Tax Audit under Section 44AB of Income Tax Act

Tax Audit under Section 44AB of the Income Tax Act is the examination and review of the books of accounts of a taxpayer having income from business or profession. The taxpayer should appoint a practicing CA i.e. Chartered Accountant to audit the books of accounts. The tax auditor would ensure that books of accounts have been maintained correctly, report observations, and required information in the tax audit report. The applicability of tax audit depends upon the turnover/sales/gross receipts of the business or profession.

Tax audit limit has been increased from INR 5 Cr to 10 Cr for taxpayers who carry out 95% of their transactions in the digital mode as announced in the budget 2021 by the FM. This limit was initially increased from INR 1 Cr to INR 5 Cr in Budget 2020

Tax Audit under Section 44AB for Business

Turnover / Sales up to INR 1 Cr

  • If the taxpayer has incurred loss or the profit is less than 6% or 8% of Turnover / Sales, and the Total Income is more than Basic Exemption Limit, Audit as per Sec 44AB(e) is applicable. The taxpayer should file ITR 3.
  • If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales, Audit is not applicable.
    • However, if the taxpayer has opted for the Presumptive Taxation Scheme under Section 44AD, they need to file ITR 4.
    • And, if the taxpayer has not opted for the Presumptive Taxation Scheme under Sec 44AD. The taxpayer should still file ITR 3.

Turnover / Sales more than INR 1 Cr and up to INR 2 Cr

  • If the taxpayer has incurred a loss or the profit is less than 6% or 8% of Turnover / Sales, Audit as per Sec 44AB(a) is applicable. The taxpayer should file ITR 3
  • If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales and has not opted for Presumptive Taxation Scheme under Sec 44AD, Audit is applicable as per Sec 44AB(a). The taxpayer should file ITR 3
  • If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales and has opted for the Presumptive Taxation Scheme under Sec 44AD, Audit is not applicable. The taxpayer should file ITR 4
  • If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales and has not opted for the presumptive taxation scheme, then they must file the tax audit report

Turnover / Sales more than INR 2 Cr

  • Tax Audit under Sec 44AB(a) is applicable irrespective of the profit or loss. The taxpayer should file ITR 3

Note: The prescribed rate is 8% for non-digital transactions and 6% for digital transactions

Tax Audit limit change FY 2020-21 onwards

The limit for turnover under Section 44AB is INR 1 Cr. Under budget 2021, the turnover limit under Sec 44AB has been increased from INR 5 Cr to 10 Cr if the following conditions are satisfied:

  1. Cash Payments do not exceed 5% of the Total Payments in the financial year AND
  2. Cash Receipts do not exceed 5% of the Total Receipts in the financial year

Note: For the taxpayers who do not satisfy the above conditions, the limit under Sec 44AB of INR 1 Cr remains unchanged

Tax Audit limit change FY 2019-20 onwards

The limit for turnover under Section 44AB is INR 1 Cr. Under Budget 2020, the turnover limit under Sec 44AB has been increased from INR 1 Cr to 5 Cr if the following conditions are satisfied:

  1. Cash Payments do not exceed 5% of the Total Payments in the financial year AND
  2. Cash Receipts do not exceed 5% of the Total Receipts in the financial year

Note: For the taxpayers who do not satisfy the above conditions, the limit under Sec 44AB of INR 1 Cr remains unchanged.

Tax Audit u/s 44AB for Profession

Turnover / Sales up to INR 50 lacs

  • If the taxpayer has incurred loss or the profit is less than 50% of Gross Receipts, and the Total Income is more than Basic Exemption Limit, Tax Audit as per Sec 44AB(d) is applicable. The taxpayer should file ITR-3
  • If the taxpayer has a profit of more than or equal to 50% of Gross Receipts and has not opted for the Presumptive Taxation Scheme under Sec 44ADA, Tax Audit is applicable as per Sec 44AB(d). The taxpayer should file ITR 3
  • If the taxpayer has a profit of more than or equal to 50% of Gross Receipts and has opted for the Presumptive Taxation Scheme under Sec 44ADA, Tax Audit is not applicable. The taxpayer should file ITR-4

Turnover / Sales more than INR 50 lacs

  • Tax Audit under Sec 44AB(b) is applicable irrespective of the profit or loss. The taxpayer should file ITR 3

Tax Audit under Section 44AB(c) of Income Tax Act

If a business eligible for Presumptive Taxation under Sec 44AE, 44BB, or 44BBB but reports profits or gains lower than the prescribed rate under the relevant section, they are liable to Tax Audit under Section 44AB(c).

