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DTL on Special Reserve under Section 36(1)(viii) of IT Act

Current · Source: Reserve Bank of India · RBI/2013-14/412 · issued 20 Dec 2013 · ~2 min read
Quick answerRBI mandates banks to create deferred tax liability (DTL) on Special Reserve under Section 36(1)(viii) of the Income Tax Act, regardless of intent to not withdraw. This ensures prudent accounting and allows full Special Reserve to count for Tier-I capital.
The rule, in the simplest words
How it plays out — a real example

A branch operations officer in Indore, Mr. Kumar, ensures that the bank creates a DTL on Special Reserve as per AS 22, even if the bank doesn't intend to withdraw from it. This prudential measure allows the bank to include the full Special Reserve in Tier-I capital computation, maintaining consistency with accounting norms.

What changed

Earlier, banks could avoid creating DTL on Special Reserve if they had Board resolutions stating no intent to withdraw. Now, RBI mandates DTL creation as a matter of prudence, overriding such resolutions. For past reserves up to March 2013, any shortfall in DTL can be adjusted directly from reserves with disclosure; from March 2014 onwards, DTL must be charged to the Profit and Loss account.

What it means for you

Banks must now recognize a deferred tax liability on Special Reserve, reducing reported profits or reserves. However, the full Special Reserve (gross of DTL) can be included in Tier-I capital computation, which may offset some capital impact. This aligns accounting with prudential norms and ensures consistency across banks.

What you must do

Who it affects

All commercial banks (excluding RRBs), Bank finance and accounting teams, Bank treasury and capital management teams

❓ Common questions

Can we still avoid DTL if our Board has passed a resolution not to withdraw from Special Reserve?

No. RBI has clarified that DTL must be created as a matter of prudence, regardless of any Board resolution or intent to not withdraw.

How should we treat the DTL shortfall for Special Reserve created before March 31, 2013?

If the DTL expense was not fully charged to Profit and Loss, you can adjust the shortfall directly from reserves. This adjustment must be disclosed in the Notes to Accounts for FY 2013-14.

Does creating DTL affect our Tier-I capital calculation?

Yes, but positively. The circular allows banks to reckon the entire Special Reserve (gross of DTL) for Tier-I capital, so the full reserve amount counts, not just the net-of-tax portion.

📜 Read the original circular — full text as issued by RBI
RBI/2013-14/412 DBOD. No.BP.BC.77/21.04.018/2013-14 December 20, 2013 The Chairmen and Managing Directors / Chief Executive Officers of all Commercial Banks (excluding Regional Rural Banks) Dear Sir, Deferred Tax Liability on Special Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961 Please refer to our mailbox clarification dated November 6, 2009 with respect to the 'Special Reserve' created by banks under Section 36(1) (viii) of Income Tax Act, 1961 (hereinafter referred to as ‘Special Reserve’), in terms of which, only the net amount of such Special Reserve (net of tax payable) should be taken into account for the purpose of computation of Tier-I capital. 2. In this context, it has been observed that some banks are not creating deferred tax liability (DTL) on Special Reserve as per Accounting Standard 22: ‘ Accounting for taxes on Income’ (AS 22)on the grounds that they do not intend to withdraw from such Reserve in the future. In many cases banks have formalised such intent by having resolutions passed by their Boards or Committees to this effect. 3. The matter regarding creation of DTL on Special Reserve has been examined and banks are advised that, as a matter of prudence, DTL should be created on Special Reserve. 4. For this purpose, banks may take the following course of action: a) If the expenditure due to the creation of DTL on Special Reserve as at March 31, 2013 has not been fully charged to the Profit and Loss account, banks may adjust the same directly from Reserves. The amount so adjusted may be appropriately disclosed in the Notes to Accounts of the financial statements for the financial year 2013-14. b) DTL for amounts transferred to Special Reserve from the year ending March 31, 2014 onwards should be charged to the Profit and Loss Account of that year. 5. In view of the requirement to create DTL on Special Reserve, banks may reckon the entire Special Reserve for the purpose of computing Tier-I Capital. Yours faithfully (Chandan Sinha) Principal Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/412 · issued 20 Dec 2013. The plain-English explanation above is BankPulse’s own independent summary.
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Who does what — compliance checklist
💻 IT / Systems
  • Update Tier-I capital computation to include full Special Reserve (gross of DTL) as per the circular.
📜 Compliance
  • Calculate DTL on Special Reserve as per AS 22 for all periods, irrespective of withdrawal intent.
  • For DTL shortfall as of March 31, 2013, adjust directly from reserves and disclose in Notes to Accounts for FY 2013-14.
  • From FY 2013-14 onwards, charge DTL on annual transfers to Special Reserve to the Profit and Loss account.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template

Example: if you are a Compliance officer at a bank this circular applies to (All commercial banks (excluding RRBs), Bank finance and accounting teams, Bank treasury and capital management teams), your first concrete step on “DTL on Special Reserve under Section 36(1)(viii) of IT Act” is: “Calculate DTL on Special Reserve as per AS 22 for all periods, irrespective of withdrawal intent.” (RBI issued this 20 Dec 2013).

  1. Circular: RBI/2013-14/412 -- DTL on Special Reserve under Section 36(1)(viii) of IT Act
  2. Issued: 20 Dec 2013
  3. Action required: Calculate DTL on Special Reserve as per AS 22 for all periods, irrespective of withdrawal intent.
  4. Action required: For DTL shortfall as of March 31, 2013, adjust directly from reserves and disclose in Notes to Accounts for FY 2013-14.
  5. Action required: From FY 2013-14 onwards, charge DTL on annual transfers to Special Reserve to the Profit and Loss account.
  6. Action required: Update Tier-I capital computation to include full Special Reserve (gross of DTL) as per the circular.
  7. Owner: ____________ Target date: ____________
  8. Board/committee approval needed? Y / N
  9. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly).
Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8638&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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