Imagine you are using a Buy Now, Pay Later scheme for a new smartphone. You get the phone today, and you have more cash in your pocket right now, but you are fully aware that in the coming months, you will have to pay that money back. It is a debt that you have legally committed to. In the business world, a Deferred Tax Liability (DTL) is very similar. It is a tax debt that a company owes to the government, but thanks to some specific rule, it doesn't have to pay it this year.

A DTL usually pops up because the Indian Income Tax department is sometimes more generous than a company’s own accountant. The government might allow you to claim a big expense today to encourage you to grow your business. While this makes your tax bill smaller today, it creates a gap because your company books show you earned more profit than what you are paying tax on. Eventually, this gap closes and you have to pay that saved tax back. It is not a permanent saving, it is just a delay.

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What is Deferred Tax Liability (DTL)?

Deferred Tax Liability is the amount of income tax that a company will have to pay in future periods. This happens because of timing differences in situations where an item is recorded in the company’s profit statement at one time but is recorded in the tax return at a different time. For an Indian business owner, DTL is a reminder on the balance sheet: You saved tax today, but keep some cash ready for tomorrow.

Under Ind AS 12 or AS 22, it is mandatory for Indian companies to show this liability so that investors aren't misled into thinking the company is tax-free just because it paid less this year.

How is Deferred Tax Liability Created?

The most common way a DTL is born is through Depreciation.

Company Books: Use a Straight Line Method (same amount every year).
Income Tax Act: Uses Written Down Value (higher amount in the first few years).

When the Tax Dept allows a higher deduction, your Taxable Profit goes down. You pay less tax today. But in later years, the tax deduction will become very small, and your tax bill will jump up.

Other Common Reasons:

Accrued Income: You earned interest on a fixed deposit. Your books show it as profit now. But the Tax Dept says, Pay tax only when the bank actually credits the interest to your account.
Preliminary Expenses: Some startup costs are written off in 1 year in books but must be spread over 5 years for tax purposes.

DTL Calculation (As per 2026 Tax Rules)

To calculate DTL, we find the difference between the Book Value and the Tax Value of an asset and multiply it by the current tax rate. For the financial year 2025-26 (Assessment Year 2026-27), the standard rate for most Indian companies is 25.17%.

The Formula:

Deferred Tax Liability = (Accounting Income - Taxable Income) X Tax Rate

Example: The Factory Machine

Rajesh Manufacturing Ltd buys a machine for ₹20,00,000.

Item

Accounting Books (10% SLM)

Income Tax (15% WDV)

Depreciation

₹2,00,000

₹3,00,000

Profit (Before Dep.)

₹10,00,000

Net Profit

₹8,00,000

₹7,00,000

Calculation:

The Gap: ₹8,00,000 (Book) - ₹7,00,000 (Tax) = ₹1,00,000
Tax Rate (2026): 25.17%
DTL: ₹1,00,000 × 25.17% = ₹25,170

Rajesh saved ₹25,170 in taxes this year. This amount will be shown as a Deferred Tax Liability on the balance sheet.

Difference Between DTL and DTA

It is very important to know which side of the fence you are on. Here is a quick comparison:

Feature

Deferred Tax Liability (DTL)

Deferred Tax Asset (DTA)

Simple Meaning

Future Tax Payable.

Future Tax Saving.

Current Status

You paid less tax than you should.

You paid more tax than you should.

Main Cause

Higher tax depreciation early on.

Provisions for expenses/losses.

Formula Result

Accounting Profit > Taxable Profit.

Taxable Profit > Accounting Profit.

Investor View

A future cash drain.

A future cash benefit.

Summary of Indian Tax Rates (2026) for DTL Calculation

When calculating DTL, you must use the tax rate that is expected to apply when the liability is settled.

Type of Business

Tax Rate (including Surcharge/Cess)

Domestic Co (Opted for 115BAA)

25.17%

New Manufacturing (115BAB)

17.16%

Large Companies (Turnover > 400cr)

34.94% (Approx)

Frequently Asked Questions (FAQs)

Is DTL a bad thing for a company?

Not necessarily. It actually means the company is keeping more cash today to reinvest in the business. It’s like an interest-free loan from the government.

When does DTL have to be paid?

It reverses when the timing difference ends. For machinery, this usually happens in the later years of the machine's life when tax depreciation becomes lower than book depreciation.

Does every company have DTL?

Almost every company that owns significant assets (like machinery, cars, or buildings) will have some DTL due to depreciation differences.

Can I avoid paying DTL?

No. As long as the company continues to operate and stay profitable, these timing differences will eventually catch up, and the tax will become due.

Where do I find DTL in a Balance Sheet?

Look under the Non-Current Liabilities section. It is never shown as a current (short-term) liability.

What if the company shuts down?

If a company stops operating, the DTL is usually adjusted or settled during the final winding-up process of the business.

Does DTL affect Dividend distribution?

Indirectly, yes. Since DTL is an expense that reduces Profit After Tax (PAT), it might slightly reduce the amount of profit available to be given out as dividends.

Is DTL calculated on Gross Profit?

No, it is calculated on the Temporary Differences arising from specific items like depreciation or income recognition.

Can DTL turn into DTA?

Yes. If the situation reverses (for example, if a company starts incurring huge losses), the net position could shift from a liability to an asset.

Is DTL the same as Tax Evading?

Absolutely not! DTL is a perfectly legal and standard accounting practice. It is about when you pay, not if you pay.

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