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DTL on Special Reserve for UCBs under Section 36(1)(viii)

Current · Source: Reserve Bank of India · RBI/2013-14/619 · issued 30 May 2014 · ~2 min read
Quick answerRBI mandates all Primary Urban Co-operative Banks to create deferred tax liability on Special Reserve under AS 22, regardless of intent to not withdraw. Past shortfalls can be adjusted from reserves; future transfers must hit P&L. The full reserve counts for Tier-I capital.
The rule, in the simplest words
How it plays out — a real example

Ramesh Patel, a senior credit officer at a Primary Urban Co‑operative Bank in Pune, reviews the Special Reserve balance on March 31 2013, finds a small tax shortfall, adjusts it directly from the reserves and notes it in the accounts for FY 2013‑14. Starting April 2014, he makes sure the tax charge for every new amount moved to the Special Reserve is recorded in the bank’s profit‑and‑loss statement, keeping the bank’s capital calculations clear and compliant.

What changed

RBI observed that some UCBs were not creating DTL on Special Reserve, citing no intention to withdraw and often backing it with board resolutions. The central bank now clarifies that prudence requires DTL creation irrespective of such intent. For past shortfalls up to March 31, 2013, banks may adjust directly from reserves with disclosure; from FY 2013-14 onwards, DTL must be charged to the P&L account.

What it means for you

UCBs can no longer avoid DTL on Special Reserve by claiming non-withdrawal intent. This aligns tax accounting with AS 22 and strengthens balance sheet transparency. The full Special Reserve remains eligible for Tier-I capital computation, so capital adequacy is not adversely affected. Banks must adjust past omissions and ensure ongoing P&L charges.

What you must do

Who it affects

All Primary (Urban) Co-operative Banks, Finance and accounts departments of UCBs, Auditors and compliance teams of UCBs

❓ Common questions

Can we 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 under AS 22, regardless of any board resolution or stated intent. The circular explicitly rejects that argument.

How do we handle the DTL shortfall for periods before March 31, 2013?

If the full DTL expense for the Special Reserve as at March 31, 2013 has not been charged to P&L, you may adjust the amount directly from reserves. This adjustment must be disclosed in the Notes to Accounts for FY 2013-14.

Does creating DTL reduce our Tier-I capital?

No. The circular states that banks may reckon the entire Special Reserve for Tier-I capital computation, despite the DTL creation. So capital adequacy is not negatively impacted.

📜 Read the original circular — full text as issued by RBI
RBI/2013-14/619 UBD. CO. BPD. PCB. Cir. No. 67/09.50.001/2013-14 May 30, 2014 The Chief Executive Officers of All Primary (Urban) Co-operative Banks Madam/ Dear Sir, Deferred Tax Liability on Special Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961-UCBs 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 ground 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. 2. 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. 3. 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 ended March 31, 2014 onwards should be charged to the Profit and Loss Account of that year. 4. 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, (P. K. Arora) General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/619 · issued 30 May 2014. The plain-English explanation above is BankPulse’s own independent summary.
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Who does what — compliance checklist
💻 IT / Systems
  • Recompute Tier-I capital by including the entire Special Reserve, now that DTL is created.
📜 Compliance
  • Review your Special Reserve balance as at March 31, 2013 and compute any shortfall in DTL creation.
  • Adjust the shortfall directly from reserves and disclose it 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 Primary (Urban) Co-operative Banks, Finance and accounts departments of UCBs, Auditors and compliance teams of UCBs), your first concrete step on “DTL on Special Reserve for UCBs under Section 36(1)(viii)” is: “Review your Special Reserve balance as at March 31, 2013 and compute any shortfall in DTL creation.” (RBI issued this 30 May 2014).

  1. Circular: RBI/2013-14/619 -- DTL on Special Reserve for UCBs under Section 36(1)(viii)
  2. Issued: 30 May 2014
  3. Action required: Review your Special Reserve balance as at March 31, 2013 and compute any shortfall in DTL creation.
  4. Action required: Adjust the shortfall directly from reserves and disclose it 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: Recompute Tier-I capital by including the entire Special Reserve, now that DTL is created.
  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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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8913&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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