Form 3CD Clauses Founders and CAs Get Wrong in the September 30, 2026 Tax Audit (and the Move to Form 26 Under the Income-tax Act 2025)

Practitioner advisory, updated 18 September 2026. The tax audit report for FY 2025-26 (Assessment Year 2026-27) is due by 30 September 2026. Most audit disputes do not come from complex law; they come from a handful of Form 3CD clauses that founders and, sometimes, their advisers fill in on autopilot. This memo walks through the clauses that most often go wrong, what the correct position is, and where the tax audit itself moves under the Income-tax Act 2025.

Quick Summary: The Form 3CD Clauses That Trip Up the 2026 Tax Audit

• Clause 26 (Section 43B): MSME dues unpaid at 31 March cannot use the pay-before-return rescue. This is the most common wrong entry this season.
• Clause 20(b) (Section 36(1)(va)): Employee PF and ESI contributions deposited even one day after the due date under the relevant welfare law are permanently disallowed. The Supreme Court settled this in 2022.
• Clause 21(b) (Section 40(a)): Expenditure on which TDS was not deducted, or was deducted but paid late, is disallowed at 30 per cent (residents) or 100 per cent (non-residents).
• Clause 21(d) (Section 40A(3)): Cash payments above Rs 10,000 to a single person in a day are disallowed, subject to the prescribed exceptions.
• Clause 44 (GST expenditure break-up): The clause everyone leaves blank. It is now expected to be completed.
• What is next: From FY 2026-27, Section 44AB becomes Section 63 of the Income-tax Act 2025, and Forms 3CA, 3CB and 3CD are replaced by Form No. 26.

Who Needs a Tax Audit for FY 2025-26?

The audit requirement sits in Section 44AB of the Income-tax Act 1961, headed “Audit of accounts of certain persons carrying on business or profession.” On the Income Tax Department’s own record, the thresholds are:

• Business: total sales, turnover or gross receipts exceeding Rs 1 crore in the previous year. This threshold rises to Rs 10 crore where cash receipts and cash payments each do not exceed 5 per cent of the total, so predominantly digital businesses get the higher limit.
• Profession: gross receipts exceeding Rs 50 lakh in the previous year.
• Presumptive cases: a person who declares income below the presumptive rate under Section 44ADA (professionals) or the business presumptive rules, where total income exceeds the basic exemption limit.

Where an audit applies, the accountant’s report is furnished in Form 3CA (for entities already audited under another law, such as companies) or Form 3CB (for others), together with the statement of particulars in Form 3CD, on or before the specified date, which for FY 2025-26 non-transfer-pricing cases is 30 September 2026.

The Form 3CD Clauses Founders and CAs Get Wrong

Clause 26: Section 43B Items, Especially MSME Dues

Clause 26 reports the Section 43B sums: statutory dues, interest to banks and financial institutions, bonus, leave encashment, and, since Assessment Year 2024-25, amounts payable to a micro or small enterprise under Section 43B(h). The mistake is to treat all of them alike. For most 43B items, paying before the return due date preserves the deduction. For MSME dues, it does not: clause (h) is expressly excluded from that rescue, so an MSME payable outstanding at 31 March is disallowed even if you clear it in July. We cover this in detail in our note on the Section 43B(h) MSME payment disallowance. Reconcile your micro and small vendor ageing before finalising this clause.

Clause 20(b): Employee PF and ESI Contributions

This is the clause that quietly costs founders the most. The employee’s share of provident fund and ESI, once deducted from salary, is the employer’s to deposit by the due date under the PF or ESI law. Under Section 36(1)(va), if it is deposited even one day late, the deduction is lost permanently, not merely deferred. The Supreme Court settled the point in Checkmate Services Pvt Ltd v CIT in October 2022, holding that the Section 43B rescue for employer contributions does not extend to the employee’s share under Section 36(1)(va). Many startups run payroll late in a tight month and deposit PF a few days after the 15th; the auditor must report every such instance, and the disallowance follows. Do not confuse this with the employer’s contribution, which is a Section 43B item and does get the pay-before-return rescue.

Clause 21(b): TDS Defaults Under Section 40(a)

Clause 21(b) captures expenditure disallowed for a TDS failure. Where tax was not deducted, or was deducted but not paid by the return due date, on a payment to a resident, 30 per cent of the expense is disallowed under Section 40(a)(ia). On payments to non-residents, the disallowance is the full 100 per cent under Section 40(a)(i). The common error is to overlook payments that attract TDS but were booked without it, such as professional fees, rent, contractor charges and commission. We set out the mechanics and the second-proviso relief in our note on the Section 40(a)(ia) TDS disallowance.

Clause 21(d): Cash Payments Over Rs 10,000

Under Section 40A(3), any expenditure for which a cash payment exceeding Rs 10,000 is made to a single person in a single day is disallowed in full, subject to the exceptions prescribed in Rule 6DD. The threshold is Rs 35,000 for payments to a transporter. Founders often miss aggregated cash payments to the same vendor across a day, or petty-cash reimbursements that breach the limit. Clause 21(d) requires the auditor to report these, and the whole payment, not just the excess, is disallowed.

Clause 34: TDS and TCS Compliance Reconciliation

Clause 34 asks the auditor to reconcile the tax deducted and collected with what was actually deposited and reported in the TDS and TCS statements. Mismatches between the books, Form 26Q or 24Q, and the challans surface here. A late or short TDS-statement filing reported in Clause 34 also flags interest and fee exposure under Sections 201 and 234E. Reconcile the quarterly statements to the ledgers before the auditor does.

