	When profits in a company's income statement are higher than what is mentioned in its income tax reports.	When profits in a company's income statement are lower than what is mentioned in the income tax reports.
How is it treated?	Businesses record deferred tax liabilities in the balance sheet under non-current liabilities.	Businesses record deferred tax assets in the balance sheet under non-current assets.

Role of Virtual Certainty in DTA

A Deferred Tax Asset is recognised only if there is a virtual certainty of future realisation. Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, DTA is recognised only to the extent that there is virtual certainty supported by convincing evidence. DTA is realised only when the company reliably estimates sufficient future taxable income. A virtual certainty test has to be done every year by the company. If the conditions are not met, the DTA has to be written off.

For example, a company has projected future profits based on sales estimates and plans to restructure and submit them to the bank for a loan. In such cases, it is considered convincing evidence for virtual certainty. On the other hand, virtual certainty will not be concrete if only a binding export order is provided that may be cancelled anytime. Virtual certainty is based on convincing evidence available as of the reporting date in concrete form.

DTA/DTL vs Tax Holiday & MAT

Tax Holiday is a benefit provided to a new organisation established in a 100% export-oriented undertaking (EOU)s, free trade zones, etc, under Section 10A and 10B of the Income Tax Act. The government exempts certain taxes for a limited period, subject to specific conditions, to encourage the production and consumption of specific items.

Note: Sections 10A and 10B of the Income Tax Act, 1961, are special provisions that previously allowed for significant tax deductions on profits derived from exports by specified eligible undertakings. The benefits under these sections are generally not available for A.Y. 2012–13 or thereafter.

For timing differences, deferred tax reversals occur during the period of a tax holiday. It should not be considered during the company's tax holiday period. Deferred tax related to the timing difference that reverses after the tax holiday must be recognised in the originating year.

Minimum Alternate Tax or MAT is a tax that an organisation has to pay if its tax payable as per the normal provision of the IT Act is less than the tax computed at 15% of the book profit. It comes under Section 115JB of the IT Act. MAT does not give rise to any difference between taxable income and book income. In accordance with AS22, it is not right to consider MAT credit as a deferred tax asset.

Deferred tax liability and assets must be recorded in the company's books so that its shareholders are aware of all the underlying liabilities (and assets) the company has at the end of a financial year. These are also useful for auditing purposes.

Examples of Deferred Tax Liability & Asset

Here are the examples of deferred tax liability and assets in the form of a table:

Deferred Tax Liability:

Assumptions:

Company’s Book Profit before Tax = ₹1,500
Depreciation as per the Companies Act (book depreciation) = ₹300
Depreciation as per the Income Tax Act (tax depreciation) = ₹500
Income Tax Rate = 20% (Assumed, for the illustration)

Particular	Amount (₹)
Book Profit before depreciation	1500
Less: Book Depreciation	(300)
Book Profit after Depreciation	1,200
Less: Tax Depreciation	(500)
Taxable Profit	1000
Tax Payable (1,000 × 20%)	200
Tax Payable if Book Depreciation was used (1,200 × 20%)	240
Deferred Tax Liability	40

Explaination:

A company records a profit of ₹ 1,500 before depreciation. It applies a ₹300 depreciation in its books, reducing the profit to ₹1,200. However, tax laws allow ₹500 depreciation, lowering taxable profit to ₹1,000. As a result, the company pays ₹200 in tax instead of ₹240, saving ₹40 temporarily. This amount will be paid in the future, creating a Deferred Tax Liability (DTL).

Deferred Tax Assets

Assumptions:

Company’s Book Profit before Tax =- ₹1,000
Provision for Bad Debts (as per books)- = ₹200
Income Tax Rate -= 20% (Assumed, for the illustration)

Particular	Amount
Book Profit before tax	1000
Less: Provision for Bad Debts (charged in books)	-200
Accounting profit after provision (as per books)	800
Taxable Profit (as per tax laws)	1200
Tax Rate	20%
Tax Payable on ₹1200	240
Tax Payable on ₹1,000 (if bad debts allowed	200
Excess Tax Paid (Deferred Tax Asset)	40

Explaination:

A company reports ₹1,000 profit after tax adjustments but sets aside ₹200 for bad debts in its books. If this provision is not allowed as a deduction in the current year for tax purposes, the taxable profit is ₹1,200, leading to a ₹240 tax liability at 20%. If bad debts were allowed in the current year, the tax would be ₹200, creating a ₹40 Deferred Tax Asset (a future tax benefit expected when the deduction is allowed in a later year).

Conclusion

Deferred tax liabilities and assets play a crucial role in financial reporting. They help businesses account for the tax effects of timing/temporary differences and maintain compliance with accounting standards.

Companies must assess these figures regularly to ensure accurate financial disclosures and to appropriately recognise deferred tax (and review them at each reporting date).

Glossary

Bad Debts: An amount owed by customers that is unlikely to be collected
Taxable Income: The portion of income on which a company or individual must pay a tax
Depreciation: The decrease in an asset's value over time due to use or ageing
Provision for Bad Debts: An amount set aside for expected customer payments that may not be received
Accounting Standards: Rules that guide how financial statements are prepared and reported

FAQs

DTA arises due to expenses disallowed for tax now but deductible later (e.g., bad debts).

DTL arises due to higher tax deductions now, leading to lower taxable income (e.g., depreciation).

Yes, if legally enforceable and related to the same tax jurisdiction.

Deferred tax assets are recorded under non-current assets.

A deferred tax liability arises when a transaction is recognised differently in financial statements and tax returns, creating a temporary timing difference. This leads to lower tax payments in the current period and higher tax payments in a future period when the difference reverses.

As a result, the accounting income reported in the financial statements exceeds the taxable income declared to the tax authorities, and the resulting additional tax obligation is carried forward to a later period.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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