Tax audit under s.44AB ITA 1961 is mandatory when turnover exceeds ₹1 crore — but the threshold rises to ₹10 crore where cash receipts ≤ 5% of total receipts AND cash payments ≤ 5% of total payments (the "95% digital" test inserted by Finance (No. 2) Act 2019 (as expanded by Finance Act 2021 raising the threshold from ₹5 crore to ₹10 crore)). A private company whose turnover sits between ₹1 crore and ₹10 crore and transacts digitally therefore avoids the tax audit; a company above ₹10 crore is always audited.
What the law actually requires
Section 44AB(a) — every person carrying on a business whose total sales, turnover or gross receipts exceed ₹1 crore in the previous year must get a tax audit. The report is given in Form 3CA (where accounts are audited under any other law, e.g. the Companies Act) or Form 3CB (otherwise), along with Form 3CD (the statement of particulars).
The ₹10 crore digital exception. The proviso to s.44AB, inserted by Finance (No. 2) Act 2019 (as expanded by Finance Act 2021 raising the threshold from ₹5 crore to ₹10 crore), substitutes ₹10 crore for ₹1 crore where both conditions hold:
Both conditions must be satisfied cumulatively for the whole year. Failing either one keeps the threshold at ₹1 crore.
The decision table:
The profit-margin caveat (not a company rule). The "profit below 8% of turnover (non-cash) / 6% (cash)" audit trigger applies to eligible assessees who opt into presumptive taxation under s.44AD — that is, individuals, HUFs and firms, not private limited companies. A company is not an eligible assessee for 44AD, so its low profit margin does not itself trigger an audit below the turnover threshold.
What counts as "turnover" for the test. Section 44AB(a) keys the audit to total sales, turnover or gross receipts of the business — the gross figure before expenses, not net profit and not net of trade returns. For a trading or manufacturing company that means gross sales; for a service company it means gross receipts from services. Cash and credit sales both count, and non-operating business receipts are included to the extent they are receipts of the business. The figure should reconcile with the turnover reported in ITR-6 and, for GST purposes, with the GSTR-3B turnover.
Worked example: BlueOrbit Trading Pvt Ltd
BlueOrbit Trading Pvt Ltd has turnover of ₹6.5 crore in FY 2025-26. Its records:
Both cash ratios are within 5%, so the ₹10 crore threshold applies. Since ₹6.5 crore < ₹10 crore, no tax audit is required under s.44AB. Note the ratios are computed on aggregate payments/receipts, not on turnover alone, and petty cash payments count.
If BlueOrbit's cash receipts had been ₹36 lakh (5.5%), it would fail the receipts test and the ₹1 crore threshold would apply — making the audit mandatory at ₹6.5 crore.
Practical implications
- The 5% test is arithmetic on your bank statements. Pull the year's total payments and receipts and tag every transaction not settled by cheque/draft/ECS/UPI/NEFT/RTGS as "cash". The split drives the whole result.
- Petty cash is included. Cash payments under ₹10,000 that escape s.40A(3) disallowance still count inside the 5% aggregate.
- A single failed ratio is fatal. There is no averaging between receipts and payments — each must be ≤ 5% independently.
- Audit is an obligation, not a choice. If the audit is required and not done, s.271B imposes a penalty of 0.5% of turnover, capped at ₹1,50,000 (⚠ Verify: Finance Act 2025 may have revised these amounts effective FY 2025-26 — some readings put the new rate at 0.1% with a ₹50,000 minimum and ₹5,00,000 cap. Confirm the current statutory quantum before advising).
- The audit report must precede the ITR. For a non-transfer-pricing company, Form 3CA/3CB + 3CD is due 30 September; the ITR follows by 31 October (with transfer pricing: 31 October / 30 November).
- A company is still audited under the Companies Act. Even where no tax audit is needed, a pvt ltd must complete its statutory audit under s.143 CA 2013 and file AOC-4 — the two audits are distinct, and the tax-audit exemption does not remove the statutory one.
Changed FY 2025-26: The ₹1 crore / ₹10 crore framework is unchanged this year. The practical change is enforcement plumbing: the income-tax portal now pre-validates the cash-percentage fields against the bank-statement figures in Form 3CD, so an audit-required company that files ITR-6 without the tax-audit UDIN gets the return flagged as defective.
Step-by-step: what to do
- Compute turnover. Sales, turnover and gross receipts for FY 2025-26; include operating and non-operating receipts relevant to the business.
- Compute cash receipts % — total receipts not settled by cheque/draft/ECS/UPI/NEFT/RTGS divided by total receipts.
- Compute cash payments % — same test on the payment side, including petty cash.
- Compare against the decision table. Both ≤ 5% and turnover ≤ ₹10 crore → no tax audit.
- If the audit is required, engage the CA early, complete Form 3CA/3CB + 3CD, and file before the 30 September (non-TP) / 31 October (TP) deadline.
- Even if exempt, complete the statutory audit under the Companies Act and file AOC-4.
FAQ
My company's turnover is ₹6 crore. Do we need a tax audit?
Only if you fail the 5% cash test. If both cash receipts and cash payments are ≤ 5% of their totals, the threshold is ₹10 crore and you are exempt. Verify the ratios from your bank statements before concluding.
What counts as "cash" for the 5% test?
Any payment or receipt not made by account-payee cheque, account-payee bank draft, or electronic clearing through a bank account (NEFT, RTGS, UPI, IMPS). Petty cash counts.
Is the profit-margin (8%/6%) audit trigger relevant to a pvt ltd?
No. That trigger applies to eligible assessees under s.44AD presumptive taxation (individuals, HUFs, firms). A company's low profit margin below the turnover threshold does not by itself force a tax audit.
What if turnover crosses ₹10 crore?
The digital exception has no application above ₹10 crore — the tax audit is mandatory regardless of how digital the business is.
What is the penalty for not getting a tax audit done?
Under s.271B, 0.5% of turnover with a ₹1,50,000 cap. Note: Finance Act 2025 may have revised these amounts (potentially to 0.1% / ₹50,000–₹5,00,000) effective FY 2025-26 — confirm the current statutory quantum with your CA before quantifying exposure.
Does a loss-making company with high turnover still need a tax audit?
Yes. The s.44AB test is turnover-based, not profit-based. A company with ₹8 crore turnover and a net loss still needs the audit if it fails the 5% cash test, because the ₹1 crore threshold applies when the digital proviso is not met.
Sources
- Income Tax Act 1961, s.44AB (audit thresholds and ₹10 crore digital proviso), s.271B (penalty), s.44AD (presumptive business taxation — 8%/6% audit trigger for eligible assessees)
- Finance (No. 2) Act 2019 (as expanded by Finance Act 2021 raising the threshold from ₹5 crore to ₹10 crore) — ₹10 crore threshold proviso
- Income Tax Rules 1962 — Form 3CA/3CB, Form 3CD (Rule 6G)
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