Taxation · Profits and Gains of Business or Profession

Maintenance of Books and Tax Audit (Income-tax Act, 2025)

Updated 5 October 2026 · Fact-checked

Tax audit is a mandatory audit by a chartered accountant, required when business turnover exceeds ₹1 crore (₹10 crore if cash receipts and cash payments are each within 5%), professional receipts exceed ₹50 lakh, or eligible-business presumptive income is under-declared. Test the threshold first, then check books, report and penalty.

Understand Maintenance of Books and Tax Audit

Tax law wants a reliable record behind the profit you declare. So it does two things. First, it forces certain people to keep books of account. Second, it forces larger or riskier cases to get those books audited by a chartered accountant. This audit is called a tax audit. It is separate from a company's statutory audit.

Books of account come first. Specified professions must keep books if gross receipts exceeded ₹1,50,000 in each of the three preceding years. The list is as notified by the government. It covers legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representative, film artist, company secretary and other professions as notified. A new professional must keep books if receipts are expected to exceed ₹1,50,000.

Other businesses and professions have two tests, depending on who you are:

Individuals and HUFs: books are required if income exceeds ₹2,50,000 or turnover or gross receipts exceed ₹25,00,000 in any of the three preceding years.
Persons other than individuals and HUFs (firms, companies and so on): books are required if income exceeds ₹1,20,000 or turnover or gross receipts exceed ₹10,00,000 in any of the three preceding years.

Books must be kept for six years from the end of the relevant tax year.

Now the audit. A person carrying on business needs a tax audit if total sales, turnover or gross receipts exceed ₹1 crore. The limit becomes ₹10 crore if cash receipts are 5% or less of total receipts and cash payments are 5% or less of total payments. Both conditions must hold. If turnover exceeds ₹10 crore, audit is required whatever the cash ratios. A person carrying on a profession needs a tax audit if gross receipts exceed ₹50 lakh.

There is a third trigger, which applies to the eligible-business presumptive scheme only. It needs three things together: you have opted for that scheme, you claim profits and gains lower than the presumptive profits, and your total income exceeds the basic exemption limit. Then you must maintain books of account as required and get them audited. This trigger catches people who take the benefit of presumptive taxation but then show lower profits.

This trigger does not apply to the 50% professional scheme. A professional who claims less than 50% is tested under the general books rules and the ₹50 lakh receipts limit.

The presumptive profit under the eligible-business scheme is a percentage of turnover. It is 8% of turnover, or 6% of turnover received through banking channels and other prescribed electronic modes. This scheme is open only up to a turnover of ₹2 crore, or ₹3 crore if cash receipts are within 5% of total receipts. For a profession, the presumptive profit is 50% of gross receipts.

There is also an opt-out case. If you opt out of the eligible-business scheme after having opted in, you cannot opt in again for the next five tax years. During that lock-out period, if your total income exceeds the basic exemption limit, you must keep books and get them audited.

The auditor gives a report in the prescribed form, with a statement of particulars covering items such as loans, cash payments, TDS compliance and disallowances. You must furnish it on or before the date that is one month before the return due date. If you do not get the accounts audited or do not furnish the report, a penalty can apply, unless you show reasonable cause.

Key rules to remember

Books of account: specified professions: Gross receipts > ₹1,50,000 in each of the 3 preceding years; For a new profession, the test is expected receipts above ₹1,50,000 in the year. The list is as notified and covers legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representative, film artist, company secretary and other professions notified.
Books of account: other business or profession (individual/HUF): Income > ₹2,50,000 OR turnover/gross receipts > ₹25,00,000 in any of the 3 preceding years; This is the rule for individuals and HUFs.
Books of account: other business or profession (persons other than individual/HUF): Income > ₹1,20,000 OR turnover/gross receipts > ₹10,00,000 in any of the 3 preceding years; This is the rule for firms, companies and other persons. Do not apply the individual/HUF figures to them.
Tax audit: business, general limit: Turnover > ₹1 crore; Applies to sales, turnover or gross receipts.
Tax audit: business, enhanced limit: Turnover > ₹10 crore, if cash receipts ≤ 5% of total receipts AND cash payments ≤ 5% of total payments; If either cash test fails, the ₹1 crore limit applies. Count only cash, not banking channels. Above ₹10 crore, audit is required whatever the cash ratios.
Tax audit: profession: Gross receipts > ₹50 lakh; No enhanced ₹10 crore limit for professions.
Tax audit: presumptive case (eligible-business scheme only): Person has opted for the eligible-business presumptive scheme AND profit claimed < presumptive profit AND total income > basic exemption limit; All three conditions must hold. The eligible-business scheme gives 8% of turnover (6% for turnover received through banking channels and other prescribed electronic modes) and is open only up to turnover of ₹2 crore (₹3 crore if cash receipts are within 5%). This trigger does not cover the 50% professional scheme. A professional claiming less than 50% is tested under the general books and ₹50 lakh rules. Audit also applies to a person who opted out of the eligible-business scheme after opting in, is within the five-year lock-out, and has total income above the basic exemption limit. Books must then be maintained as required and audited.
Penalty for not getting accounts audited or not furnishing the report: Lower of 0.5% of turnover/gross receipts and ₹1,50,000; Applies when the accounts are not audited or the audit report is not furnished. Not levied if you show reasonable cause for the failure.
Penalty for not keeping books: A penalty (₹25,000 under the old law); Do not quote ₹25,000 as the fixed amount under the Income-tax Act, 2025 unless you have confirmed it. Books must be kept for six years from the end of the relevant tax year. The penalty is also avoidable on proving reasonable cause.

