Deferred Tax: Meaning, Types & Calculation Explained

Imagine you are running a small cafe in Mumbai. You bought a high-end coffee machine for ₹5 Lakhs. Now, your CA tells you that for your own records, this machine will last 5 years, so you should count a loss (depreciation) of ₹1 Lakh every year. But when you go to the Income Tax department, they have a different rulebook. They might say, No, take a ₹2 Lakh discount this year itself!

Suddenly, your personal books and the government's books don't match. This gap creates a timing issue. You might pay less tax today because of the government's rule, but you know that in the future, this will balance out and you’ll have to pay more. This future tax or tax adjustment is exactly what we call Deferred Tax. It is not a tax you pay today; it is a promise or a warning on your balance sheet about what will happen tomorrow.

What exactly is Deferred Tax?

Deferred Tax is like a post-dated cheque for your taxes. It represents the tax that a company will either have to pay or will save in the future because of the differences between Accounting Profit (what you show in your books) and Taxable Profit (what the Income Tax department sees).

In India, companies follow the Companies Act, 2013 for their accounts, but they pay taxes according to the Income Tax Act, 1961. Because these two laws have different rules for things like depreciation and expenses, the profit numbers rarely match.

Why does it happen?

1. Depreciation Differences: The biggest culprit. Tax laws often allow accelerated depreciation (higher deduction early on) to encourage business, while accounting rules spread it evenly.
2. Disallowed Expenses: Sometimes you spend money on employee bonuses or gratuity. You count it as an expense now, but the Tax Dept says, Only deduct it when you actually pay the cash.
3. Losses: If your business had a bad year, you can carry forward those losses to reduce future taxes.

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The Two Faces of Deferred Tax

Deferred Tax isn't always a liability (burden); sometimes it is an asset (benefit). Let’s break them down.

1. Deferred Tax Liability (DTL) – Pay Later

This happens when your current tax bill is lower than what your accounts suggest. You are basically pushing your tax burden to the future.

• Logic: Taxable Income < Accounting Income
• Simple Example: You claimed more depreciation in your tax return than in your books. You saved tax today, but you will have less depreciation to claim later, meaning higher taxes in the future.

2. Deferred Tax Asset (DTA) – Save Later

This is the good kind. It means you have paid more tax today than your accounting profit suggests, or you have losses that will save you tax in the coming years.

• Logic: Taxable Income > Accounting Income
• Simple Example: You made a provision for Bad Debts (customers who might not pay). Your accounts count this as a loss, but the Tax Dept says, We only believe it when the customer actually runs away. So, you pay higher tax now and get the benefit later.

Latest Tax Rates in India (2026 Update)

To calculate Deferred Tax, we must use the rates that will be applicable when these differences reverse. As of the Assessment Year 2026-27, here are the effective corporate tax rates in India:

Category of Company

Base Tax Rate

Effective Rate (incl. Surcharge & Cess)

New Manufacturing Companies (u/s 115BAB)

15%

17.16%

Domestic Companies (u/s 115BAA - No incentives)

22%

25.17%

Companies with Turnover < ₹400 Cr

25%

26% to 29.12%

Other Large Domestic Companies

30%

33.38% to 34.94%

Note: For most calculations, the Substantively Enacted rate (usually 25.17% for most mid-to-large Indian firms) is used.

How to calculate Deferred Tax?

You don't need to be a math genius to find the Deferred Tax amount. Just follow this simple three-step formula:

Step 1: Find the Temporary Difference

Temporary Difference = Accounting Value - Tax Value

Step 2: Apply the Tax Rate

Deferred Tax = Temporary Difference X Applicable Tax Rate

Step 3: Identify if it's DTA or DTL

• If Accounting Profit > Tax Profit, it is a Liability (DTL).
• If Accounting Profit < Tax Profit, it is an Asset (DTA).

Real-Life Example: The Machinery Case

Let’s say Rahul Electronics Pvt Ltd buys a machine for ₹10,00,000 in April 2025.

Particulars

Accounting (Books)

Income Tax (Tax Return)

Depreciation Rate

10% (Straight Line)

15% (WDV)

Depreciation Amount

₹1,00,000

₹1,50,000

Profit before Dep.

₹5,00,000

₹5,00,000

Net Profit (Base)

₹4,00,000

₹3,50,000

Calculation:

1. Difference in Profit: ₹4,00,000 - ₹3,50,000 = ₹50,000
2. Tax Rate (2026): 25.17%
3. Deferred Tax: ₹50,000 × 25.17% = ₹12,585

Since the Tax Profit is lower, Rahul is paying less tax now. Therefore, this ₹12,585 will be recorded as a Deferred Tax Liability on the balance sheet.

Difference Between Deferred Tax and Current Tax

It’s easy to get confused between the two. Think of it like your electricity bill: Current Tax is the bill for the units you used this month. Deferred Tax is like a security deposit or a pending adjustment that will show up in next year's bill.

Feature

Current Tax

Deferred Tax

When to pay?

Must be paid this year.

Paid/Saved in future years.

Basis

Based on Tax Laws only.

Based on the gap between Book and Tax.

Impact

Affects your Cash Flow today.

Affects your Balance Sheet strength.