Provision For Income Taxes: How to Record and Adjust in Tally?

The provision for income taxes is simply the estimated amount of tax a business or individual expects to pay for the current year. Income-tax accounting does not end with payment of advance tax or filing ITR until the CPC processes the return and the final tax payable or refund is known. 

The overall process can be divided into four major stages:

• Calculate and pay advance tax.
• Record and reconcile TDS receivable.
• Create the year-end income-tax provision.
• Adjust the balances once CPC processes the Income Tax Return.

Accounting Entry for Advance Tax

Advance tax is calculated based on estimated taxable income, as the actual taxable income is known only when the ITR is prepared.

How to Estimate Advance Tax?

Businesses can estimate their current-year income by:

• Using the previous year's income as a starting point as the current year’s complete details are not yet available.
• Adjust the expected current-year growth or decline.
• Compare the same number of months with the previous year.
• By the 3rd quarter, the full-year position is usually clearer, while the fourth-quarter estimate can use results up to February because the fourth-quarter payment deadline falls in March.
• Calculating the estimated tax after applicable cess.
• Reduce tax already paid to determine the remaining amount payable.

Entries in Tally Prime

Go to "Vouchers" and select "Payment" . Enter the actual payment date for each instalment.

• Debit: Advance Tax FY 2025-26 (under current assets)
• Credit: Bank account (Select the bank account used for payment.)

Mention the financial year and quarter in the narration.

Accounting Entry for TDS Receivable

There are two possible approaches for TDS:

• Payment-based: TDS is recorded when the customer makes payment
• Invoice-based: TDS is recorded when the invoice is booked

Entry will be:

• Debit: Party Name 
• Debit: TDS Receivable 2025-26 (under current asset)
• Credit: Sales
• Credit: GST

Year-End TDS Reconciliation

At 31 March, businesses should:

• Check the closing TDS receivable balance and must compare it with Form 26AS.
• Compare the balance party by party with Form 26AS.

This reconciliation will help you to ensure that the TDS claimed in the ITR matches the accounting records.

Year-End Income-Tax Provision

At the end of the financial year, the final tax liability may not yet be known. Therefore, an estimated income-tax provision is recorded on 31 March.   Say For Example

• Advance Tax Paid = ₹2,35,000
• TDS Receivable = ₹1,00,000
• Estimated Total Income-Tax Liability = ₹3,00,000

The provision is recorded for the estimated total liability, not merely for the amount of advance tax already paid.  

Entry will be:   On 31 March 2026:

• Debit: Income-tax Expense FY 2025-26 (indirect expense) ₹3,00,000
• Credit: Provision for Income Tax FY 2025-26  ₹3,00,000

Accounting Entry After the ITR Is Processed

The processed liability may differ from the provision because of actual interest, late fee, rounding or other adjustments.  

Suppose:

• Existing provision was ₹3,00,000
• But liability becomes ₹3,15,000

The additional provision required is: ₹3,00,000 − ₹3,15,000 = ₹15,000.  

The additional entry will be:

• Debit: Income-tax Expense FY 2025-26 = ₹15,000
• Credit: Provision for Income Tax FY 2025-26 = ₹15,000

Here,  

The additional amount is recorded in the current year as the previous year's books are generally closed.

Entry After Clearing Advance Tax, TDS and Tax Provision

Once the CPC has processed the return, the previous year's tax balances can be adjusted against the processed result.   For the example, the adjustment will be:

• Debit: Provision for Income Tax FY 2025–26 = ₹3,15,000
• Debit: Refund Receivable (under current asset) FY 2025–26 = ₹20,000 
• Credit: TDS Receivable FY 2025–26 = ₹1,00,000
• Credit: Advance Tax FY 2025–26 = ₹2,35,000

Accounting for Income-Tax Refund

Suppose your refund has been cleared on 12th August 2026. When the income-tax refund is credited to the bank, the refund receivable should be cleared.  

For example (entry under receipt):

• Debit: Bank Account 
• Credit: Refund Receivable FY 2025–26 
• Credit: Interest on Refund FY 2025–26 - [If interest received].

The refund interest is treated as indirect income and is taxable income according to the source.