Tax Audit Under Section 44AB: Complete Guide for AY 2026-27

29 May 2026

Tax audit under Section 44AB of the Income Tax Act is one of those compliance requirements that catches businesses and professionals off guard every year — either because they crossed the threshold without realising it, or because they assumed their situation did not qualify. For AY 2026-27 (relating to the financial year 1 April 2025 to 31 March 2026), the provisions remain substantially as they were after the amendments brought in by the Finance Act 2021, but it is worth going through the full applicability matrix carefully.

At Regi Tom Antony And Associates, we conduct tax audits for businesses across Kerala and for clients throughout India remotely. This guide is intended to give you a clear picture of whether you are covered and what to expect.

What Is a Tax Audit?

A tax audit is an examination and verification of the books of accounts of a business or profession by a Chartered Accountant, carried out to ensure that the accounts are properly maintained, income is correctly computed, and the various claims, deductions, and provisions of the Income Tax Act have been correctly applied.

The CA conducting the audit issues a report in the prescribed forms (Form 3CA or 3CB along with Form 3CD). This report is submitted electronically to the Income Tax department through the assessee's login on the portal. The audit does not by itself result in additional tax — it is a verification and disclosure exercise. However, discrepancies identified in the audit report can trigger further scrutiny.

Who Must Get a Tax Audit Under Section 44AB — AY 2026-27 Thresholds

Business (non-presumptive): Mandatory if total sales, turnover, or gross receipts in the previous year exceed ₹1 crore.

Business (cash receipts and payments — 96% digital): If more than 95% of receipts are in non-cash mode AND more than 95% of payments are in non-cash mode in the previous year, the threshold is enhanced to ₹10 crore. This was a significant relief introduced to promote digital transactions. For AY 2026-27 (FY 2025-26), if your business exceeds ₹1 crore but is below ₹10 crore AND your cash receipts and cash payments are each below 5% of total receipts/payments respectively, audit is not required under 44AB on turnover grounds.

Profession: Mandatory if gross receipts from profession exceed ₹50 lakh. The enhanced ₹10 crore threshold does not apply to professions — the limit remains ₹50 lakh regardless of payment mode.

Presumptive taxation scheme opted but income declared below the prescribed rate:

• If a person who was previously covered under Section 44AE, 44BB, or 44BBB opts out of the presumptive scheme and declares income below the prescribed presumptive rate, audit is required regardless of turnover.
• If a person covered under Section 44AD (business) declares income below 6%/8% of turnover, they cannot opt out of 44AD for the next 5 years without triggering the audit requirement under Section 44AB read with Section 44AD(5).

Presumptive scheme for professionals (Section 44ADA): If a professional who was covered under Section 44ADA (50% of gross receipts) declares income below the 50% presumptive rate, audit is required. The gross receipt limit for 44ADA as of FY 2025-26 is ₹75 lakh (₹50 lakh for those with more than 5% cash receipts).

Turnover Definition: What Counts?

The definition of turnover, total sales, or gross receipts is not explicitly defined in the Income Tax Act for Section 44AB purposes. The ICAI guidance note provides direction. Key points:

• For trading businesses: gross sales value (before deducting returns)
• For service businesses: total fees or service charges billed
• GST collected on behalf of the government: The ICAI guidance note and departmental position has generally been that GST should be excluded from turnover for the purpose of the 44AB threshold, since it is collected as an agent of the government. However, this is not settled by statute and practice varies. Be consistent with your accounting treatment.
• Speculative income: treated as separate business; profits and losses are computed separately but are included in total income
• Futures and Options trading: the ICAI Guidance Note provides that for F&O trading, the turnover is the absolute value of profits plus the absolute value of losses (not the underlying transaction value)

Form 3CA vs Form 3CB: Which Applies to You?

Form 3CA: Used when the assessee is already required by any other law (e.g., Companies Act, Partnership Act) to get their accounts audited. Here, the tax audit report certifies that the accounts already audited under other law are consistent with the income tax return. The CA's report under Section 44AB is an addendum to the primary audit.

