Deferred tax Schedule III: AS 22 presentation and note

Deferred tax under AS 22 — SignReady guide

In this guide · 9 sections

Deferred tax in Schedule III: where the lines are
AS 22 basics: timing differences and permanent differences
Deferred tax asset presentation: reasonable vs virtual certainty
Offsetting, the rate to use and section 115BAA
MAT credit: not a deferred tax asset
Worked example: computing deferred tax for FY 2025-26
AS 22 deferred tax disclosure: the note format
FAQs
Sources

Key points

Division I has one line on each side: Deferred tax liabilities (Net) under non-current liabilities and Deferred tax assets (net) under non-current assets. ICAI's Guidance Note says the net figure is always non-current.
The Statement of Profit and Loss splits tax expense into (1) Current tax and (2) Deferred tax. Excess or short provision of earlier years is shown separately; interest on tax is a finance cost, not tax.
AS 22 recognises deferred tax on timing differences only. A deferred tax asset needs reasonable certainty of future taxable income — and virtual certainty supported by convincing evidence where there is unabsorbed depreciation or carried-forward loss.
Deferred tax assets and liabilities are offset when the company can legally set off current tax assets and liabilities and both relate to the same tax law. The major components go in the notes (AS 22 para 31).
MAT credit is not a deferred tax asset under AS 22: ICAI's Guidance Note puts it under loans and advances as "MAT credit entitlement". Companies taxed under section 115BAA pay no MAT and get no credit.

Try SignReady: Draft the Schedule III statements from the trial balance in Excel.

Deferred tax is usually the last entry before the accounts are closed, and in small-company files it is often one balancing figure carried from last year's working with the rate updated. Deferred tax under Schedule III needs more than that: the right line on the balance sheet, the current/deferred split in the Statement of Profit and Loss, an AS 22 test before any deferred tax asset is recognised, and a note that breaks the balance into its components. This guide covers the Division I presentation, the AS 22 recognition rules, MAT credit, the rate to use for FY 2025-26, a full worked computation and the note format. It is part of our Schedule III guide. Ind AS companies follow Ind AS 12 and Division II, which work differently and are not covered here.

Deferred tax in Schedule III: where the lines are

Division I of Schedule III has three tax-related places on the face of the statements:

Statement	Heading	Line
Balance Sheet	Non-current liabilities	(b) Deferred tax liabilities (Net)
Balance Sheet	Non-current assets	(c) Deferred tax assets (net)
Statement of Profit and Loss	X. Tax expense	(1) Current tax; (2) Deferred tax

Only one of the two balance sheet lines is used in a year — the net figure goes to whichever side it falls on. ICAI's Guidance Note on Division I (Revised January 2022, para 7.6) says the net deferred tax asset or liability should always be classified as non-current, even if part of it will reverse next year. That matches AS 22 para 30, which asks for deferred tax to be shown under a separate heading, apart from current assets and current liabilities. So the usual tests in current and non-current classification under Schedule III do not apply to this line.

Current tax balances are not deferred tax. Under Division I, the year's tax provision net of advance tax and TDS sits in short-term provisions (see other current liabilities and provisions under Schedule III), and an excess of advance tax over the provision sits in loans and advances or other current assets. Division II has separate "current tax assets/liabilities" lines; Division I does not.

In the Statement of Profit and Loss, the Guidance Note (paras 9.8.1 and 9.8.2) adds four points:

Deferred tax charge or credit is shown separately on the face, not merged into current tax.
Excess or short provision of tax for earlier years is disclosed separately.
Interest on shortfall in advance tax is a finance cost (shown separately), not current tax.
Tax penalties are not current tax: compensatory ones are treated as interest, others go to other expenses.

