Deffered Tax - CA Intermediate - For New Entrant | Explained with a Simple Depreciation Example 📊

Let’s break down exactly what a Deferred Tax Liability is with a simple example! 📊 Imagine you earn a profit of ₹400 lakhs in a year before depreciation In that same year, you buy a new asset worth ₹200 lakhs Now, the income tax authorities tell you to take the full 100% depreciation claim right in the first year, which brings your taxable income down to ₹200 lakhs However, for your own accounting books, the asset has a useful life of 10 years, so you only record 1/10th of the depreciation That’s just a ₹20 lakhs deduction based on its useful life, leaving your accounting income at a much higher ₹380 lakhs So right now, the government is asking you to pay taxes on the lower amount of ₹200 lakhs Sounds great, right? But here is the catch! Next year, the depreciation you record in your accounting profit and loss statement won't be allowed by the income tax authorities, because they already gave you the full allowance upfront Because you won't get that extra ₹180 lakhs deduction again, your taxable income is going to be much higher, meaning you will have to pay more tax in the future This extra tax that you will have to pay in the future is called a Deferred Tax Liability It is created whenever there is a difference between your accounting income and your taxable income that allows you to pay less tax today, knowing you will definitely have to pay it later #DeferredTaxLiability #AccountingTips #CAInter #Taxation #FinanceExplained #DeferredTax #AccountingStudent