FY 2025-26 Tax Audit Under Section 44AB: Thresholds, Due Dates, Key Form 3CD Clauses and Penalty
The Income-tax Act, 2025 came into force on 1 April 2026, but the tax audit for FY 2025-26 (AY 2026-27) is still an audit under Section 44AB of the Income-tax Act, 1961, reported in Form 3CA or 3CB with Form 3CD. This post sets out who needs the audit, the due dates as they stand, the Form 3CD clauses that need early work, the Section 43B(h) and Section 40(a)(ia) disallowances, and the Section 271B penalty.
Key Takeaways
- The FY 2025-26 audit report is filed in the forms prescribed under the 1961 Act (Form 3CA or 3CB, with Form 3CD), even though it is filed after 1 April 2026. The new Form 26 applies from Tax Year 2026-27.
- The audit report is due one month before the return due date: 30 September 2026 where the return is due on 31 October 2026, and 31 October 2026 in transfer pricing cases where the return is due on 30 November 2026.
- A sum payable to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act is deductible only in the year it is actually paid. Once the time limit has been missed, paying before the return due date does not save the FY 2025-26 deduction.
- Section 40(a)(ia) disallows 30% of a sum payable to a resident where tax deductible at source was not deducted, or was deducted but not paid on or before the Section 139(1) due date.
- The Section 271B penalty is 0.5% of turnover or gross receipts, or Rs 1,50,000, whichever is less. It does not apply if the person proves reasonable cause under Section 273B.
Which Law Governs the FY 2025-26 Audit
Section 536(1) of the Income-tax Act, 2025 repeals the 1961 Act. Section 536(2) then saves the old law in several ways that matter for the audit:
- Section 536(2)(a): nothing affects the previous operation of the repealed Act or anything duly done or suffered under it.
- Section 536(2)(b): nothing affects any right, privilege, obligation or liability acquired, accrued or incurred under the repealed Act. The obligation to get FY 2025-26 accounts audited arose under Section 44AB.
- Section 536(2)(c): the repealed Act continues to apply to proceedings initiated on or after 1 April 2026, including assessment and penalty, for any tax year beginning before 1 April 2026, following the procedure in the repealed Act.
- Section 536(2)(d): a penalty proceeding for a tax year beginning before 1 April 2026 may be initiated, and the penalty imposed, under the repealed Act as if the 2025 Act had not been enacted.
Section 536(3) of the Income-tax Act, 2025 reads a reference to tax year 2025-26 or earlier as a reference to the corresponding previous year under the 1961 Act. The CBDT transition FAQs (Q3.25 and Q4.32) confirm the practical result: the FY 2025-26 audit report must be filed in Form 3CA (persons audited under another law) or Form 3CB (all others), with the Form 3CD statement of particulars under Section 44AB.
Who Must Get Accounts Audited for FY 2025-26
| Section 44AB clause | Person | When audit is required |
|---|---|---|
| (a) | Carrying on business | Total sales, turnover or gross receipts in business exceed Rs 1 crore. The limit becomes Rs 10 crore if cash receipts do not exceed 5% of total receipts and cash payments do not exceed 5% of total payments. |
| (b) | Carrying on profession | Gross receipts in profession exceed Rs 50 lakh. |
| (c) | Business covered by Section 44AE, 44BB or 44BBB | Income claimed is lower than the profits deemed under that section. |
| (d) | Profession covered by Section 44ADA | Income claimed is lower than the deemed profits and income exceeds the maximum amount not chargeable to tax. |
| (e) | Business where Section 44AD(4) applies | Income exceeds the maximum amount not chargeable to tax. There is no turnover threshold in this clause. |
Three points in the text of Section 44AB are often missed:
- The 5% test has two limbs. Both cash receipts and cash payments must stay within 5% for the Rs 10 crore limit. A receipt or payment by a cheque or bank draft that is not account payee counts as cash.
- Presumptive filers are outside the section. The first proviso excludes a person who declares profits under Section 44AD(1) or Section 44ADA(1). Section 44AD is available only to a resident individual, HUF or firm (other than an LLP) whose turnover does not exceed Rs 2 crore (Rs 3 crore if cash receipts do not exceed 5%), and Section 44ADA only where gross receipts do not exceed Rs 50 lakh (Rs 75 lakh on the same cash condition).
- The Section 44AD(4) bar. An eligible assessee who declared profit under Section 44AD for a year and then does not declare profit under Section 44AD(1) in any of the next five assessment years cannot claim Section 44AD for the five assessment years after the year in which it did not. While that bar applies, Section 44AB(e) requires an audit if income exceeds the maximum amount not chargeable to tax, whatever the turnover.