How to solve Maintenance of Books and Tax Audit questions

Use this order for any question asking whether books or a tax audit are required, or what the consequence of default is.

1Identify the person and the activity: business, profession, or eligible-business presumptive scheme. This decides which limit applies.
2For a profession, check gross receipts against ₹50 lakh. For books, check against ₹1,50,000 over three preceding years if it is a specified profession. For other persons, use ₹2,50,000 income or ₹25,00,000 turnover for individuals and HUFs, and ₹1,20,000 income or ₹10,00,000 turnover for others. A professional who claims less than 50% is tested under these general books and ₹50 lakh rules, not under the presumptive trigger.
3For business, compute turnover (sales, turnover or gross receipts). If it is ₹1 crore or less, no audit unless the eligible-business presumptive trigger applies.
4If turnover exceeds ₹10 crore, audit is required irrespective of the cash ratios. Stop the cash test here.
5If turnover is above ₹1 crore but up to ₹10 crore, test the cash condition. Compute cash receipts ÷ total receipts and cash payments ÷ total payments. Both must be 5% or less.
6If both cash tests pass, the limit is ₹10 crore, so no audit up to ₹10 crore. If either fails, the ₹1 crore limit applies and audit is required.
7Check the presumptive trigger for the eligible-business scheme only: the person has opted for that scheme, claims profits lower than the presumptive profits, and total income is above the basic exemption limit. Also check the opt-out case: the person opted out of the eligible-business scheme after opting in, is within the five-year lock-out, and total income is above the basic exemption limit. If either applies, books must be maintained as required and audited.
8State the compliance: audit report in the prescribed form, furnished on or before the date that is one month before the return due date.
9If the accounts were not audited or the report was not furnished, compute the penalty (lower of 0.5% of turnover and ₹1,50,000) and mention the reasonable-cause relief.

Quickest way: Threshold ladder for MCQs and written answers

When to use it: Use for any 'is tax audit required?' question. It takes under a minute.

MCQ: classify first. Profession means compare with ₹50 lakh and stop. Business means go on to the turnover check.
MCQ: for turnover between ₹1 crore and ₹10 crore, go straight to the two cash percentages. Compute 5% of total receipts and of total payments, then compare with the cash figures. One failure means audit.
MCQ: watch for turnover above ₹10 crore. Audit is required regardless of cash, so skip the cash test.
MCQ: no negative marking, so attempt every one. Eliminate options that apply the ₹10 crore limit to a professional.
Written: use a four-line format. Provision (the limit), Facts (turnover, cash ratios), Conclusion (audit required or not), Consequence (report due date and penalty). Show each percentage working to earn step marks.

Common mistakes in Maintenance of Books and Tax Audit

Applying the ₹10 crore limit after checking only cash receipts.
Students remember the 5% rule for receipts and forget the payments side.
Fix: Always compute both ratios: cash receipts ÷ total receipts and cash payments ÷ total payments. Both must be 5% or less.
Applying the ₹10 crore enhanced limit to a professional.
The ₹1 crore and ₹10 crore pair is memorised for everyone.
Fix: Remember that the enhanced limit is for business only. A professional is tested at ₹50 lakh of gross receipts, with no higher limit.
Calling a person 'not liable to tax audit' just because turnover is below the limit.
Students ignore the presumptive-scheme trigger.
Fix: After the turnover test, ask whether the person has opted for the eligible-business presumptive scheme (or opted out of it and is within the five-year lock-out), claims profit below the presumptive rate, and has income above the basic exemption limit. Do not apply this trigger to a professional claiming less than 50%. Test that case under the general books and ₹50 lakh rules.
Confusing books of account thresholds with tax audit thresholds.
Both use receipts figures, and the numbers (₹1,50,000, ₹25 lakh, ₹50 lakh) look alike.
Fix: Keep two separate lists. Books: ₹1,50,000 for specified professions; ₹2,50,000 income or ₹25 lakh turnover for individuals and HUFs; ₹1,20,000 income or ₹10 lakh turnover for other persons. Audit: ₹50 lakh for profession, ₹1 crore or ₹10 crore for business.
Computing the penalty as 0.5% of turnover without the cap.
Students stop at the percentage.
Fix: Always take the lower of 0.5% of turnover or gross receipts and ₹1,50,000. Add the reasonable-cause exception in your conclusion.
Counting the whole transaction value as cash when part went through the bank.
Cash tests are read loosely.
Fix: Include only amounts actually received or paid in cash. Amounts through account payee cheque, draft or electronic modes are not cash.