Tax Audit of Trading Income

Stock Traders trade in shares, securities, commodities, and currency through online trading platforms. Income from trading in Equity Intraday, Equity F&O, Commodity Trading, and Currency Trading is considered as a Business Income. Thus, it is important to determine if the Tax Audit as per the provisions of the Income Tax Act is applicable to Trading Income.

Under budget 2021, the limit for turnover as per Section 44AB is increased from INR 5 Cr to INR 10 Cr if at least 95% of the total payments and at least 95% of the total receipts are digital in nature.

In the case of Traders, the limit for Tax Audit applicability u/s 44AB would be INR 10 Cr since all transactions are digital. For the taxpayers who do not satisfy the above conditions, the limit under Sec 44AB of INR 1 Cr remains unchanged.

Let us understand the conditions for Tax Audit in the case of Stock Traders who have all their trading transactions online. The presumptive rate is 6% since the transactions are digital. The increased limit of INR 10 Cr is applicable FY 2020-21 onwards. If the tax audit is applicable the trader should appoint a CA to prepare and file a tax audit report.

In the case of Income Tax on Trading, since all these trading transactions are digital, the prescribed rate under Sec 44AD would be 6% instead of 8% in normal cases.

Tax Audit of Trading Income – AY 2021-22 Onwards

Trading Turnover up to INR 2 Cr

  • Tax Audit as per Sec 44AB(e) is applicable if there is loss or profit is less than 6% of Trading Turnover and total income exceeds the basic exemption limit.
  • Tax Audit is not applicable if the profit is more than or equal to 6% of Trading Turnover.

Trading Turnover more than INR 2 Cr and up to INR 10 Cr

  • Tax Audit is not applicable irrespective of profit or loss.
  • Under Budget 2021, the turnover limit under Sec 44AB has been increased from INR 5 Cr to INR 10 Cr. However, the turnover limit under Sec 44AD has not been changed. When the Trading Turnover is between INR 2 Cr and INR 10 Cr, neither Sec 44AB is applicable nor Sec 44AD. Thus, Tax Audit is not applicable irrespective of profit or loss. The Income Tax Department is expected to make an amendment to the turnover limit of Sec 44AD to resolve this loophole.

Trading Turnover more than INR 10 Cr

  • Tax Audit under Sec 44AB(a) is applicable irrespective of the profit or loss.

Tax Audit of Trading Income – Upto AY 2019-20

Trading Turnover up to INR 1 Cr

  • Tax Audit as per Sec 44AB(e) is applicable if there is loss or profit is less than 6% of Trading Turnover and total income exceeds the basic exemption limit.
  • Tax Audit is not applicable if the profit is more than or equal to 6% of Trading Turnover.

Trading Turnover more than INR 1 Cr and up to INR 2 Cr

  • Tax Audit as per Sec 44AB(a) is applicable if:
    • There is a loss or profit is less than 6% of Trading Turnover.
    • The profit is more than or equal to 6% of Trading Turnover and the taxpayer has not opted for the Presumptive Taxation Scheme under Sec 44AD.
  • Tax Audit is not applicable if the profit is more than or equal to 6% of Trading Turnover and the taxpayer has opted for the Presumptive Taxation Scheme under Sec 44AD.

Trading Turnover more than INR 2 Cr

  • Tax Audit under Sec 44AB(a) is applicable irrespective of the profit or loss.

FAQs

If a business is liable to get accounts audited under any other law, is Tax Audit under Income Tax Act also required?

Assessee such as Company is liable to Statutory Audit under Companies Act 2013. As per Section 44AB, if an assessee is required to get audit under any other law, he/she need not get the accounts audited again to comply with Section 44AB. In such a case, the assessee should submit the report as per audit under the other law and also a Tax Audit Report (Form 3CB-3CD) by a Chartered Accountant as prescribed by Section 44AB.

What is the Due Date for Tax Audit as per Section 44AB?

Assessee liable to tax audit as per section 44AB of the Income Tax Act should get the books of accounts audited on or before 30th September of the next financial year. In case of the applicability of tax audit for AY 2019-20, the due date to file the audit report was 30th September 2019.

AY 2020-21 onwards, the due date to file the Tax Audit Report has been amended to 31st October of the next financial year. The assessee should appoint a practicing CA. Once the CA electronically files the tax audit report, the assessee must approve the tax audit report from the account on incometaxindiaefiling.gov.in.

What is the penalty if I do not get books of accounts audited as per Section 44AB?