Illustration: A trading business has turnover of Rs 8 crore, total receipts of Rs 8 crore and total payments of Rs 7.5 crore. Cash receipts are Rs 30 lakh (3.75% of receipts) but cash payments are Rs 50 lakh (6.67% of payments). The payment limb fails, so the limit stays at Rs 1 crore and the audit is required.
Due Dates for AY 2026-27
Under the Explanation to Section 44AB, the “specified date” for the audit report is one month before the return due date under Section 139(1). As on 19 May 2026, the dates were:
| Case | Return due date (Section 139(1), Explanation 2) | Audit report due date |
|---|---|---|
| Company, or person whose accounts must be audited, where Section 92E does not apply | 31 October 2026 | 30 September 2026 |
| Assessee required to furnish a Section 92E transfer pricing report | 30 November 2026 | 31 October 2026 |
Both audit report dates appear in CBDT transition FAQ Q3.25.
Form 3CD Clauses That Need Early Work
Form 3CD was amended by the Income-tax (Eighth Amendment) Rules, 2025 (Notification No. 23/2025, dated 28 March 2025, in force from 1 April 2025). That amendment rewrote clause 22, extended clause 26 to every clause of Section 43B including clause (h), omitted clauses 28 and 29, and inserted clause 36B on amounts received on buy-back of shares. The clauses below need data that cannot be assembled in the last week:
| Clause | What is reported | Work needed |
|---|---|---|
| 8 | Clause of Section 44AB under which the audit is conducted | Confirm the clause, including the 5% test for the Rs 10 crore limit |
| 18 | Depreciation allowable under the Act, asset or block-wise | Rates, opening written down value, additions and deletions by block |
| 21(b) | Amounts inadmissible under Section 40(a), including payments to non-residents (Section 40(a)(i)) and payments to residents (Section 40(a)(ia)) | Payments where tax was not deducted, or deducted but not paid in time, with date, amount, nature and payee |
| 22 | Interest inadmissible under section 23 of the MSMED Act; total amount required to be paid to micro or small enterprises under section 15 of that Act; the part paid within the section 15 time and the part not paid and inadmissible | Supplier status and payment dates for each micro or small supplier |
| 26 | Sums referred to in Section 43B, by whether the liability pre-existed or arose in the year, and whether paid | For clauses other than 43B(h), payment on or before the Section 139(1) due date |
| 31 | Loans or deposits above the Section 269SS limit, receipts above the Section 269ST limit, and repayments above the Section 269T limit | Nature codes for each loan, deposit and repayment (cash, non account payee cheque, journal entry and others) under Note 1 inserted in 2025 |
| 32 | Brought forward loss and depreciation | Agree with earlier returns and assessment orders |
| 34 | Compliance with Chapter XVII-B and XVII-BB (TDS and TCS) | Section-wise reconciliation of amounts, tax deducted or collected, and tax deposited |
| 44 | Break-up of expenditure on entities registered and not registered under GST | Vendor GST status from the purchase ledger |
Section 43B(h): Payments to Micro and Small Enterprises
Section 43B(h) covers “any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15” of the Micro, Small and Medium Enterprises Development Act, 2006. Such a sum is allowed only in the previous year in which it is actually paid, irrespective of when the liability was incurred. The proviso to Section 43B, which allows sums paid on or before the return due date, applies to every clause of Section 43B except clause (h).
A few points follow from the text:
- It covers the sum payable itself, not only interest. Interest inadmissible under section 23 of the MSMED Act is a separate item in clause 22(i) of Form 3CD.
- “Micro enterprise” and “small enterprise” take their meanings from section 2(h) and section 2(m) of the MSMED Act (Explanation 4 to Section 43B). Medium enterprises are not covered.
- Amounts are reported in both clause 22 and clause 26 of Form 3CD after the 2025 amendment.
Illustration: A company owes Rs 6,00,000 to a small enterprise for goods supplied in FY 2025-26. The section 15 time limit expired on 10 March 2026. The company paid Rs 2,00,000 on 5 March 2026 and Rs 4,00,000 on 20 May 2026. Rs 2,00,000 is deductible for FY 2025-26. Rs 4,00,000 is not deductible for FY 2025-26, even though it was paid before the 31 October 2026 return due date. In clause 22, the total required to be paid is Rs 6,00,000, the amount paid within time is Rs 2,00,000 and the amount not paid within time and inadmissible is Rs 4,00,000.
