FAQs on the Applicability of Tax Audit under the Income Tax Act, 1961

Introduction

In the realm of Indian taxation, the Tax Audit under Section 44AB of the Income Tax Act, 1961, stands as a critical compliance requirement for businesses and professionals. Introduced to ensure accurate reporting of income and prevent tax evasion, a Tax Audit involves an independent examination of a taxpayer's accounts by a Chartered Accountant. This audit verifies the books of accounts, ensuring they reflect true and fair financial transactions.

As of November 2025, the thresholds for applicability have evolved with amendments, including relaxations for digital transactions and presumptive taxation schemes. However, non-compliance can attract penalties up to 0.5% of turnover (capped at Rs 1.5 lakh) and disallowance of expenses.

We've structured this as a Q&A to keep it concise yet comprehensive, covering eligibility criteria, exemptions, reporting, and more. Let's dive in.

1. What is a Tax Audit, and who needs to get one?

A Tax Audit is a statutory audit mandated under Section 44AB to certify that a taxpayer's books of accounts are maintained properly and income is computed correctly. It applies to persons (individuals, HUFs, firms, companies, etc.) engaged in business or profession.

Applicability Snapshot:

• Business Turnover Threshold: Exceeds Rs 1 crore in a financial year (FY). For FY 2024-25 onwards, if cash receipts and payments are less than 5% of total receipts/payments, the limit rises to Rs 10 crore.
• Professional Receipts Threshold: Gross receipts exceed Rs 50 lakh.
• Presumptive Taxation Opt-Out: If you opt out of Sections 44AD/44ADA and declare income lower than the presumptive rate.

In essence, if your income computation relies on maintained books (not presumptive schemes), and you cross these limits, an audit is mandatory. For example, a software developer earning Rs 60 lakh from freelance work must audit if not under 44ADA.

2. Does the Rs 1 crore turnover limit apply to all businesses uniformly?

No, the limit varies based on the nature of transactions, thanks to the Finance Act 2023 amendments effective from AY 2024-25.

• Standard Limit: Rs 1 crore for businesses where cash transactions exceed 5% of total receipts/payments.
• Enhanced Limit: Rs 10 crore if digital compliance is met-i.e., 95%+ of transactions via account payee modes (cheque, bank transfer, etc.).

This encourages a cashless economy. For instance, an e-commerce seller with Rs 8 crore turnover, 98% digital, is exempt from audit. However, if 10% is cash-based, they fall under the Rs 1 crore slab and must audit if exceeded.

Key Tip: Turnover includes all sales, but excludes GST if not includible in income. Excise duties and sales tax are included if part of the turnover.

3. What counts as 'turnover' for Tax Audit purposes?

Turnover (or gross receipts) is the aggregate value of all sales, services, or operations in the FY, without deducting expenses.

• Trading/Manufacturing: Total sales value.
• Services: Billable fees (e.g., consultancy charges).
• Commission/Agency: Gross commissions received.
• Forex/Shares: Positive differences in buy-sell (not notional profits).

For contractors, it's the contract value, not just profit share. A common pitfall: Many SMEs forget to include exports or inter-state sales. If your audited P&L shows Rs 1.2 crore sales, you're in audit territory, regardless of net profit.

Under presumptive taxation (44AD), if eligible (turnover

4. Are professionals like doctors, lawyers, or freelancers required to undergo Tax Audit?

Yes, under Section 44AA/44AB, professionals (specified under Section 44AA, e.g., legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, or any notified profession) must audit if gross receipts exceed Rs 50 lakh.

• Presumptive Option (44ADA): Declare 50% of receipts as income if under Rs 75 lakh (enhanced from Rs 50 lakh via Finance Act 2023). No audit needed if opted in.
• Opt-Out Scenario: If you maintain books and declare less than 50%, audit is compulsory.

Example: A CA with Rs 55 lakh fees opting for 44ADA declares Rs 27.5 lakh income-no audit. But if claiming Rs 20 lakh (after expenses), audit required.

5. Do partnership firms and LLPs need a Tax Audit?

Absolutely, unless fully under presumptive schemes. Partners/LLPs follow business/profession rules:

• Turnover >Rs 1/10 crore (as applicable).
• If any partner claims deduction for salary/interest under Section 40(b), books must be audited anyway.

For LLPs, the audit is filed via Form 3CEB. Non-compliance blocks loss carry-forward. A firm with Rs 1.5 crore turnover (mostly digital) audits, but if all partners are salaried and no presumptive, it's straightforward.

Pro Tip: Even if exempt from audit, statutory audit under Companies Act applies to LLPs above Rs 40 lakh turnover or Rs 25 lakh capital.

6. What about companies-private, public, or startups? Are they always audited?

Companies (under Companies Act, 2013) require statutory audits regardless of turnover, but Income Tax Audit under 44AB applies additionally if thresholds are met.

• All companies must file audited accounts with ITR-6.
• Tax Audit (Form 3CA/3CB) if business/profession limits exceeded.
• Startups under DPIIT recognition get presumptive benefits up to Rs 25 crore turnover (8% deeming), potentially waiving IT audit if fully opted.

Public companies follow the same, but with stricter SEBI disclosures. A Pvt Ltd with Rs 50 lakh turnover is statutorily audited but exempt from IT audit.

7. Are there exemptions or special cases for Tax Audit applicability?

Yes, several relaxations exist:

• Presumptive Taxation: Full opt-in under 44AD (businesses
• Cashless Threshold: As noted, up to Rs 10 crore.
• Non-Residents: Limited to Indian-sourced income; expatriates often qualify via DTAA.
• Agricultural Income: Pure agri-business exempt, but hybrid (e.g., dairy + sales) may trigger if turnover >limit.
• Loss-Making Entities: Audit still mandatory if thresholds crossed; losses need certification.

8. When and how is the Tax Audit Report filed?

The report must be obtained by September 30 of the assessment year (e.g., for FY 2024-25, by 30.09.2025). File via:

• Form 3CA/3CB: 3CA for statutorily audited entities; 3CB otherwise.
• Form 3CD: Detailed statement (140+ clauses on transactions, TDS, etc.).
• E-filing on Income Tax portal; CA's digital signature required.

Delays attract penalties under Section 271B. Extended deadlines (e.g., October 31 for some) apply during monsoons or disruptions, but confirm via CBDT notifications.

9. What are the consequences of not conducting a Tax Audit?

Penalties are steep:

• Section 271B: 0.5% of turnover/gross receipts, max Rs 1.5 lakh.
• Disallowance: Expenses under Section 37(1) may be rejected.
• Prosecution: In extreme cases, under Section 276B for willful evasion.
• ITR Scrutiny: Triggers notices; best to comply voluntarily.

11. Can I avoid Tax Audit by opting for presumptive taxation every year?

Yes, but with caveats. Sections 44AD/44ADA allow repeated opt-in, but opting out once locks you into full books + audit for 5 years.

• Business (44AD): Eligible if resident, non-company/professional.
• Deemed Income: 8% (6% digital) of turnover-no books needed.

A serial entrepreneur switching schemes risks scrutiny; consistency is key.

Conclusion

Navigating Tax Audit applicability requires vigilance on thresholds, transaction modes, and scheme opt-ins. With digital India's push, the Rs 10 crore limit offers relief, but presumptive taxation remains a boon for small players. Always consult a CA for personalized advice, as CBDT circulars evolve (check incometaxindia.gov.in).

Compliance isn't just about avoiding penalties-it's about building credible financials for loans, investors, and growth. Stay updated, maintain digital records, and turn audit from a chore into a compliance ally. If your turnover's creeping up, start prepping now for FY 2025-26.