In the world of income tax, staying informed about changes in rules and limits is essential for compliance. One area that often sees updates is the Tax Audit under Section 44AB of the Income-tax Act, 1961. This section outlines when a business or professional must have their financial accounts examined by a Chartered Accountant.

For Financial Year (FY) 2024-25, which corresponds to Assessment Year (AY) 2025-26, important changes have occurred compared to the previous year (AY 2024-25 / FY 2023-24). Understanding these changes is vital to avoid penalties and ensure accurate filing of your returns.

Tax Audit Clauses: Then (AY 2024-25) vs. Now (AY 2025-26)

What is a Tax Audit? 

A Tax Audit is an examination of a taxpayer's books of accounts and financial records by a Chartered Accountant. The CA checks that the accounts are accurate, true, and comply with the Income-tax Act. It's a way to ensure proper reporting of income and deductions.

The requirement for a tax audit arises mainly under Section 44AB of the Income-tax Act.

The "Then" (AY 2024-25 / FY 2023-24) - What Were the Rules?

For the previous assessment year, here’s a summary of the main tax audit triggers:

• For Businesses (General Rule): If your total sales, turnover, or gross receipts exceeded ₹1 Crore.
• For Professionals (General Rule): If your gross receipts exceeded ₹50 Lakhs.

Special Rules for Presumptive Taxation (Simplified Schemes):

These rules applied to small businesses and professionals who wanted to report their income at a fixed percentage of turnover or receipts, avoiding detailed bookkeeping.

• Businesses under Section 44AD (Presumptive Income):
  • If your turnover was up to ₹2 Crore, you could choose this scheme.
  • Audit Trigger: If you reported profit lower than the required rate (6% for digital receipts, 8% for cash receipts) and your total income was above the basic exemption limit, a tax audit was necessary.
• Professionals under Section 44ADA (Presumptive Income):
  • If your gross receipts were up to ₹50 Lakhs, you could choose this scheme.
  • Audit Trigger: If you reported profit lower than 50% of your gross receipts and your total income was above the basic exemption limit, a tax audit was necessary.

Digital Transaction Benefit (Higher Limit):

There was an important exception for businesses. The ₹1 Crore general audit limit increased to ₹10 Crore if:

• Your total cash receipts during the year did not exceed 5% of total gross receipts.
• Your total cash payments during the year did not exceed 5% of total payments.

The "Now" (AY 2025-26 / FY 2024-25) - What Has Changed?

The most significant change for AY 2025-26, based on Budget 2023 proposals effective from FY 2023-24, impacts small businesses using the presumptive taxation scheme.

1. Increased Presumptive Turnover Limit for Businesses (Section 44AD):

The turnover limit for opting into the presumptive taxation scheme under Section 44AD has increased from ₹2 Crore to ₹3 Crore.

Impact: This provides relief for more small businesses, allowing them to report income at 6% or 8% without needing detailed records, even if their turnover is up to ₹3 Crore.

2. Direct Impact on Tax Audit for Businesses (Section 44AB):

The tax audit trigger for businesses using Section 44AD is now tied to the new ₹3 Crore limit.

Audit Trigger (Updated): A tax audit is mandatory if:

• Your turnover is up to ₹3 Crore, and you opt for Section 44AD but report profit lower than the prescribed 6% (for digital receipts) or 8% (for cash receipts), and your total income exceeds the basic exemption limit.

3. No Change for Professionals (Section 44ADA):

• The gross receipts limit for presumptive taxation for professionals under Section 44ADA remains ₹50 Lakhs.
• The audit trigger (reporting less than 50% profit while income exceeds basic exemption) also remains unchanged.

4. Digital Transaction Benefit Continues:

• The ₹1 Crore general audit limit for businesses remains effectively ₹10 Crore if 95% or more of your total receipts and payments during the year are digital. This incentive for cashless transactions continues.

Who Needs an Audit for AY 2025-26 (FY 2024-25)? 

Let’s summarize who falls under the tax audit requirement for the current assessment year:

For Businesses:

• If your turnover exceeds ₹10 Crore (provided 95% or more transactions are digital).
• If your turnover exceeds ₹1 Crore (and cash transactions are 5% or more).
• If your turnover is between ₹1 Crore and ₹3 Crore, and you do not opt for presumptive taxation (Section 44AD).
• If your turnover is up to ₹3 Crore, you opt for Section 44AD, but you report profit less than 6% (digital) or 8% (cash), and your total income is above the basic exemption limit.
• If you report losses, and your total income exceeds the basic exemption limit (even if turnover is below limits), an audit might be triggered based on past 44AD declarations.

For Professionals:

• If your gross receipts exceed ₹50 Lakhs.
• If your gross receipts are up to ₹50 Lakhs, you opt for Section 44ADA, but you report profit lower than 50%, and your total income is above the basic exemption limit.

Why These Changes Matter

The increased turnover limit for Section 44AD is a significant step in simplifying compliance for many small businesses. It reduces the burden of keeping detailed records and undergoing mandatory audits for many. This goes along with the government's efforts to make business easier and promote the digital economy.

Understanding these updated limits and conditions is vital for every business owner and professional to ensure proper tax planning and avoid unnecessary penalties. If you’re uncertain about your specific situation, especially with changing limits and options, it’s best to consult a qualified tax professional.

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