Section 40(a)(ia): TDS Defaults on Payments to Residents
Section 40(a)(ia) disallows 30% of any sum payable to a resident on which tax is deductible under Chapter XVII-B where the tax has not been deducted or, after deduction, has not been paid on or before the due date under Section 139(1). Two provisos soften this:
- Where the tax is deducted in a later year, or deducted in the year but paid after the Section 139(1) due date, the 30% is allowed in the previous year in which the tax is paid.
- Where the payer is not treated as an assessee in default because of the first proviso to Section 201(1), the tax is deemed deducted and paid on the date the payee furnished the return of income.
For payments to non-residents, Section 40(a)(i) disallows the whole sum, not 30%. Both are reported in clause 21(b) of Form 3CD.
For deposits made after 1 April 2026, CBDT transition FAQ Q2.9 says tax deducted on a sum paid or credited on or before 31 March 2026 is deposited through the challan under the 1961 Act, and Q2.8 gives 30 April 2026 as the due date for tax deducted in March 2026 by non-government deductors.
Illustration: A firm credits professional fees of Rs 5,00,000 to a resident in February 2026 and does not deduct tax. For AY 2026-27, 30% of Rs 5,00,000, that is Rs 1,50,000, is disallowed. If the firm had deducted the tax in February 2026 and paid it to the Government by 31 October 2026 (its Section 139(1) due date as a non-transfer pricing audit case), there would be no disallowance under Section 40(a)(ia).
Section 271B Penalty
If a person fails to get accounts audited, or to furnish the audit report as required by Section 44AB, Section 271B allows the Assessing Officer to levy a penalty equal to 0.5% of total sales, turnover or gross receipts in business, or gross receipts in profession, or Rs 1,50,000, whichever is less.
- Illustration 1: Turnover Rs 2.4 crore. 0.5% is Rs 1,20,000, which is less than Rs 1,50,000. Maximum penalty: Rs 1,20,000.
- Illustration 2: Turnover Rs 6 crore. 0.5% is Rs 3,00,000. Maximum penalty: Rs 1,50,000.
Section 273B provides that no penalty under Section 271B is imposable if the person proves there was reasonable cause for the failure, and Section 274(1) requires that the assessee be heard or given a reasonable opportunity of being heard before a penalty order. For FY 2025-26, Section 536(2)(d) of the Income-tax Act, 2025 keeps the penalty proceeding under the 1961 Act. Reasonable cause is a question of fact, so keep a dated record of whatever prevented the filing.
Frequently Asked Questions
Can the new Form 26 be used for the FY 2025-26 audit?
No. CBDT transition FAQ Q4.33 says Form 26 under the Income-tax Rules, 2026, which merges Forms 3CA, 3CB and 3CD, applies for Tax Year 2026-27. For FY 2025-26, FAQ Q4.32 requires the existing 1961 Act forms.
Do the audit thresholds change under the Income-tax Act, 2025?
According to CBDT transition FAQ Q4.31, Section 63 of the Income-tax Act, 2025 corresponds to Section 44AB and the thresholds remain the same: Rs 1 crore for business (Rs 10 crore where cash receipts and cash payments each do not exceed 5%), Rs 50 lakh for profession, and audit for persons who opt out of presumptive taxation and declare income below the prescribed level.
Related Posts
- ITR forms for AY 2026-27: why FY 2025-26 returns are filed under the 1961 Act
- Section 14A and Rule 8D disallowance in the FY 2025-26 tax audit
- Depreciation and unabsorbed depreciation for FY 2025-26
Need a Review of Your Tax Audit Position?
If you run a business or profession that needs a Section 44AB audit for FY 2025-26, and want your Form 3CD reporting, Section 43B(h) exposure or TDS disallowances reviewed, talk to an expert from the Tax Update India team.
Sources: Income-tax Act, 2025 (Section 536); Income-tax Act, 1961 as amended up to the Finance Act, 2026 (Sections 40(a)(i), 40(a)(ia), 43B, 44AB, 44AD, 44ADA, 139(1) Explanation 2, 271B, 273B, 274); Income-tax Rules, 1962, Form No. 3CD as amended by the Income-tax (Eighth Amendment) Rules, 2025 (CBDT Notification No. 23/2025 dated 28 March 2025); CBDT, FAQs on Interplay and Transition from the Income Tax Act, 1961 to the Income Tax Act, 2025 (updated 2 April 2026), Q2.8, Q2.9, Q3.25, Q4.31 to Q4.33.
Disclaimer: This article is for general information only and does not constitute legal or tax advice. Tax positions depend on the facts of each case. Section numbers refer to the Income-tax Act, 1961 unless otherwise stated. Consult a qualified professional before acting on any information here.