Deferred tax credit: meaning, how it works in India and examples

Deferred tax is the gap between the tax a company shows in its accounts and the tax it actually pays in the same year. Accounting rules and tax rules count some items at different times, so the two numbers differ. The accounts record the difference as a deferred tax asset or a deferred tax liability on the balance sheet.

A deferred tax asset is a future tax saving. A deferred tax liability is a tax bill that will fall due later. The yearly movement in these balances flows into the profit and loss statement as a deferred tax charge or credit.

A company that makes a tax loss can carry that loss forward and set it against future profit, which cuts future tax. The accounts can book that future saving as a deferred tax asset today. The credit appears in the tax line of the profit and loss statement, so the loss after tax is smaller than the loss before tax.

No cash comes in. The company has not received a refund, and it has not earned anything. It has only recognised, on paper, that its past losses should reduce taxes it expects to pay later. That is the reason the headline profit after tax can be quite far from the underlying business.

Under Ind AS 12, a company recognises a deferred tax asset on unused tax losses only to the extent that future taxable profit is probable. Where a company has a history of recent losses, the standard says that history is strong evidence against recognising the asset, unless there is convincing other evidence, such as taxable gains already locked in.

Companies that do not follow Ind AS, which includes many private startups, use the older AS 22. It sets a tougher bar: an asset on carried-forward losses needs virtual certainty, backed by convincing evidence, of future taxable profit. In practice, early-stage losses rarely get a deferred tax credit under AS 22, while a company expecting profit soon, or one under Ind AS with an accepted forecast, may book one.

As of November 2026, a business loss under the Income-tax Act can generally be carried forward for eight assessment years, and unabsorbed depreciation can be carried forward without a time limit. The Income-tax Act, 2025 applies from April 2026 and renumbers the sections, so the section numbers in older articles (such as Section 72) need a check against the new Act.

A change in shareholding can restrict carry-forward of losses in closely held companies, with a relief for eligible startups, so a funding round that changes ownership can matter. A professional should check the exact test. The rate used to value the asset is the rate expected to apply when the loss is used. Domestic companies on the concessional regime pay about 25.17% including surcharge and cess, so a ₹100 crore loss carried forward is worth about ₹25 crore of tax saving.

• Business losses: carried forward for up to 8 assessment years.
• Unabsorbed depreciation: no time limit.
• Tax rate commonly used: about 25.17% for companies on the concessional regime.
• Ind AS 12: recognise only if future taxable profit is probable.
• AS 22: needs virtual certainty with convincing evidence.

A deferred tax liability is the opposite of an asset. It arises when the accounts count a gain or an asset in a way that creates a larger tax bill later. An example is an asset that the tax rules let the company depreciate faster than the accounts do. In the early years, tax paid is lower than the accounts suggest, and the gap becomes tax payable later.

A company can hold both. Under Ind AS 12, it can offset them when they relate to the same tax authority and are expected to reverse in a similar period. A startup with real deferred tax liabilities, such as those from a business acquisition, can sometimes book a deferred tax asset on its losses more easily, because the liabilities give taxable income against which the losses can be used.

The reading order matters. Profit before tax shows the business result before any tax item. Tax expense then adds current tax, which is the tax actually payable, and deferred tax, which is the accounting entry. Profit after tax is what is left.

A deferred tax credit lowers tax expense, and a large credit can exceed the current tax and push profit after tax above profit before tax. A startup with a small pre-tax loss can then report a profit after tax, and a headline saying it turned profitable follows. The business did not change. The accounting entry did.

Because it is a judgement. The credit depends on a forecast of future profits, and forecasts in loss-making startups can be wrong. Analysts therefore compare profit before tax and operating profit across years and treat a big swing in the tax line as a one-off. In an IPO document, the restated accounts show the tax line in each year, and the reasons for a credit appear in the notes.

Another reason is comparison. Two startups with the same pre-tax loss can show very different final results because one booked a deferred tax asset and the other did not. Reading profit before tax removes that difference and puts the two on equal terms.

It is accounting profit, but it is not cash earned from customers. A deferred tax credit can reverse. If the company's forecast changes, or the tax losses expire unused, the asset is written down and a charge hits the profit and loss statement in that year. That makes the profit less steady than operating profit.

A cleaner reading is to start with revenue, then operating profit or EBITDA, then profit before tax, and only then profit after tax. Compare the movement in the tax line to the previous year. If a single year's tax credit is larger than the pre-tax loss, ask what changed in the company's forecast.

Look for the words profit after tax, and then find the profit before tax in the same article or filing. A gap between them is the first clue. Then check the notes headed Income taxes or Deferred tax, which list where the asset came from, how much relates to carried-forward losses, and the expected period of use.

Distinguish this from items such as exceptional gains and ESOP costs, which also move profit without touching cash. This guide is general information, not tax or accounting advice, so check with a chartered accountant before relying on it.