Check Tax Audit Applicability
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What is a tax audit?
A tax audit is a review of a taxpayer's books of accounts by a Chartered Accountant. It verifies that income, expenses, and deductions for the tax year are correctly reported.
Under the Income Tax Act 2025, tax audit provisions are governed by Section 63 — which replaces Section 44AB of the Income Tax Act 1961, effective from FY 2025-26 (AY 2026-27) onwards. The requirement is triggered when turnover or gross receipts cross prescribed limits, or when profits declared under presumptive taxation fall below the required minimum.
Tax audit turnover limit for businesses
A business must get its accounts audited if total sales, turnover, or gross receipts exceed ₹1 crore in a tax year under Section 63(1)(a).
This limit rises to ₹10 crore if both conditions are satisfied:
Cash receipts do not exceed 5% of total receipts for the year
Cash payments do not exceed 5% of total payments for the year
Both thresholds must be met together. Meeting only one does not qualify the business for the higher limit.
Example: Audit is not required
A software services firm has a turnover of ₹7.5 crore. All invoices are settled via NEFT; cash receipts are ₹28 lakh (under 5%) and cash payments are ₹22 lakh (under 5%). Since both conditions are met and turnover is below ₹10 crore, no tax audit is required.
Example: Audit is required
A trader has a turnover of ₹3 crore. Cash receipts are ₹65 lakh — over 5% of total. The digital exception does not apply. Since turnover exceeds ₹1 crore, a tax audit is mandatory.
Tax audit limit for professionals
A professional must get accounts audited if gross receipts from the profession exceed ₹50 lakh in a tax year under Section 63(1)(c).
"Profession" here covers the specified professions under Section 62(4): legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology, and company secretary services. This applies equally to freelancers and sole proprietors in these fields.
Professionals who opt for presumptive taxation under Section 58 get an extended threshold of ₹75 lakh, provided cash receipts are below 5% of gross receipts and profit is declared at 50% or above of gross receipts. Above ₹75 lakh, audit is mandatory regardless.
Example:
Priya is a freelance architect with gross receipts of ₹64 lakh, all via bank transfer. She opts for presumptive taxation under Section 58 and declares ₹32 lakh (50% of receipts) as profit. Since receipts are below ₹75 lakh, cash is under 5%, and the declared profit meets the minimum rate — no tax audit is required. If her receipts cross ₹75 lakh next year, audit becomes mandatory.
When presumptive taxation affects audit applicability
Under Section 58, eligible businesses and professionals can declare income at prescribed minimum rates rather than maintaining full books of accounts. Section 63(2) explicitly states that audit is not required when profits are declared as per Section 58 rates.
Minimum rates under Section 58:
Businesses: 8% of cash turnover + 6% of digital/banking turnover (for turnovers up to ₹2 crore; extended to ₹3 crore if cash is below 5%)
Professionals: 50% of gross receipts (for receipts up to ₹50 lakh; extended to ₹75 lakh if cash is below 5%)
Audit is triggered when:
Declared profits are below the prescribed minimum rates, AND
Total income exceeds the basic exemption limit
The 5-year rule under Section 58(7):
If a business uses presumptive taxation and then declares profits below the minimum rate in any subsequent year, it is barred from using presumptive taxation for the next 5 years. If total income exceeds the exemption limit during this period, audit is mandatory under Section 58(8) — even if turnover is below the standard threshold.
Example:
Rahul runs a retail business with a turnover of ₹1.8 crore. He opts for presumptive taxation and declares a profit of ₹8 lakh — under 4% of turnover. The minimum prescribed rate is 8% (₹14.4 lakh). Since declared profits fall below this and his total income exceeds the exemption limit, a tax audit is required under Section 63.
Tax audit due date and penalty
The audit report must be filed in Form No. 26 (Part B) under Rule 47 of the Income Tax Rules 2026 — replacing Form 3CD under the old Act. The due date is one month before the ITR filing deadline under Section 263(1).
Under Section 446 of the Income Tax Act 2025, failing to furnish the audit report attracts a penalty equal to the lower of:
0.5% of total sales, turnover, or gross receipts for the tax year, or
₹1,50,000