Clause 44: The GST Expenditure Break-up

Clause 44 requires a break-up of total expenditure between registered and unregistered GST suppliers, and within the registered head, the split across exempt, composition and other suppliers. For years it was left blank on the assumption that reporting was deferred. That assumption is no longer safe; the clause is expected to be completed. Building this break-up at finalisation, with no working through the year, is painful, so extract it from the GST purchase data early.

Form 3CD Error Map: Clause, Provision, Mistake, Consequence

Clause	Provision	Common mistake	Consequence
26	Section 43B, incl. 43B(h) MSME	Using the pay-before-return rescue for MSME dues	Deduction deferred to year of payment
20(b)	Section 36(1)(va)	Depositing employee PF or ESI late	Permanent disallowance (no rescue)
21(b)	Section 40(a)(ia) and (i)	Booking a TDS-liable expense without deducting	30% (resident) or 100% (non-resident) disallowed
21(d)	Section 40A(3)	Cash payment over Rs 10,000 to one person in a day	Whole payment disallowed
34	TDS and TCS statements	Book vs statement vs challan mismatch	Interest and fee under Sections 201, 234E
44	GST expenditure break-up	Leaving it blank	Incomplete report, query risk

What Changes Under the Income-tax Act 2025: Section 63 and Form 26

The Income-tax Act 2025 takes effect from 1 April 2026 and governs FY 2026-27 onward. The tax audit requirement moves from Section 44AB to Section 63, headed simply “Tax audit.” On the Department’s record, Section 63(1) reads:

“63. (1) Every person, carrying on the business or profession fulfilling any of the conditions specified in column B of the Table below, shall get his accounts of the tax year audited by an accountant, before the specified date.”

The substance of who must be audited, and the Rs 1 crore, Rs 10 crore and Rs 50 lakh thresholds, carries forward. What changes is the report itself. CBDT is understood to have notified a single new tax-audit form, Form No. 26, to replace Forms 3CA, 3CB and 3CD for tax years commencing on or after 1 April 2026. In other words, the FY 2025-26 audit you are finalising now stays on Forms 3CA, 3CB and 3CD; the change to Form 26 applies from the audit for FY 2026-27, filed in 2027. Treat the Form 26 transition as a forward-planning item and confirm the notified form and its clause structure before the next cycle.

Pre-Audit Checklist

1. Confirm applicability. Check turnover against Rs 1 crore or Rs 10 crore for business, Rs 50 lakh for profession, and the presumptive triggers.
2. MSME ageing (Clause 26). List micro and small supplier balances unpaid beyond their limit at 31 March 2026.
3. PF and ESI dates (Clause 20(b)). Reconcile the employee-share deposit dates against the due dates; flag every late deposit.
4. TDS review (Clauses 21(b) and 34). Identify expenses booked without deduction and reconcile the TDS statements to the ledgers.
5. Cash payments (Clause 21(d)). Scan for aggregated cash payments over Rs 10,000 to one person in a day.
6. GST break-up (Clause 44). Extract registered vs unregistered expenditure from the purchase data.
7. Quantify and recompute. Total the add-backs, recompute taxable income, and estimate the advance-tax and interest impact before signing.

Frequently Asked Questions

What is the tax audit due date for FY 2025-26?

For non-transfer-pricing cases, the audit report must be furnished by 30 September 2026, and the return by 31 October 2026. Transfer-pricing cases under Section 92E have later dates.

Is late-deposited employee PF really disallowed permanently?

Yes. Under Section 36(1)(va), the employee’s share deposited after the due date under the PF or ESI law is disallowed, and the Supreme Court in Checkmate Services (2022) held there is no pay-before-return rescue for it. This is different from the employer’s contribution, which is a Section 43B item.

Do I have to complete Clause 44 on GST expenditure?

Treat it as required. The earlier practice of leaving it blank on the basis of a deferral is no longer safe. Build the registered versus unregistered expenditure break-up from your GST purchase data.

Which forms apply for FY 2025-26, and when does Form 26 start?

Forms 3CA or 3CB with 3CD apply for FY 2025-26. Form No. 26 under the Income-tax Act 2025 is understood to apply for tax years commencing on or after 1 April 2026, that is from the FY 2026-27 audit. Confirm the notified Form 26 before the next cycle.

The Bottom Line

The Form 3CD clauses that cause the most grief are not the obscure ones; they are Clause 26, Clause 20(b), Clause 21 and Clause 44, and they turn on discipline in dates and documentation rather than clever positions. Reconcile MSME ageing, PF and ESI deposit dates, TDS, cash payments and the GST break-up before the auditor arrives, and the 30 September signing is a formality rather than a fight. From next year the same substance is reported through Form 26 under Section 63 of the Income-tax Act 2025.

Want a second pair of eyes on your Form 3CD before you sign? Schedule a Strategy Session with Tax Update India to pressure-test the high-risk clauses and quantify the add-backs. Book a quick call.

Disclaimer: This article is for general information only and does not constitute legal, tax or professional advice. Statutory provisions are cited from the Income Tax Department record as retrieved on 18 September 2026; the Form 26 transition is stated on the basis of publicly reported CBDT material and should be confirmed against the notified form. Apply the law to your specific facts with a qualified professional before acting. Tax Update India.