Tax Audit for MSMEs: Who Needs It, the Turnover Limits and the Due Date

You need a tax audit if your business turnover exceeds ₹1 crore in the year, or ₹10 crore when cash receipts and cash payments are each within 5% of the totals, or if your professional receipts exceed ₹50 lakh. Presumptive-tax users who declare less than the deemed profit also need one, if their income is above the taxable minimum. For FY 2025-26 the rule is section 44AB of the 1961 Act; from tax year 2026-27 it is section 63 of the Income-tax Act 2025, with the same limits.

Sources checked: 20 October 2026

Facts checked on 20 October 2026 against section 63 and section 428 of the Income-tax Act 2025, sections 44AB and 271B of the Income-tax Act 1961 on incometaxindia.gov.in, CBDT Circular No. 7/2026 and the CBDT FAQs on interplay and transition.

Key facts

Point	FY 2025-26 (AY 2026-27)	Tax year 2026-27 onwards
Law	Income-tax Act 1961, section 44AB	Income-tax Act 2025, section 63
Business limit	Turnover above ₹1 crore	Same
Higher limit	₹10 crore if cash receipts ≤ 5% and cash payments ≤ 5%	Same
Profession limit	Gross receipts above ₹50 lakh	Same
Report form	Form 3CA or 3CB, with Form 3CD	Form No. 26
Report due	21 October 2026 (extended by Circular 7/2026)	30 September 2027 for tax year 2026-27
Return due (audit cases)	21 November 2026 (extended)	31 October 2027
If not done	Penalty: 0.5% of turnover or ₹1,50,000, whichever is less (s.271B)	Fee: ₹75,000 up to one month's delay, ₹1,50,000 after (s.428(c))

Who needs a tax audit?

Anyone carrying on a business or profession who meets one of the conditions in section 63(1) needs a tax audit. The same conditions appeared in section 44AB, which still applies to FY 2025-26. The CBDT transition FAQs confirm that the thresholds did not change.

The conditions are:

1. Business turnover above ₹1 crore. Total sales, turnover or gross receipts of the business exceed ₹1 crore in the year.
2. The ₹10 crore relaxation. The ₹1 crore becomes ₹10 crore if both of these hold:
   • all amounts received in cash, including sales receipts, are no more than 5% of total receipts; and
   • all payments made in cash, including expenses, are no more than 5% of total payments.
3. Professional receipts above ₹50 lakh. Gross receipts from the profession exceed ₹50 lakh in the year.
4. Presumptive cases declaring lower profit. A business or profession covered by the presumptive provisions (section 58 of the 2025 Act; 44AD, 44ADA or 44AE earlier) claims profit lower than the deemed profit. For business and professional presumptive cases, section 58(3) adds the condition that total income exceeds the amount not chargeable to tax.

Section 63(2) adds the flip side: if you declare profit as per the presumptive scheme, section 63 does not apply to you, even if turnover is above ₹1 crore but within the presumptive limit.

How does the cash-receipts condition work?

The cash test compares cash with the totals, separately for receipts and for payments, and both must be within 5%. Section 63(5)(b) (and the proviso to section 44AB) treats a cheque or bank draft that is not account payee as cash. UPI, bank transfers and account-payee cheques are not cash.

Example: a trader with ₹6 crore turnover receives ₹20 lakh in cash (3.3%) and pays ₹40 lakh of expenses in cash out of ₹5.5 crore total payments (7.3%). Receipts pass the test but payments fail it, so the limit stays at ₹1 crore and the trader needs an audit. With cash payments brought to ₹27 lakh (4.9%), both tests would be met and the ₹10 crore limit would apply.

The figures in the example are illustrative. Your auditor will apply the test to your actual books.

What is the audit report form?

For FY 2025-26 the report is in the old forms: Form 3CA where accounts are audited under another law, Form 3CB for everyone else, each with the statement of particulars in Form 3CD. The CBDT FAQs confirm these apply even though the filing happens after 1 April 2026.

From tax year 2026-27, the report is Form No. 26 under rule 47 of the Income-tax Rules 2026. It merges Forms 3CA, 3CB and 3CD into one form. CBDT describes it as having rationalised clauses aligned with the return, and schedules for losses, depreciation, deductions and prior-period items.

Where a company or other entity is already audited under another law, section 63(4) lets that audit count, provided the other audit is done and the accountant's report in the prescribed form is filed by the specified date.

When is the tax audit report due?

The report is due on the "specified date", which section 63(5)(a) defines as one month before the return due date under section 263(1). Section 44AB had the same rule.

• FY 2025-26 (AY 2026-27): the normal date was 30 September 2026. CBDT Circular No. 7/2026, dated 28 September 2026, extended the return due date for audit cases to 21 November 2026. As a result, the audit report date moved to 21 October 2026.
• Tax year 2026-27: the return due date for audit cases is 31 October 2027, so the report is due 30 September 2027 (CBDT FAQs). Transfer pricing cases have a later return date of 30 November.

Mark these on the compliance calendar. If an audit case needs a return date, the advance tax guide also explains the year's other deadlines.

What does it cost to miss the audit?

For FY 2025-26, section 271B of the 1961 Act allows the Assessing Officer to levy a penalty of 0.5% of turnover or gross receipts, or ₹1,50,000, whichever is less.

From tax year 2026-27 the consequence is a fee under section 428(c) of the Income-tax Act 2025, inserted by Finance Act 2026: ₹75,000 if the failure lasts up to one month, and ₹1,50,000 after that. The old penalty section 446 now deals with a different subject, so do not rely on older mapping tables for this point.

Checklist before the audit

1. Work out turnover or gross receipts for the year from your books, not from GST returns alone.
2. Total the cash receipts and cash payments, including non-account-payee cheques.
3. If you used presumptive tax, compare the profit you will declare with the deemed profit under section 58 (or 44AD, 44ADA or 44AE for FY 2025-26).
4. Close the books: bank reconciliations, stock, fixed assets register, TDS returns and GST reconciliations.
5. Collect loan statements, tax challans and payments to micro and small suppliers. The audit report asks about them, and late payments to micro and small enterprises affect your deduction (see the 45-day payment rule).
6. Engage an independent chartered accountant in good time. The audit and the report are the accountant's professional work; this platform does not conduct audits.
7. Confirm the report is uploaded and accepted on the e-filing portal before the return is filed.

Common mistakes

• Using GST turnover as the test figure. The section looks at sales, turnover or gross receipts of the business. Reconcile the two figures first.
• Testing only cash receipts. The ₹10 crore limit needs both receipts and payments in cash to be within 5%.
• Treating bearer cheques as bank receipts. Non-account-payee cheques count as cash.
• Assuming presumptive tax always avoids an audit. Declaring less than the deemed profit can trigger an audit if income is above the taxable minimum.
• Mixing up the two Acts. FY 2025-26 uses section 44AB and the old forms; tax year 2026-27 uses section 63 and Form No. 26.

What to do now

If your FY 2025-26 accounts need an audit and the report is not yet filed, the extended date is 21 October 2026. Contact your independent chartered accountant today. For the current year, check your turnover and cash ratios each quarter so you know early which limit applies. The Income-tax Act 2025 overview explains the other changes, and the presumptive taxation guide helps if you are near the ₹2 crore or ₹3 crore limits.

For help with returns, advance tax and record-keeping around the audit, ask our expert team or book a consultation.