Understanding Income Tax Audit: Rules, Limits & Categories

A tax audit means checking your financial records to make sure everything is correct and follows the tax rules. Under Section 44AB of the Income Tax Act, if your business turnover or professional income is above a certain limit, you must get a tax audit done. This helps ensure your books are accurate and that you are paying the right amount of tax.

What Is a Tax Audit?

A tax audit is when your financial records are checked to make sure everything is correct. It helps confirm that your income, expenses, taxes, and deductions are reported properly and follow the tax rules.

Objectives of a Tax Audit

Make sure your financial records are kept properly and verified by a Chartered Accountant (CA).
Find and report any mistakes or issues in your accounts.
Share important financial details with the tax department, like depreciation and compliance info.
Help the tax department confirm that your income tax return is correct and follows all tax rules.

Why a Tax Audit is Done

The main purpose of a tax audit is to make sure you are following income tax rules. It helps find any mistakes in your accounts early and makes filing your tax return easier. It also ensures everything is clearly reported so the tax department can check your return smoothly.

Who Has to Get a Tax Audit?

You must go through a tax audit if:

Your business has sales or turnover of more than ₹1 crore in a year.
You’re a professional (like a doctor or lawyer) earning over ₹50 lakh. But if 95% of your payments are digital, the limit goes up to ₹75 lakh.
You are under the presumptive tax scheme but show lower profits than expected, or you decide to opt out of the scheme.

Who Needs a Tax Audit in India?

As per Indian tax rules, certain businesses and professionals must get their accounts checked through a tax audit.

Businesses: If your total sales or turnover go over ₹1 crore in a year, a tax audit is required.
Professionals: If you earn more than ₹50 lakh in a year (like doctors, lawyers, engineers, architects, etc.), you also need a tax audit. You can find the full list of such professions in Rule 6F of the Income Tax Rules, 1962.
Presumptive Taxation: If you’re using the presumptive taxation scheme and your turnover crosses ₹2 crore, or if you show less profit than required under the scheme, you’ll need to get a tax audit too.

If you skip a required tax audit, you could face penalties. But in some genuine cases like natural disasters, theft of records, or if your auditor quits suddenly, you may be excused under Section 273B of the Income Tax Act.

Who Can Do a Tax Audit?

Only a Chartered Accountant (CA) or a CA firm can carry out a tax audit in India.

A single CA is allowed to conduct up to 60 tax audits in one financial year.
If it’s a CA firm, this limit of 60 audits applies to each partner separately.

So, if a firm has 3 partners, the firm can handle up to 180 audits (60 per partner).

What Is the Turnover Limit for a Tax Audit?

A tax audit becomes mandatory if:

Your business turnover is more than ₹1 crore in a financial year.
Your professional income (like doctors, lawyers, consultants) is more than ₹50 lakh.
You’re under the presumptive taxation scheme but:
- You report profits lower than the required limit, or
- You opt out of the scheme.

These limits help determine who must get their accounts audited as per income tax laws.

Recent Changes to Tax Audit Rules

According to the Finance Act, 2021 (effective from April 1, 2021), the tax audit limit for businesses has increased from ₹1 crore to ₹10 crore.
👉 But this applies only if:

Cash transactions (receipts + payments) are 5% or less of total business transactions.
This change encourages digital payments and reduces the need for audits in digital-first businesses.

Who Must Get a Tax Audit Done?

1. Businesses

Business Type	When Tax Audit is Required
Not under presumptive taxation	If turnover exceeds ₹1 crore. But if cash transactions ≤ 5%, audit required only if turnover crosses ₹10 crore.
Under presumptive taxation (Sections 44AE, 44BB, 44BBB)	If you show income lower than what’s prescribed under the scheme.
Under presumptive taxation (Section 44AD)	If income is less than 8%/6% of turnover AND total income is above ₹2.5 lakh.
Opted out of presumptive taxation (Section 44AD)	If you leave the scheme and total income exceeds ₹2.5 lakh in any of the next 5 years.

2. Professionals

Professional Type	When Tax Audit is Required
Regular profession	If gross receipts exceed ₹50 lakh in a year.
Under presumptive scheme (Section 44ADA)	If declared profit is less than 50% of receipts AND total income exceeds ₹2.5 lakh.

