AS 22 Deferred Tax: Assets, Liabilities, and Recognition

AS 22 deferred tax is the accounting entry Indian companies make under the Institute of Chartered Accountants of India’s Accounting Standard 22 to align their reported tax expense with their accounting profit, by recognizing the future tax effect of timing differences between book income and taxable income. Without it, a single transaction taxed in one year but booked in another would distort profit after tax. The standard smooths that distortion by putting a deferred tax asset or a deferred tax liability on the balance sheet.

Timing Differences Create Deferred Tax; Permanent Differences Do Not

Accounting profit and taxable income rarely match. AS 22 splits the reasons into two buckets, and only one of them triggers a deferred tax entry.

Timing differences originate in one period and reverse in later periods. The total amount recognized under both systems is eventually the same; only the year of recognition differs. AS 22 defines them as differences that “originate in one period and are capable of reversal in one or more subsequent periods.”¹ These are what create deferred tax.

Depreciation is the most common source. The Income Tax Act sets its own written-down-value rates for different asset classes,² while the Companies Act prescribes useful lives that spread depreciation differently across years. Tax depreciation typically runs ahead of accounting depreciation in the early years, then falls behind later. The gap in any given year is a timing difference.

Section 43B of the Income Tax Act creates another familiar timing difference. Certain expenses are deductible for tax only in the year they are actually paid, even if the liability was booked earlier. Covered items include employer contributions to provident fund and gratuity fund, interest on loans from financial institutions or scheduled banks, leave encashment liabilities, and payments to micro and small enterprises beyond the prescribed time limit.³ Book a bonus of ₹10 lakh in March and pay it in April, and the expense hits accounting profit this year but taxable income next year.

Business losses and unabsorbed depreciation carried forward under tax law also produce timing effects, because they will reduce taxable income in later years. Business losses can be carried forward for eight years; unabsorbed depreciation carries forward indefinitely.⁴

Permanent differences never reverse. A regulatory penalty reduces book profit but is disallowed for tax forever. A weighted deduction for scientific research at 150% of actual spend gives a tax benefit on 50% that the books never see. AS 22 is explicit that permanent differences do not generate deferred tax assets or liabilities.¹

When You Book a Liability and When You Book an Asset

The direction of the future tax effect decides which side of the balance sheet the entry lands on.¹

A deferred tax liability arises when the company pays less tax today than its accounting profit would suggest, with the difference owed in a future year. Accelerated tax depreciation is the standard case. If tax depreciation is ₹50,000 and accounting depreciation is ₹25,000, taxable income drops by an extra ₹25,000 this year, but that ₹25,000 gap will reverse later when tax depreciation runs out and book depreciation continues. The company records a liability now for the tax it will owe then.

A deferred tax asset arises when the company pays more tax today than its accounting profit warrants, with a future benefit to come. Section 43B expenses fit here: the expense has already reduced book profit, but the tax deduction waits for actual payment. When payment happens, taxable income falls and the company collects the benefit. Carry-forward tax losses work the same way, because they will shelter future taxable income.

How to Calculate It

The mechanics are simple: identify the timing difference, apply the tax rate. AS 22 requires the rate to be one enacted or substantively enacted by the balance sheet date, and it prohibits discounting deferred tax balances to present value no matter how far away the reversal sits.¹

A three-year walkthrough at a 30% rate:

Year 1: Tax depreciation exceeds book depreciation by ₹25,000. Book a deferred tax liability of ₹7,500. Current tax is lower, but total tax expense in the profit and loss account matches accounting profit.
Year 2: The difference reverses by ₹25,000. Reverse the ₹7,500 liability. Current tax rises, deferred tax falls, total tax expense stays aligned with accounting profit.
Year 3: Book depreciation now exceeds tax depreciation by ₹15,000. Book a deferred tax asset of ₹4,500. Total tax expense again tracks accounting profit.

That smoothing is the entire point of the standard.

Which Rate to Apply

For assessment year 2026–27, the base rate for domestic companies is 25% where turnover in the relevant previous year was up to ₹400 crore, and 30% otherwise. Companies that have opted for Section 115BAA pay 22%, with an effective rate of roughly 25.17% after a flat 10% surcharge and 4% health and education cess. New manufacturing companies under Section 115BAB pay 15% plus surcharge and cess.⁵

Where different rates apply to different income slabs, AS 22 permits the use of average rates.¹ A company that switches tax regimes between years must remeasure existing deferred tax balances at the new rate, with the adjustment routed through the profit and loss account.

Recognition Thresholds for Deferred Tax Assets

Deferred tax liabilities are always recognized in full. Deferred tax assets face a certainty test, because they only pay off if the company earns enough taxable income later to actually use them.¹ AS 22 sets two thresholds.

For deferred tax assets from ordinary timing differences, such as Section 43B expenses or the normal depreciation gap, the test is reasonable certainty of sufficient future taxable income. Profit projections, past performance, and business plans usually establish this for a profitable company.

For deferred tax assets arising from unabsorbed depreciation or carry-forward tax losses, the bar rises to virtual certainty supported by convincing evidence.¹ Forecasts alone will not do. The evidence must exist in concrete form at the reporting date: legally binding contracts, confirmed export orders, or comparable commitments that make future profits close to certain. A loss-making company that recognizes a large deferred tax asset without meeting this standard is overstating its net worth.

Recognition is not final. Management reviews deferred tax asset carrying amounts at each balance sheet date. If prospects have deteriorated, the asset is written down. If a company that could not previously recognize an asset now meets the threshold, the standard allows recognition at that later date.¹

Presentation and Disclosure

Deferred tax assets and liabilities are shown separately from current tax items on the balance sheet, under a separate heading distinct from current assets and current liabilities.¹ A single net figure is permitted only where the company has a legally enforceable right to set off current tax assets against current tax liabilities and both deferred tax items relate to taxes levied by the same governing tax laws.

The notes must break down the major components of the deferred tax balance. If a net deferred tax liability of ₹20 lakh consists of ₹35 lakh from depreciation differences offset by ₹15 lakh from Section 43B items, each component is disclosed. Where a company with unabsorbed depreciation or carry-forward losses has recognized a deferred tax asset, it must also disclose the nature of the evidence relied on to meet the virtual certainty test.¹

When AS 22 Does Not Apply

Companies required to follow Indian Accounting Standards apply Ind AS 12 instead of AS 22. Mandatory Ind AS adoption covers listed companies, companies with net worth above ₹250 crore, and their subsidiaries and holding companies. Below those thresholds, Indian GAAP companies continue to apply AS 22. The two standards use different mechanics, and Ind AS 12 uses a single “probable” threshold for all deferred tax assets rather than the two-tier reasonable-and-virtual-certainty test. If you are unsure which framework applies, check the basis of preparation note in the most recent annual report.

1
ICAI. Accounting Standard (AS) 22
2
Income Tax Department. Rule Number New Appendix I – Table of Rates at Which Depreciation Is Admissible
3
Income Tax Department. Income Tax Act 1961 – Section 43B
4
Income Tax Department. Set Off/Carry Forward of Losses
5
Income Tax Department. Tax Rates – Assessment Year 2026-27