If the assessee does not get accounts audited as per requirements of Section 44AB, the Assessing Officer may impose a penalty under Section 271B. The penalty is lower of the following:
(a) 0.5% of Sales / Turnover / Gross Receipts OR
(b) INR 1,50,000
However, if the assessee can provide a valid justification and prove a reasonable cause for not getting a tax audit, the Assessing Officer may not impose any penalty.

Is the Tax Audit limit of INR 5 Cr increased for MSME only?

After the Budget 2020 speech, there was confusion regarding the tax audit limit. Whether the limit of INR 5 Cr was increased for MSME only?
No. The limit of INR 5 Cr is not restricted to MSME only. As per the Finance Bill, the increased limit in Sec 44AB is applicable to any person who earns Business Income.

I have a loss from Intraday / F&O Trading. Is Tax Audit applicable?

Tax Audit applicability as per Income Tax Act is:

1. If the Trading Turnover in a financial year is up to INR 2 Crore and net profit is less than 6% of the trading turnover
2. If the Trading Turnover exceeds INR 2 Crore irrespective of profit or loss
The limit of turnover to determine tax audit has been increased to INR 5 Cr under Budget 2020. The new limit is applicable to AY 2020-21. Therefore in the case of loss from Intraday Trading, Tax Audit is applicable.

How do I calculate Trading Turnover for Intraday Trading and F&O Trading?

Trading Turnover should be calculated to determine the Tax Audit applicability as per the Income Tax Act. Absolute Turnover is the sum of the absolute value of profit and loss of each trade during the financial year.
1. Trading Turnover for Intraday Trading = Absolute Turnover
2. Trading Turnover for F&O Trading
Futures = Absolute Turnover
Options = Absolute Turnover + Premium on Sale of Options

Got Questions? Ask Away!

  1. Hi @saik,

    Tax audit is applicable when your turnover is above the threshold or you have losses and your total income is above the basic exemption limit.
    If your total income is below the basic exemption limit of INR 2.5 lakh and your turnover is below the threshold - Tax audit is not applicable. You can carry forward the losses by reporting them when filing your ITR.

    You can use this tool to determine if tax audit is applicable to you.

    Learn more about tax audit

    Hope this helps

  2. Hey @saik

    1. You can carry forward the losses by filing ITR within due date without going through tax audit when your total income from all sources is below 2.5 lakhs and total turnover from trading activities does not cross the threshold limit of 5 crore.

    2. No other way except filing ITR. If you do not want to carry forward the losses while filing ITR, you can make the losses to be carried forward as 0 in “Schedule CFL”, but there is no way to report losses to ITD except filing ITR.

    Hope this helps!

  3. Muru says:

    Hi
    For FY 2020-2021
    I have made a loss of 2,36,532 with Turnover of 4,56,545 in option Trading
    I have a salary income of 1,30,000

    Should i pay tax
    which ITR should i file
    whether Audit is required.

    Please help.

  4. Hi @Muru

    F&O Income or Loss is a non-speculative business income or loss as per the Income Tax Act. Since you had options trading, ITR form applicable shall be ITR-3.
    Since your total income is less than Basic Exemption Limit i.e. INR 2,50,000 there seems to be no tax liability. You can check our Income Tax Calculator.
    For audit applicability, you can check the applicability here.

  5. Hi,

    As per the section 44AB and 44AD of the Income Tax Act - Tax Audit is applicable if:

    1. Turnover is above INR 1cr up to FY 2019-20 or INR 2 cr from FY 2020-21
    2. Incurred losses
    3. Profit is less than 6% of the turnover.

    Read more for Income Tax Audit Applicability

    Check Tax Audit requirement using the Determine Tax Audit Applicability tool

  6. Thanks for your response.

  7. Hi @KDN,

    Tax Audit is applicable when

    • Turnover is above the threshold
    • Profit is less than 6% of the turnover & income is more than the basic exemption limit.

    Since the income is below the basic exemption limit and the turnover is less the threshold tax audit is not applicable.

    We are getting the issue fixed in the above determine tax audit applicability tool.

  8. @inquisitive

    Yes, since your turnover is more than 25 lakhs you need to maintain the books of accounts and prepare the financials and file ITR 3.

    You can refer the below article for detailed applicability.

    Hope this helps !

  9. Hi @gurjot_ahluwalia,

    Under the presumptive taxation scheme, you can declare your profits at a predefined rate and let go of maintaining books of accounts.
    However, you cannot carry forward your losses under the presumptive taxation scheme.

    This article might be helpful to carry forward and set off losses

Continue the conversation on TaxQ&A

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