If you run a business or earn professional income, you’ll likely have numerous transactions, both for payments received and expenses incurred. To accurately track and record these transactions, you will need to maintain detailed financial statements and accounts.
Now in certain cases, the Income Tax Department (ITD) requires a thorough examination of these accounts to verify that they are accurately maintained and that the expenses claimed are legitimate.
This is exactly what a tax audit is.
Who conducts a tax audit?
A tax audit is carried out by a Chartered Accountant (CA), who ensures that the books of accounts and financial statements are properly maintained. The CA then includes their observations and other necessary details in the tax audit report.
Applicability of tax audit
The applicability of a tax audit depends on the turnover, sales, or gross receipts from a business or profession, along with a few specific conditions.
a) For businesses
If your business turnover crosses ₹1 crore, you need a tax audit. But if you deal mostly in digital payments, not cash, this limit becomes ₹10 crore instead. Here’s the exact rule: cash you receive must be 5% or less of your total receipts, and cash you pay out must be 5% or less of your total payments. Both need to be true. If even one goes over 5%, you’re back to the ₹1 crore limit. One small catch: a cheque that isn’t “account payee” counts as cash here, even though it’s not really cash.
Here’s a table to sum it up.
b) For professionals
For professionals, both turnover and profit reported are key in determining tax audit applicability.
Additionally, businesses and professionals may choose to opt for the presumptive taxation scheme, where tax audit applicability rules become a little different.
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If you’re a business using the 44AD scheme, and within 5 years you show a lower profit than the scheme expects, you can’t use the scheme again for the next 5 years. During that time, you’ll need a tax audit only if your total income is above the basic exemption limit. If it’s below, you’re fine.
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If you’re a professional using the 44ADA scheme, you can join if your receipts are ₹75 lakh or less (₹50 lakh if you use a lot of cash). If you later show a lower profit than the scheme expects, you need an audit only if your income is also above the basic exemption limit.
The basic exemption limit rule above is only for people leaving these schemes. It doesn’t apply to the ₹1 crore / ₹10 crore rule earlier. Cross that, and you need an audit no matter what you earn.
You see, tax audit rules can get technical. You can check Income Tax Audit Applicability using our tool to quickly determine if tax audit applies to you.
What are the consequences of not conducting a tax audit?
If you miss the deadline for filing your tax audit report, you can be fined under Section 271B. The fine is 0.5% of your turnover, or ₹1.5 lakh, whichever is smaller.
Further, if you file your ITR without an audit, the return will be considered defective and a notice will be issued u/s 139(9).
Important deadlines
For taxpayers required to undergo a tax audit, the due date for filing the audit report is 30th September, and the deadline for filing the ITR is 31st October of the relevant assessment year.
Here’s a video that answers everything about tax audits.