Form 3CB: Used when the assessee is not required to get accounts audited under any other law. The CA conducts the audit specifically for income tax purposes. This applies to most sole proprietors, HUFs, partnership firms (other than LLPs with mandatory audit under LLP Act), and individuals.

Form 3CD: This is the statement of particulars that accompanies both Form 3CA and Form 3CB. It is a detailed questionnaire-style form covering 44 clauses, requiring disclosure of information on various aspects of the business, including method of accounting, inventory valuation, related party transactions, payments to specified persons, TDS compliance, loans and deposits, capital expenditure, deductions claimed, and more. The CA signs this form having verified each clause.

Key Items in Form 3CD That Require Attention

Certain clauses in Form 3CD are particularly significant because errors or omissions here directly affect tax liability:

Clause 17 — Method of accounting: Declares whether mercantile or cash basis is followed and whether there has been a change. A change in method can significantly affect year-on-year income recognition.

Clause 20 — Amounts not deductible: Covers expenses that have been claimed but are disallowable under Sections 30 to 44D (including Section 40A(3) cash payment disallowance, 36(1)(va) employee contribution to PF/ESI paid late, and 43B deferred deductions).

Clause 26 — Amounts credited to P&L but not taxable or assessable at a different rate: Requires identification of exempt income, capital gains, and items that need to be removed from normal income computation.

Clause 34 — TDS compliance: Requires reporting of TDS deductible but not deducted, or deducted but not deposited on time. Deficiencies here trigger automatic disallowance under Section 40(a)(ia) for expenses where TDS was not deducted.

Clause 44 — GST breakup: Requires a total breakup of expenditure reported in the P&L into taxable GST supply, exempt supply, non-GST, and composition supplies. This is a data-intensive clause that requires coordination between income tax and GST records.

Due Date for Tax Audit and ITR Filing — AY 2026-27

The due dates for AY 2026-27 (FY 2025-26) are as follows, absent any extension notifications from CBDT:

Tax Audit Report (Form 3CA/3CB + 3CD) submission deadline: 30 September 2026

ITR filing deadline for taxpayers liable for tax audit: 31 October 2026

These dates are subject to CBDT extending them through notifications, which has occurred in several recent years. However, plan for the statutory deadline and treat any extension as a bonus rather than a plan.

The audit report must be uploaded by the CA through the CA's login on the Income Tax portal, and then accepted by the assessee in their own login. Both steps must be completed. An audit report uploaded but not accepted by the assessee is treated as not filed.

Penalty for Not Getting Tax Audit Done

If an assessee who is required to get a tax audit done fails to do so by the due date, the penalty under Section 271B is:

0.5% of total sales/turnover/gross receipts, subject to a maximum of ₹1,50,000

This penalty is levied by the Assessing Officer. It is not automatic but will typically be imposed during scrutiny or where the deficiency is identified.

There is a defence available under Section 273B: if the assessee can demonstrate a reasonable cause for the failure (e.g., death or serious illness of the proprietor, labour disputes, fire, natural disaster), the penalty can be waived. Court decisions have also held that a bona fide dispute about whether the turnover threshold was met constitutes reasonable cause in some cases.

Note that failing to file the tax audit report also means the ITR itself will be treated as defective or will miss the deadline, attracting additional consequences including interest under Section 234A and potential loss of certain deductions and set-offs.

Common Audit Issues That Lead to Tax Demands

• Section 40A(3) disallowance: Cash payments above ₹10,000 per day per person for business expenses are disallowed. The CA will identify these from the books and report them in Form 3CD Clause 20.
• Late deposit of employee PF/ESI contributions: Employer contributions to PF/ESI paid after the due date under the relevant labour laws are disallowed under Section 36(1)(va). Post the Supreme Court decision in Checkmate Services (2022), the position is settled — late payment is disallowed even if paid before the ITR filing date.
• Section 43B deductions: Several items (taxes, duties, PF employer contribution, interest on loans from financial institutions, bonus/commission) are deductible only on actual payment within the year or by the ITR due date. The CA checks payment dates against the balance sheet.
• Related party transactions under Section 40A(2): Payments to relatives or associated concerns at above-market rates are subject to disallowance. The CA reports these; the AO may use this information to question the reasonableness of expenditure.
• Unexplained credits or investments: The CA is required to report any amounts in the books that appear to be unexplained. These become fodder for assessment under Sections 68 and 69.

