Deferred Tax Liability: Meaning and Calculation Method

Deferred tax liability represents future tax obligations arising from temporary differences between a company's accounting income and taxable income. It appears on the balance sheet, indicating taxes that will be paid in subsequent periods.
Check life insurance policies
4 min
12-March-2025

A deferred tax liability (DTL) is an accounting term that represents taxes a company owes but has not yet paid. It arises due to temporary differences between accounting income and taxable income, usually because of differences in depreciation methods, revenue recognition, or expense deductions.

In simpler terms, companies may record higher profits in their financial statements than in their tax filings due to tax laws. This creates a future tax obligation, which is recorded as a liability on the balance sheet.

For Indian businesses, deferred tax liabilities are common when companies use accelerated depreciation under the Income Tax Act while following different depreciation rules under accounting standards. Over time, as the temporary differences reverse, the company will need to pay these deferred taxes.

Understanding DTL is crucial for businesses as it affects cash flow planning and financial reporting. Companies must account for it accurately to comply with financial regulations and taxation policies in India.

Example of deferred tax liability

A deferred tax liability arises when financial reporting and tax calculations differ. A common example is depreciation.

Suppose an Indian company purchases machinery for Rs. 10 lakh. Under accounting rules, it uses the straight-line method (SLM) and depreciates the machinery at 10% annually, reporting Rs. 1 lakh as depreciation. However, for tax purposes, it follows the Income Tax Act, using the written-down value (WDV) method, which allows a higher depreciation of Rs. 2 lakh in the first year.

This results in a lower taxable income for the company in the first year, reducing its immediate tax liability. However, since financial statements show only Rs. 1 lakh in depreciation, a difference arises. The company will pay lower tax now but will have to pay higher taxes in the future when depreciation reverses. This creates a deferred tax liability of Rs. 30,000 (assuming a 30% tax rate).

Deferred tax liabilities can also arise from revenue recognition differences, warranty expenses, or unrealised gains on investments. Understanding these tax implications helps businesses in effective tax planning and financial management.

Accounting rules

Deferred tax liabilities are recorded following accounting standards and tax regulations. In India, businesses must adhere to Ind AS 12 (Income Taxes) and the Income Tax Act, ensuring proper financial and tax reporting.

  1. Recognition – Companies recognise DTL when temporary differences exist between book and taxable profits. This applies mainly to depreciation, warranty provisions, and undistributed earnings.
  2. Measurement – DTL is calculated using applicable corporate tax rates. If tax rates change, companies must adjust their DTL accordingly.
  3. Presentation – Deferred tax liabilities are listed under non-current liabilities on the balance sheet. Companies must also disclose details in financial statements.
  4. Reversal – DTL gradually reverses as the temporary differences adjust over time. When book and tax values match, the liability is settled.

Proper accounting of deferred tax liabilities ensures compliance with Indian regulations and provides a clear picture of a company’s financial health.

Is deferred tax liability a good or bad thing

Deferred tax liability is neither inherently good nor bad—it depends on the business's financial strategy.

  1. Benefits – It helps businesses defer tax payments, improving short-term cash flow. Companies can reinvest these funds to generate higher returns before the liability is due.
  2. Drawbacks – DTL increases future tax obligations, which could impact cash flow when payments are due. Businesses must plan accordingly to avoid financial strain.
  3. Investor perspective – Investors view manageable deferred tax liabilities as a sign of financial stability. However, excessive DTL can indicate aggressive tax-saving strategies, raising concerns about long-term tax obligations.
  4. Regulatory impact – With changing tax laws, companies may face unexpected adjustments in their deferred tax liabilities. This makes proper accounting and financial planning essential.

While deferred tax liability offers short-term financial benefits, companies must manage it carefully to avoid cash flow issues in the future.

How is deferred tax liability calculated

Deferred tax liability is calculated based on the difference between taxable income and accounting income.

  1. Identify temporary differences – Determine the difference between book profits and taxable profits due to depreciation, provisions, or other adjustments.
  2. Apply the tax rate – Multiply the temporary difference by the applicable corporate tax rate. For example, if a company has Rs. 5 lakh in temporary differences and the tax rate is 30%, the DTL would be Rs. 1.5 lakh.
  3. Adjust for tax rate changes – If tax rates change, the deferred tax liability must be recalculated to reflect the updated tax burden.
  4. Record on balance sheet – The deferred tax liability is added under non-current liabilities. As temporary differences reverse, the liability is reduced.

By accurately calculating and recording DTL, businesses can ensure compliance with tax laws and maintain financial transparency.

Pro Tip

Create wealth and meet your financial goals with a ULIP investment plan, start investing from Rs. 3,000/month.

Conclusion

Deferred tax liability is an important financial concept for businesses in India. It arises from differences in tax and accounting treatments, leading to future tax obligations. While it helps defer tax payments and improve short-term cash flow, businesses must manage it effectively to avoid financial stress.

By understanding DTL, companies can make informed decisions about financial planning and tax management.

If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.

Frequently asked questions

What is an example of a deferred payment liability?
A common example of a deferred payment liability is unpaid corporate taxes. If a company defers tax payments due to accounting differences, it records a liability on its balance sheet. Another example is pension obligations, where businesses promise future payments to employees but recognise the liability now while actual payments occur later.

Show More Show Less

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-qualified limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

Disclaimer

*T&C Apply - Bajaj Finance Limited (‘BFL’) is a registered corporate agent of third party insurance products of Bajaj Allianz Life Insurance Company Limited, HDFC Life Insurance Company Limited, Life Insurance Corporation of India (LIC), Bajaj Allianz General Insurance Company Limited, SBI General Insurance Company Limited, ACKO General Insurance Company Limited, HDFC ERGO General Insurance Company, TATA AIG General Insurance Company Limited, ICICI Lombard General Insurance Company Limited, New India Assurance Limited, Chola MS General Insurance Company Limited, Zurich Kotak General Insurance Company Limited, Star Health & Allied Insurance Company Limited, Care Health Insurance Company Limited, Niva Bupa Health Insurance Company Limited, Aditya Birla Health Insurance Company Limited and Manipal Cigna Health Insurance Company Limited under the IRDAI composite registration number CA0101. Please note that, BFL does not underwrite the risk or act as an insurer. Your purchase of an insurance product is purely on a voluntary basis after your exercise of an independent due diligence on the suitability, viability of any insurance product. Any decision to purchase insurance product is solely at your own risk and responsibility and BFL shall not be liable for any loss or damage that any person may suffer, whether directly or indirectly. For more details on risk factors, terms and conditions and exclusions please read the product sales brochure & policy wordings carefully before concluding a sale. Tax benefits applicable if any, will be as per the prevailing tax laws. Tax laws are subject to change. BFL does NOT provide Tax/Investment advisory services. Please consult your advisors before proceeding to purchase an insurance product. Visitors are hereby informed that their information submitted on the website may also be shared with insurers. BFL is also distributor of other third-party products from Assistance service providers such as CPP Assistance Services Private Limited, Bajaj Finserv Health Limited. etc. All product information such as premium, benefits, exclusions, value added services etc. are authentic and solely based on the information received from the respective Insurance company or the respective Assistance provider company.

Note- While we have made all the efforts and taken utmost care in gathering precise information about the products, features, benefits etc. However, BFL cannot be held liable for any direct or indirect damage/loss. We request our customers to conduct their research about these products and refer to the respective products sales brochure and policy/membership wordings before concluding sales.

Show All Text