3. Businesses Reporting Losses

Situation	When Tax Audit is Required
Business making a loss (not under presumptive taxation)	If turnover exceeds ₹1 crore or total income exceeds ₹2.5 lakh, even in case of a loss.

Key Rules for Conducting a Tax Audit in India

If you are a business owner or a professional, it’s important to understand when a tax audit is required under Indian tax laws. Below are the key rules simplified for easy understanding.

1. Running More Than One Business
If you operate multiple businesses, their combined turnover is considered.
If the total turnover from all businesses exceeds ₹1 crore, a tax audit is mandatory, even if each business individually falls below the threshold.

2. Engaging in Multiple Professions
If you are involved in more than one professional activity, all professional receipts are added together.
If the total gross receipts exceed ₹50 lakh in a financial year, a tax audit is required.

3. Operating Both Business and Profession
If you are managing both a business and a profession, each is evaluated separately.
A tax audit is needed only if either:

Business turnover exceeds ₹1 crore, or
Professional receipts exceed ₹50 lakh

For example, if your business turnover is ₹90 lakh and professional income is ₹40 lakh, a tax audit is not required.

4. What is Not Included in Turnover
Certain types of income are excluded from turnover when determining tax audit applicability. These include:

Sale of fixed assets such as vehicles or equipment
Capital gains from stocks, bonds, or mutual funds
Rental income
Interest income not related to business
Client reimbursements

5. Revising a Filed Tax Audit Report
Once a tax audit report is filed online, it cannot be modified casually.
However, revisions are allowed in the following cases:

If the books of accounts are updated (e.g., after the annual general meeting)
If there are legal amendments or new interpretations of tax laws

In all cases, the revised audit report must clearly state the reason for the correction.

How Is a Tax Audit Conducted in India?

A tax audit in India is done by submitting certain forms, depending on your business type and legal requirements. Here’s a simple breakdown of the main forms used:

Form 3CA
Used when your business or profession is already required to be audited under another law (like the Companies Act).
Example: Private limited companies.

Form 3CB
Used when there is no other law that requires an audit—only the Income Tax Act applies.
Example: Small businesses or professionals who are only subject to tax audit.

Form 3CD
This is a detailed report attached to Form 3CA or 3CB.
It gives all the important financial details about your business, like income, expenses, and deductions.

Form 3CE
Used by non-residents or foreign companies who earn fees or royalties from Indian businesses or the government for technical services.

These forms are submitted online by a Chartered Accountant after verifying your accounts.

When Should the Tax Audit Report Be Filed?

The Institute of Chartered Accountants of India (ICAI) often releases guidance notes to help CAs keep up with tax audit rules and changes in forms. For example, in 2018, Form 3CD was updated to include new reporting details.

Once your audit is finished, your Chartered Accountant will upload the tax audit report online and send it to you for approval. If you don’t agree with the report, you can reject it—but this means the audit has to be done all over again.

The last date to file the tax audit report is:

30th September of the assessment year for most taxpayers
30th November for those who need to submit Form 3CE (usually foreign companies or non-residents)

Being aware of the tax audit process helps you stay compliant with income tax laws. It’s also important to know how to calculate your taxable income and use legal ways to reduce your tax liability

How to Calculate Taxable Income for Your Business

As explained earlier, a tax audit is required if:

Your business turnover is more than ₹1 crore, or
Your professional income is more than ₹50 lakh in a financial year.

If you earn from both business and profession, these amounts are considered separately, not together. For example, if your business turnover is ₹95 lakh and professional income is ₹48 lakh, you don’t need a tax audit.

Also, some types of income don’t count as business income when calculating taxable income. These include:

Profits from selling fixed assets (like machines or vehicles)
Income from mutual funds or shares
Rental income
Reimbursements from clients
Interest income not related to business

These are only included if your total income crosses the required limit.