AS 22 basics: timing differences and permanent differences

AS 22, Accounting for Taxes on Income, as notified in the Companies (Accounting Standards) Rules, 2021, defines tax expense as current tax plus deferred tax, and deferred tax as the tax effect of timing differences (para 4). A timing difference originates in one period and is capable of reversing in later periods. A permanent difference does not reverse and gives no deferred tax (para 12). AS 22 applies to Small and Medium-sized Companies as well. Its only SMC relaxation is narrow: the Companies (Accounting Standards) Amendment Rules, 2026 (G.S.R. 169(E), 10 March 2026) added Pillar Two paragraphs 2A and 32A–32D to AS 22 and let an SMC skip the exposure disclosures in paragraphs 32C and 32D.

Item (FY 2025-26, Income-tax Act, 1961)	Type	Gives
Tax depreciation higher than book depreciation	Timing	Deferred tax liability
Leave encashment provided, not paid by the return due date (s.43B(f))	Timing	Deferred tax asset
Gratuity provision not paid to an approved fund (s.40A(7))	Timing	Deferred tax asset
Sums due to micro or small enterprises, unpaid beyond the MSMED Act time limit (s.43B(h))	Timing	Deferred tax asset
Bonus or employer PF paid before the return due date	None — allowed in the same year	Nothing
Penalties for infringement of law, CSR expenditure (Explanations to s.37(1))	Permanent	Nothing

AS 22 itself uses two of these as its examples (para 11): an expense disallowed under section 43B until paid gives a deferred tax asset, and higher tax depreciation gives a deferred tax liability. Paragraph 8 adds that unabsorbed depreciation and carried-forward losses are also timing differences — but with a stricter test. The 43B(h) disallowance is explained in MSME dues and section 43B(h).

A tax note that ties to the face

SignReady drafts the Schedule III Balance Sheet, Statement of Profit and Loss and notes as an editable Excel file from your trial balances, with previous-year figures and formulas linking each note to the statements — so the deferred tax line and its note stay in step.

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Deferred tax asset presentation: reasonable vs virtual certainty

A deferred tax liability is recognised for all timing differences. A deferred tax asset is recognised only to the extent the company will have taxable income against which it can be realised. AS 22 sets two levels of proof:

Situation	Test	AS 22
Ordinary timing differences (43B items, gratuity, provisions)	Reasonable certainty — normally shown by the past record and realistic profit estimates	Paras 15–16
Unabsorbed depreciation or carried-forward losses under tax law	Virtual certainty supported by convincing evidence	Para 17

The Explanation to para 17 says virtual certainty cannot rest merely on business plans or forecasts, and a profit projection submitted to a lender and accepted by it is not, in isolation, convincing evidence; the evidence must exist in concrete form at the balance sheet date — its example is a profitable binding export order with heavy damages for cancellation. Para 18 allows recognition to the extent there are deferred tax liabilities whose reversal will produce enough taxable income. Where a company with losses recognises a deferred tax asset, the nature of the evidence must be disclosed (para 32).

Paras 19 and 26 make the test annual: unrecognised assets are re-assessed, and the carrying amount is written down if the certainty is lost (and may be written back later). Deferred tax is never discounted (para 24). In practice, a loss-making company's file should show the reversal schedule of its deferred tax liability, because that is usually the only evidence that supports any asset at all.

Offsetting, the rate to use and section 115BAA

Offsetting. Under AS 22 para 29, deferred tax assets and liabilities are offset if the company has a legally enforceable right to set off current tax assets against current tax liabilities and both relate to taxes levied under the same tax law. For a domestic company with only Indian income-tax, the conditions are normally met, which is why Schedule III shows a "net" line. A company with a foreign branch taxed abroad may need to show both lines.

The rate. Deferred tax is measured at the rates and laws enacted or substantively enacted by the balance sheet date (para 21). Where different rates apply at different levels of income, average rates are used (para 23). In a year the company pays MAT, deferred tax is still measured at the regular rate, not the MAT rate (Explanation to para 21).

