Book vs Tax Depreciation: The Deferred Tax Working

Your accounts and your tax computation write off the same machine at different speeds. Neither is wrong. The gap between them is a timing difference, and deferred tax is simply the arithmetic that stops your reported tax charge looking absurd while that gap exists.

Most explanations stop at the definition. This one carries one asset through five years so you can see the balance build and then start to unwind.

The setup

A machine costing ₹10,00,000, bought and put to use on 1 April, held for more than 180 days in the first year.

• Books. Schedule II of the Companies Act, 2013 gives general plant and machinery a useful life of 15 years, with residual value capped at 5%. On the straight line method that is (₹10,00,000 − ₹50,000) ÷ 15 = ₹63,333 a year.
• Tax. Rule 25(1) of the Income-tax Rules, 2026 computes the allowance under section 33(3) of the Income-tax Act, 2025 on written down value at the Appendix I rate. General plant and machinery is 15% on reducing balance.
• Tax rate assumed: 30%, before surcharge and cess.

Assumptions: a single asset treated in isolation, no additions or disposals in its block, no concessional-rate regime, and no change in the tax rate across the five years. Real blocks contain other assets and the isolation is a teaching simplification.

Five years, both systems

Tax runs ahead in every one of these years. That is the normal pattern for plant early in its life, and it is why a deferred tax liability rather than an asset is the usual outcome.

The deferred tax balance

The balance is computed from the two carrying amounts, not from the annual charges. That is the part people get backwards.

Temporary difference = book carrying value − tax written down value. Multiply by the tax rate to get the balance that should sit on the balance sheet. The movement between one year’s balance and the next is what goes through the profit and loss account.

Read the last column. The annual charge falls every year, from ₹26,000 to ₹4,490, because the two systems are converging. The liability is still growing, but more slowly.

When it reverses

Written down value never reaches zero; straight line does. Around year seven the annual tax allowance drops below ₹63,333 and the book charge becomes the larger of the two. From that point the temporary difference narrows, the deferred tax charge turns into a credit, and the liability unwinds.

By the end of year fifteen the book carrying value is the ₹50,000 residual while the tax WDV is still about ₹87,354. The difference has more than reversed: on these figures a small deferred tax asset of about ₹11,206 remains, and it clears when the machine is sold or scrapped. Over the asset’s whole life the two systems deduct almost the same total; deferred tax existed only to smooth the journey.

This is why a deferred tax liability on plant is not a debt. Nobody will ever present a bill for ₹71,889. It is an accounting acknowledgement that you have taken deductions early and will take fewer later.

The entry

In year one:

• Debit deferred tax expense (profit and loss) ₹26,000
• Credit deferred tax liability (balance sheet) ₹26,000

The profit and loss account then shows current tax plus deferred tax. The total is what makes the effective rate on the face of the statement look sensible against the statutory rate, rather than swinging with the timing of capital expenditure.

Three things that break the simple version

Blocks, not assets. Tax depreciation runs on a block of assets. A single machine has no separate tax written down value once other assets join its block. In practice you compute the difference at block level and the principle is unchanged.

The 180-day rule. An asset put to use for fewer than 180 days in its first year gets half the rate that year, which changes every figure in the tables above.

A rate change. Deferred tax is measured at the rate expected to apply when the difference reverses. If rates change, the entire existing balance is remeasured and the adjustment goes through that year’s charge, which can be large and has nothing to do with the year’s trading.

Where this fits

• Why the two systems differ at all: income tax vs Companies Act depreciation
• Deriving the book charge: Schedule II depreciation
• Method selection: WDV or SLM
• How tax groups the assets: block of assets
• Where the liability appears: how to read a balance sheet
• Your own figures: depreciation calculator

Sources

• Companies Act, 2013, Schedule II, Part C.
• Income-tax Rules, 2026, rule 25(1) and Appendix I, as notified in the Gazette of India, Extraordinary, Part II section 3(i), 20 March 2026.
• Income-tax Act, 2025, section 33(3). In force 1 April 2026.
• Deferred tax recognition and measurement follow the applicable accounting standard, referred to by principle and not quoted here.