Worked examples

Example 1

Ravi, a trader, has a turnover of ₹8,00,00,000 in tax year 2026-27. His total receipts are ₹8,00,00,000, of which ₹30,00,000 were in cash. His total payments are ₹7,00,00,000, of which ₹20,00,000 were in cash. Is he liable to tax audit (assume no presumptive scheme issue)?

Show the solution

He is in business, and turnover (₹8 crore) exceeds ₹1 crore, so the general limit is crossed. Test the enhanced ₹10 crore limit.
Cash receipts ratio = 30,00,000 ÷ 8,00,00,000 = 3.75%. This is 5% or less.
Cash payments ratio = 20,00,000 ÷ 7,00,00,000 = 2.86% (approx.). This is 5% or less.
Both cash conditions are met, so the limit is ₹10 crore. Turnover of ₹8 crore does not exceed it.

Answer: Ravi is not liable to tax audit, because both cash ratios are within 5% and turnover is below ₹10 crore. He must still keep books of account.

Example 2

Meena, a trader, has a turnover of ₹6,00,00,000 in tax year 2026-27. Cash receipts are ₹40,00,000 of total receipts of ₹6,00,00,000. Cash payments are ₹10,00,000 of total payments of ₹5,50,00,000. She does not get her accounts audited. Is audit required, and what penalty can apply?

Show the solution

Turnover of ₹6 crore exceeds ₹1 crore. Test whether the ₹10 crore limit is available.
Cash receipts ratio = 40,00,000 ÷ 6,00,00,000 = 6.67% (approx.). This is more than 5%, so the condition fails.
Cash payments ratio = 10,00,000 ÷ 5,50,00,000 = 1.82% (approx.). This passes, but both conditions are needed.
Because the receipts test fails, the ₹1 crore limit applies. Turnover of ₹6 crore exceeds it, so tax audit is required.
Penalty for default = lower of 0.5% of turnover and ₹1,50,000. 0.5% of ₹6,00,00,000 = ₹3,00,000. The lower figure is ₹1,50,000.

Answer: Tax audit is required. If she does not get it done, the penalty is ₹1,50,000, unless she proves reasonable cause for the failure.

Exam tips

Most MCQs test the cash condition. Do the two percentage calculations carefully, and remember that failing either one drops the limit to ₹1 crore.
Write the threshold you are applying in the first line of your answer, for example 'Business, turnover above ₹1 crore'. It earns the provision mark.
In penalty questions, show the 0.5% working and then the ₹1,50,000 cap. Then say whether reasonable cause applies.
Read the facts for an eligible-business scheme hint such as 'declares profit lower than 8%' or 'opted out of the scheme earlier and is still within the five-year lock-out'. That signals the third trigger. Then confirm that total income exceeds the basic exemption limit before you conclude that audit is required. If a professional declares less than 50%, do not use this trigger. Test the receipts against ₹50 lakh instead.
Do not quote section numbers unless you are certain of the Income-tax Act, 2025 numbering. State the rule in plain words.

Practice questions from Profits and Gains of Business or Profession

Maintenance of Books and Tax Audit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ExecutiveMaintenance of Books and Tax Audit

Maintenance of Books and Tax Audit: frequently asked questions

What is the turnover limit for tax audit under the Income-tax Act, 2025?

For business, the limit is ₹1 crore of turnover, raised to ₹10 crore if cash receipts and cash payments are each 5% or less of total receipts and payments. For a profession, the limit is ₹50 lakh of gross receipts. An eligible-business presumptive case with lower declared profit and income above the basic exemption limit also needs audit.

Is tax audit required for a professional with receipts of ₹60 lakh?

Yes. Gross receipts of a profession above ₹50 lakh require a tax audit. The ₹10 crore enhanced limit is not available to professionals.

What is the penalty for not getting tax audit done?

The penalty applies when the accounts are not audited or the audit report is not furnished. It is the lower of 0.5% of turnover or gross receipts and ₹1,50,000. It is not levied if you prove reasonable cause for the failure. Failure to maintain books can attract a separate penalty (₹25,000 under the old law).

How do the cash conditions for the ₹10 crore limit work?

Cash receipts must not exceed 5% of total receipts, and cash payments must not exceed 5% of total payments. Both tests must be satisfied. If either fails, the ₹1 crore limit applies and a business with turnover above that amount needs a tax audit.

When must the tax audit report be furnished?

The report must be furnished on or before the date that is one month before the due date for filing the return of income. This is why audit cases effectively need the report ready before the return due date, not on it.