Tax Audit for Professionals — What Is Different

For professionals (doctors, lawyers, CAs, engineers, architects, interior designers, and technical consultants falling under Section 44AA), the audit threshold is ₹50 lakh of gross receipts, with no enhanced digital payment threshold.

Many professionals maintain accounts on a cash basis rather than mercantile basis, which is permissible. The CA will report the accounting method followed. For professionals, the areas that typically attract scrutiny in audit are: income not routed through the main account (cash consultations, professional fees received directly), treatment of professional fees received in advance, and personal expenses claimed as professional expenses.

Preparing for Your Tax Audit — Practical Steps

• Close your books of accounts for FY 2025-26 by April/May 2026. Do not leave this to September.
• Reconcile your GST returns (GSTR-1 and GSTR-3B) with your P&L. Turnover declared in GST returns should tie to income tax turnover, with documented reconciliation items.
• Verify all TDS deductions: check that TDS has been deducted where required and deposited on time. Pull your Form 26AS and AIS to ensure all TDS credits are reflected.
• Check PF/ESI deposit dates: print the payment challans for employer and employee contributions and verify they were deposited by the statutory due dates.
• Prepare a schedule of related party transactions: payments to family members, partners' relatives, associated firms. Your CA will need this for Clause 23 of Form 3CD.
• Have your loan account statements ready: interest on business loans claimed as a deduction must match the lender's statement.
• Do not make last-minute adjustments to books of accounts without a proper audit trail. Post-audit adjustments that change reported figures are a red flag.

Frequently Asked Questions

Q: My turnover was ₹1.1 crore but 98% of my sales were through bank transfers. Do I still need a tax audit?
A: Yes, provided your cash payments also exceed 5% of total payments. The enhanced ₹10 crore threshold applies only when BOTH receipts and payments meet the 95% non-cash condition. If your receipts are 98% non-cash but your payments include more than 5% cash, you do not get the enhanced limit and the standard ₹1 crore threshold applies.

Q: I am a salaried person who also has some freelance income. My freelance gross receipts were ₹55 lakh. Does the professional threshold apply to me?
A: Yes — if your freelance activity falls within the specified professions under Section 44AA and gross receipts exceed ₹50 lakh, you are required to get a tax audit under Section 44AB. Your salaried income is separate but the professional threshold is crossed independently.

Q: Can I change my CA for the tax audit for AY 2026-27?
A: Yes. There is no restriction on changing the CA who conducts the tax audit. The new CA will ask for prior year's audit reports and working papers. Ensure you formally revoke the previous CA's engagement and appoint the new one with a fresh engagement letter.

Q: If I get my accounts audited under the Companies Act, do I need a separate tax audit?
A: You still need the Section 44AB report (in Form 3CA + 3CD), but this builds on the statutory audit already done. The same CA (or a different CA) issues the Form 3CA certifying that the accounts audited under the Companies Act are consistent with the Income Tax return, and the Form 3CD statement of particulars. It is not an entirely separate audit from scratch — but it is a separate engagement with its own scope and deliverable.

How We Can Help

At Regi Tom Antony And Associates, we offer comprehensive tax audit services for businesses and professionals across Kerala and pan-India (remote). Our tax audit process includes pre-audit review of books to identify potential disallowances, reconciliation of GST and income tax records, and timely filing of Form 3CA/3CB/3CD before the due date.

If you are approaching the ₹1 crore or ₹50 lakh threshold, or if you are unsure whether your business qualifies for the enhanced digital threshold, contact us for an initial assessment. Planning ahead of the year-end gives you time to correct any compliance gaps before they become audit findings.

This article is for general information only and reflects the position as of AY 2026-27. Tax law changes frequently; consult a qualified CA before making compliance decisions.