Section 115BAA. For FY 2025-26, under the Income-tax Act, 1961, a domestic company that opts for section 115BAA pays tax at 22%, plus a 10% surcharge and 4% cess — an effective rate of 25.168%. It gives up specified deductions (including additional depreciation under section 32(1)(iia) and most Chapter VI-A deductions), MAT does not apply to it (section 115JB(5A)), and the option cannot be withdrawn once exercised. A company that opts during the year should re-measure its opening deferred tax balances at the new rate; the change goes through the deferred tax line. Timing differences at 31 March 2026 reverse in tax years governed by the Income-tax Act, 2025, so check the rates enacted for those years — the Finance Act, 2026 was published on 30 March 2026, before the balance sheet date.

MAT credit: not a deferred tax asset

For companies not under section 115BAA, MAT under section 115JB of the 1961 Act is 15% of book profit (plus surcharge and cess), and the excess of MAT over normal tax is carried forward as a credit under section 115JAA for up to fifteen assessment years. The accounting comes from ICAI's Guidance Note on Accounting for Credit Available in respect of Minimum Alternative Tax, quoted in the Schedule III Guidance Note (para 9.8.1.2):

MAT paid is current tax, charged at the gross amount.
MAT credit is recognised as an asset only where there is convincing evidence that normal tax will be paid within the credit period. It is shown under loans and advances as "MAT credit entitlement" — not as a deferred tax asset. Under Division I, split it into long-term and short-term loans and advances according to when it is expected to be used; see loans and advances under Schedule III.
In the Statement of Profit and Loss, the credit is shown under current tax: "Current tax (MAT) — Less: MAT credit entitlement — Net current tax".
The asset is reviewed at each balance sheet date and written down when the evidence is no longer convincing.

That review matters at 31 March 2026. The Finance Act, 2026 (enacted on 30 March 2026, before the balance sheet date) amended section 206 of the Income-tax Act, 2025 from tax year 2026-27. The MAT rate falls to 14%. Clauses (m) to (p) of section 206(1), which gave credit for MAT paid, are omitted, so MAT paid from tax year 2026-27 is a final tax and creates no new credit. Under a substituted sub-section (3), credit brought forward under section 115JAA as on 31 March 2026 can be set off by a domestic company only if it opts for the concessional regime (section 200(5) or 201(2)) for a tax year beginning on or after 1 April 2026, limited each year to 25% of the tax on its total income and within fifteen tax years from the year the credit first arose. A company that stays in the regular regime has no route to use the credit. Keep the MAT credit entitlement only if there is convincing evidence that the company will switch and use the credit within these limits; otherwise write it down (MAT Guidance Note para 12).

Worked example: computing deferred tax for FY 2025-26

Example Pvt Ltd opted for section 115BAA from AY 2020-21 (rate 25.168%) and has a steady profit record, so reasonable certainty is met. Figures are illustrative.

Timing difference (₹)	31 March 2026	31 March 2025	Effect
WDV of PPE as per books	48,00,000	42,00,000
WDV as per Income-tax Act	39,00,000	35,00,000
Depreciation difference	9,00,000	7,00,000	DTL
Gratuity provision (unfunded, s.40A(7))	9,55,000	8,05,000	DTA
Leave encashment unpaid at return due date (s.43B(f))	2,30,000	1,90,000	DTA
MSE dues unpaid beyond the MSMED Act limit (s.43B(h))	1,20,000	—	DTA

Bonus of ₹3,40,000 was paid before the return due date, so it is allowed in FY 2025-26 and gives no timing difference. A ₹25,000 penalty for infringement of law, disallowed under section 37(1), is a permanent difference.

Deferred tax at 25.168% (₹)	31 March 2026	31 March 2025
Deferred tax liability — depreciation	2,26,512	1,76,176
Deferred tax asset — gratuity	2,40,354	2,02,602
Deferred tax asset — leave encashment	57,886	47,819
Deferred tax asset — MSE dues	30,202	—
Net deferred tax asset	1,01,930	74,245

The deferred tax credit for the year is ₹27,685 (1,01,930 − 74,245). Check it from the movements: 25.168% of (−2,00,000 + 1,50,000 + 40,000 + 1,20,000) = 25.168% of 1,10,000 = ₹27,685.

