Deferred Tax Liability

  • Author :
  • TATA AIG Team
  • Published on :
  • 02/01/2024

Terms like Deferred Tax Asset (DTA) and Deferred Tax Liability (DTL) may seem like jargon to those who are unfamiliar with the complex world of finance and accounting. But comprehending these ideas is essential to appreciating the state of a business's finances and its upcoming tax liabilities.

In this blog post, we will debunk the overall journey of deferred tax meaning, its definition, comparison with deferred tax assets, and discuss the critical role that it plays in the accounting industry.

Deferred Tax Meaning

One crucial component of a company's balance sheet is a deferred tax. Generally, deferred income tax affects the balance sheet in either a positive or negative way. This balance sheet entry may be represented as an asset or a liability.

If someone has received a tax credit that they can use in the future after paying advance taxes, that credit will be considered an asset. On the other hand, a business will be viewed as having a liability if it is required to pay more taxes in the future.

The gap in deferred assets and liabilities happens when there is a difference in timing. This shows that the taxable income and book income do not match. This can leave a temporary or permanent impact on the firm’s future

What is a Deferred Tax Asset?

A company's deferred tax asset shows that it has supplies or cash on hand to cover unforeseen expenses. The balance sheet shows that either the company has made an overpayment or has paid the applicable tax in advance.

People may be reimbursed for any excess money they have paid. A business should ideally be able to use deferred assets in the event that tax laws change.

Take the introduction of tax exemptions in the annual Union Budget, for example. It may also happen if a business has lost money over the course of the fiscal year. The losses incurred can then be balanced by the assets.

Deferred tax asset generation may result from the following factors:

When a tax is imposed in advance on revenue.

The taxing authority has already factored in expenses.

Assets and liabilities are treated differently under tax laws.

What is Deferred Tax Liability?

The term "deferred tax liability" refers to a company's outstanding tax obligations. When a business promises to pay back future taxes while underpaying its tax obligations, it shows up on the balance sheet.

People should be aware that a company's liability does not imply that it has not made any tax payments at all. Rather, the business agrees to pay the tax at a later time.

Deferred tax liability calculation indicates on a balance sheet that the taxable income is lower than the revenues reported in the financial statement of the company.

The following circumstances are deferred tax liability example:

When a business uses its profits to reward its investors.

Businesses that use dual accounting. They either give financial statements to tax professionals or retain an extra copy for their own use.

Businesses attempt to defer paying taxes on their current profits until later. They use the extra income for business operations rather than paying tax. Increasing profits is their goal.

Deferred Tax Liabilities VS Deferred Tax Asset

In order to better understand the main distinctions between deferred tax liabilities and assets, let's compare them:

Parameters  Deferred Tax Asset (DTA) Deferred Tax Liability (DTL)
What is it? Differentiated tax liability refers to the situation where a company accrues tax in the current year but pays it in subsequent years. Deferred tax assets are those for which the company makes an advance payment in the current period but which will be accumulated in a later period.
When is an entry made? When a company's income tax reports mention lower profits than what the income statement shows. When a company's income tax reports mention higher profits than what the income statement shows.
How is it treated? Deferred tax liabilities are listed by businesses under non-current liabilities on the balance sheet. Deferred tax assets are listed by businesses under non-current assets on the balance sheet.

The Importance of Virtual Certainty in DTA

The concept of "virtual certainty" is important in the world of Deferred Tax Assets. This refers to the company's reasonable assurance that it will have enough future taxable income to realise the benefits associated with its Deferred Tax Assets. Without virtual certainty, DTA recognition may be delayed, potentially resulting in financial statement adjustments.

It is critical to ensure virtual certainty because it prevents overstatement of assets and income. Companies must evaluate their ability to use DTAs in light of previous performance, future business plans, and the economic environment. This evaluation is necessary not only for accurate financial reporting but also for maintaining transparency with stakeholders.

DTA/DTL Vs Tax Holiday and MAT

Under Section 0A and 10B of Income Tax Act, a Tax Holiday is a benefit granted to a newly established organisation in a free trade zone, 100% export-oriented undertaking, etc. To promote the production and consumption of particular goods, the government temporarily waives some taxes under certain restrictions.

When there is a tax holiday, the deferred tax reverses for the timing difference. It should not be taken into account when the business is having a tax holiday. The origination year is when deferred tax related to the timing difference that reverses after the tax holiday must be recognised.

An organisation must pay Minimum Alternate Tax, or MAT, if its tax liability under the regular provisions of the IT Act is less than the tax calculated at 18.5% of book profit. It falls under the IT Act's Section 115JB. There is no difference between taxable and book income as a result of MAT. It is incorrect to treat MAT credit as a deferred tax asset in accordance with AS22.

In order for the company's shareholders to be aware of all the underlying liabilities (and assets) the company has at the end of a financial year, deferred tax assets and liability must be recorded in the company's book. These are beneficial for auditing purposes as well.


The deferred tax liability formula is a critical component of tax accounting that necessitates careful thought and strategic planning. Understanding the complexities of Deferred Tax Liability becomes critical for accurate financial reporting and effective tax management as businesses operate in an ever-changing financial landscape.

Businesses can navigate the complexities of deferred tax calculation and Tax Liability and improve their overall financial health by understanding why it exists, how it affects financial statements, and implementing prudent management strategies.

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How to Calculate deferred tax?

The temporary differences between accounting and tax values are multiplied by the applicable tax rate to determine deferred tax.

Is deferred tax liability carrying value?

Yes, deferred tax liability is recorded on the balance sheet because it represents future tax obligations due to temporary differences. As these differences reverse or change, the carrying value is adjusted over time.

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