Easy Ways to Save Tax for Business Owners and Professionals

If you run a business or are a professional, here are some easy ways to reduce your tax:

Buy in your business name: Buy things like laptops, mobiles, or vehicles in your company’s name. You can get tax benefits on them.
Show your utility bills as business expenses: Use bills for internet, electricity, or AC used for work to save tax.
File your return on time: If you file on time, you can carry forward your business losses for up to 8 years.
Know the latest tax rules: The government gives new tax benefits often—especially for small businesses. Keep yourself updated.
Claim work-related expenses: If you spend on travel, food, or meetings for work, keep the bills. These can help reduce your tax.
Claim start-up costs: Money spent before starting your business (like setting up) can also be claimed slowly over 5 years.

Doing all this can help you pay less tax and avoid problems later. If you miss your audit deadline, you may have to pay a fine of up to ₹1.5 lakh.

Penalty for Late or Missed Tax Audit Report

If you don’t finish or file your tax audit report on time, you may have to pay a penalty. The penalty is the lower of:

0.5% of your total turnover, or
₹1,50,000.

This rule is made to make sure businesses submit their financial details on time and follow tax laws properly.

However, in some cases, you may not have to pay the penalty. You can get relief if the delay happened due to reasons like:

Natural disasters affecting your business
Your auditor suddenly resigning
Strikes or lockouts that stopped work
Losing records due to unexpected events
Serious illness or death of the person managing your accounts

If these kinds of genuine problems happen, the tax department may forgive the delay.

Difference Between Tax Audit and Statutory Audit

Criteria	Statutory Audit	Tax Audit
Purpose	To check if the company follows legal and financial reporting rules.	To check if the company follows income tax rules.
When Required	Mandatory for certain companies under company laws.	Required if turnover is over ₹1 crore or as per tax law limits.
Who Does It	External auditor appointed by the company.	A Chartered Accountant (CA) registered with ICAI.
What Is Checked	Full financial statements and accounting systems.	Income, expenses, deductions, and tax compliance.
Main Goal	To confirm that financial statements are true and fair.	To confirm income is reported correctly and tax laws are followed.

Types of Audits in India

Audits in India are done in different ways depending on how the tax department wants to check your records. The main three types are:

1. Field Audit

Done at your business location.
Sometimes conducted at your employee’s or representative’s office.
You must provide all the required records at the place where the audit is done.

2. Office Audit

Done at a government tax office.
You will receive a notice in advance telling you what documents to bring.

3. Correspondence Audit

You get a letter asking for specific documents related to your tax return.
You have to send those documents by post or as instructed.

Conclusion

Tax audits in India are important because they make sure businesses and professionals report their income correctly and follow all tax rules. The main goal is to check if the income, expenses, and deductions reported are accurate, which helps stop tax evasion and keeps things transparent.

A tax audit becomes mandatory if:

Your business turnover is more than ₹10 crore (with less cash transactions), or
Your professional income is more than ₹50 lakh.

A Chartered Accountant (CA) does the audit using formats set by the Income Tax Department. Knowing when a tax audit is needed and following the rules can help you avoid penalties and make tax filing easier. It also helps if you understand how to reduce your taxable income legally using deductions and exemptions. Tax audits are different from statutory audits. A statutory audit checks your overall financial statements under company law, while a tax audit focuses on income tax rules.

In short, tax audits are a key part of India’s tax system. They help build trust, ensure rules are followed, and support honest financial reporting.

FAQs

1. What is an income tax audit?
An income tax audit is a review of a taxpayer’s accounts and financial statements by a Chartered Accountant to ensure accuracy and compliance with the Income Tax Act, 1961.

2. Who is required to get a tax audit?
Businesses with turnover exceeding ₹1 crore and professionals with gross receipts over ₹50 lakhs (subject to conditions) must undergo a tax audit under Section 44AB. Limits may vary based on digital transaction criteria.

3. What is the due date for filing a tax audit report?
The tax audit report must be filed by 30th September of the assessment year unless extended by the Income Tax Department.

4. What happens if I don’t comply with tax audit rules?
Non-compliance can attract a penalty of 0.5% of turnover or ₹1,50,000, whichever is lower, under Section 271B.5. Which form is used for submitting a tax audit report?
The audit report is submitted in Form 3CA/3CB along with Form 3CD through the income tax e-filing portal.