Current tax. Profit before tax ₹62,40,000; less extra tax depreciation ₹2,00,000; add increase in gratuity ₹1,50,000, leave ₹40,000, MSE dues ₹1,20,000 and the penalty ₹25,000 = taxable income ₹63,75,000. Tax at 25.168% = ₹16,04,460. Last year's tax was short-provided by ₹18,500.

AS 22 deferred tax disclosure: the note format

AS 22 para 31 requires the break-up of deferred tax assets and liabilities into their major components. For the example, the balance sheet shows ₹1,01,930 under non-current assets as "Deferred tax assets (net)", with this note:

Note: Deferred tax assets (net) (₹)	31 March 2026	31 March 2025
Deferred tax assets
Provision for gratuity	2,40,354	2,02,602
Provision for compensated absences	57,886	47,819
Disallowance under section 43B(h)	30,202	—
	3,28,442	2,50,421
Less: Deferred tax liability
Difference between book and tax written down value of PPE	2,26,512	1,76,176
Deferred tax assets (net)	1,01,930	74,245

Statement of Profit and Loss — X. Tax expense (₹)	FY 2025-26
(1) Current tax	16,04,460
Tax relating to earlier years	18,500
(2) Deferred tax	(27,685)
Total tax expense	15,95,275

Add the accounting policy (deferred tax on timing differences at enacted rates; assets subject to reasonable or virtual certainty), the nature of the evidence if there are losses, and the rate used. AS 22 does not require a reconciliation of tax expense to accounting profit — that is an Ind AS 12 requirement — but many firms keep one in the working papers. The WDV figures should agree to the tax audit report and the property, plant and equipment note under Schedule III.

Before signing: the deferred tax ledger agrees to this note; only one of the two balance sheet lines is used; MAT credit is not inside it; and the Schedule 3 face shows current and deferred tax separately.

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Frequently asked questions

Where is deferred tax asset shown in Schedule III?

Under Division I, a net deferred tax asset is shown under non-current assets as "Deferred tax assets (net)". ICAI's Guidance Note on Division I says the net deferred tax asset or liability is always classified as non-current.

Is deferred tax liability current or non-current?

Non-current. Schedule III Division I places "Deferred tax liabilities (Net)" under non-current liabilities, and AS 22 para 30 requires deferred tax to be shown separately from current assets and current liabilities.

What disclosure does AS 22 require for deferred tax?

The break-up of deferred tax assets and liabilities into major components in the notes (para 31), the nature of the evidence supporting a deferred tax asset where there is unabsorbed depreciation or carried-forward loss (para 32), and tax expense split into current and deferred tax on the face of the Statement of Profit and Loss.

Can deferred tax asset be recognised on business losses?

Only to the extent there is virtual certainty, supported by convincing evidence, that sufficient future taxable income will be available (AS 22 para 17). Projections and business plans alone are not enough; reversing deferred tax liabilities can support it.

Where is MAT credit entitlement shown in the balance sheet?

Under loans and advances as "MAT credit entitlement", per ICAI's Guidance Note on MAT credit — not as a deferred tax asset. The credit is also shown as a deduction from current tax in the Statement of Profit and Loss.

Sources

Deferred tax in the right line, every year

Map the deferred tax ledger once through its Tally group; SignReady carries the mapping to next year, and FinalCheck flags arithmetic and cross-reference differences between the notes and the face, and compares key figures with the trial balance. First 3 finalisations free.

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About this guide. Written by the SignReady Team at PracticeGuru (Brainy Accountant Solutions Pvt Ltd). SignReady is our product and is mentioned where it fits. The guide reflects the law and standards as at 26 October 2026 and the sources listed above. It is general information, not professional advice: check the primary sources and apply your own professional judgement to each engagement.
Version history: 26 Oct 2026 — first published.