What is the meaning of Differed Tax?

 

The term is usually spelled "Deferred Tax" (not "differed") — I'll assume that's what you meant, since it's a standard accounting/finance term.

Deferred Tax refers to the tax effect of timing differences between the profit calculated as per accounting records (books of accounts) and the profit calculated as per tax laws (Income Tax rules). It arises because certain incomes and expenses are recognized in a different period for accounting purposes versus tax purposes.

In simple terms: Sometimes the taxable income (as per tax law) and accounting income (as per company's books) differ — not permanently, but due to timing. Deferred tax accounts for the future tax impact of these timing differences.

Why it arises:

Companies calculate profit in two ways:

1.    As per accounting standards (for reporting to shareholders) — called accounting profit

2.    As per tax laws (for calculating actual tax payable) — called taxable profit

These two profits often differ due to timing differences, such as:

·         Depreciation: Accounting depreciation (e.g., straight-line method) vs. tax depreciation (often accelerated, allowing higher deduction in early years) differ in rate/method

·         Provisions: A provision for doubtful debts might be allowed as an accounting expense immediately, but allowed for tax purposes only when the debt actually becomes bad

·         Expenses disallowed temporarily: Certain expenses may be disallowed in the year incurred but allowed in a later year (e.g., unpaid statutory dues under Section 43B in India)

Two types of Deferred Tax:

Type	Meaning	Example
Deferred Tax Liability (DTL)	Arises when accounting profit is higher than taxable profit in the current year → company pays less tax now but will pay more tax in future	Company claims lower depreciation in books but higher depreciation for tax now → future book depreciation will be higher, tax will catch up later
Deferred Tax Asset (DTA)	Arises when accounting profit is lower than taxable profit in the current year → company pays more tax now but will pay less tax in future (a future tax benefit)	Unabsorbed losses or provisions disallowed now but allowed in future years

How it works — simple example:

Suppose a company's:

·         Accounting profit = ₹10,00,000 (as per books)

·         Taxable profit = ₹8,00,000 (as per tax law, due to higher tax depreciation allowed)

Since taxable profit is lower, the company pays less tax this year. But this difference will reverse in future years (when tax depreciation reduces and accounting depreciation continues), so the company will owe more tax later. This future tax obligation is recorded now as a Deferred Tax Liability.

Important distinction:

·         Deferred tax arises only from timing differences (which reverse in future periods)

·         It does not arise from permanent differences (e.g., an expense completely disallowed under tax law forever, like certain fines/penalties) — these don't create deferred tax because they never reverse

Where it's recorded:

·         Deferred Tax Liability → shown on the liabilities side of the balance sheet

·         Deferred Tax Asset → shown on the assets side of the balance sheet

·         Governed by accounting standards like AS 22 (India), Ind AS 12, or IAS 12 (Deferred Tax - International)

Why it matters: Deferred tax ensures that the tax expense reported in the financial statements reflects the true economic cost of tax over time, matching income and related tax impact in the correct periods — giving a more accurate picture of a company's financial health, rather than just showing the tax actually paid/payable in a given year.