Book vs Tax Depreciation: Computing Deferred Tax on Fixed Assets
A worked reconciliation of book (Companies Act) and tax (Income-tax) depreciation showing how two depreciation bases create deferred tax assets and liabilities.
Fixed assets are the classic source of deferred tax. You depreciate them one way for the books (Schedule II useful life) and another way for tax (Section 32 block WDV, often with additional depreciation). The gap between the two carrying values is a temporary difference — and that difference, multiplied by the tax rate, is your deferred tax.
Why the two bases diverge
- Different methods and lives: book SLM/WDV over useful life vs tax WDV at block rates.
- Additional depreciation: 20% under Section 32(1)(iia) accelerates the tax base with no book equivalent.
- The 180-day rule and pooling: tax depreciation follows the block, not the individual asset.
The reconciliation, block by block
For each block you compare the book written-down value against the income-tax written-down value. Where the tax base is lower (usually, because tax depreciation is faster), you carry a deferred tax liability; where it is higher, a deferred tax asset. At a 25.17% effective rate, a ₹1 crore temporary difference is roughly ₹25.17 lakh of deferred tax.
AssetOS produces a Book vs Tax → Deferred Tax report directly: book WDV vs IT WDV by block, the temporary difference, and deferred tax at 25.17% with the year's movement — straight from the two engines that already agree with your register.