Tax Audit: Limits, Common Reporting Issues and the Move to Section 63 of the Income-tax Act, 2025
A tax audit is required for businesses and professionals above certain limits. The audit report is a detailed statement on the taxpayer's compliance, and the Income Tax Department uses it extensively. From tax year 2026-27 the provision moves from Section 44AB of the 1961 Act to Section 63 of the Income-tax Act, 2025. The substance is largely carried forward.
Who needs a tax audit
| Category | Audit required if |
|---|---|
| Business | Turnover exceeds ₹1 crore |
| Business with limited cash transactions | Turnover exceeds ₹10 crore, where cash receipts and cash payments are each not more than 5% of the total |
| Profession | Gross receipts exceed ₹50 lakh |
| Presumptive taxation – business | Income declared below the presumptive rate, and total income above the basic exemption limit |
| Presumptive taxation – profession | Gross receipts up to ₹75 lakh (with the cash condition) and income declared below 50% of receipts, with total income above the exemption limit |
The ₹10 crore limit depends on the cash condition being met. Receipts by non-account-payee cheques or drafts count as cash for this test.
Due dates
The audit report must be filed one month before the due date of the return. For most audit cases, the report is due by 30 September and the return by 31 October. Transfer pricing cases have a later return date. For FY 2025-26 (AY 2026-27), CBDT Circular No. 7/2026 extended these to 21 October 2026 for the audit report and 21 November 2026 for the return. Late or non-filing of the audit report attracts a penalty of 0.5% of turnover or receipts, up to ₹1,50,000, unless there is reasonable cause.
Items that most often cause trouble
- MSME payments. Amounts due to micro and small enterprises and paid beyond the time allowed under the MSMED Act must be reported and are disallowed until paid. Supplier classification must be verified.
- TDS. Deductions made, deposit dates, and defaults, which lead to disallowances.
- Cash transactions. Cash payments above ₹10,000 to a person in a day are disallowed. Receipts of ₹2 lakh or more in cash in a transaction are reportable, and penalties apply.
- Loans and deposits. Loans or deposits accepted or repaid otherwise than by account-payee cheque or electronic mode, above ₹20,000.
- GST reconciliation. Turnover as per the books compared with GST returns, and expenditure on entities registered and not registered under GST.
- Deemed income. Gifts and transfers of property below stamp duty value, and share premium issues.
- Quantitative details for manufacturers and traders.
What changes from tax year 2026-27
- Section references change to the 2025 Act. Ensure your accounting and compliance tools use the updated references.
- The report form and annexure have been updated to the new Act's structure. Tax year 2026-27 audits, conducted in 2027, will be the first under the new formats.
- Audits for FY 2025-26 (conducted in 2026) remain under Section 44AB and the existing forms.
Practical preparation
- Close the books and complete the GST and TDS reconciliations before the audit starts.
- Keep a supplier master with MSME status and payment dates.
- Track cash transactions throughout the year, not just at year end.
- Review the previous year's report. Items reported then, such as pending disallowances, often affect the current year.
The information in this article reflects the law as on the date of publication and is for general guidance only.