If you are part of a partnership firm in India and wondering if you need to get your accounts audited?
You are not alone. While the Indian Partnership Act makes no mention of audits, the Income Tax Act of 1961 introduces specific situations where an income tax audit becomes mandatory.
In this blog, we will explain:
- Why there is no audit under partnership law
- When an audit becomes compulsory under Section 44AB
- How thresholds are changing in 2024–25
- What an audit involves
- Consequences of skipping it
- Benefits of voluntary audits
By the end, you’ll clearly know whether your firm needs an audit—and how to handle it if so.
Partnership Law Vs Income Tax Law
Under the Partnership Act of 1932, there is no legal requirement for a partnership firm to undergo an audit. Partners can maintain books of account however they agree internally; no CA sign-off is required by law.
However, the Income Tax Act of 1961, specifically Section 44AB, mandates a tax audit for certain taxpayers, including partnership firms, based on specific thresholds. That’s why the audit requirement depends not on the type of entity but on your turnover, receipts, and profit pattern.
When Is an Audit Mandatory?
1. If the annual turnover exceeds ₹1 crore, the firm must get its accounts audited by a Chartered Accountant.
2. However, this limit has been relaxed to ₹10 crore under one condition:
At least 95% of your total business transactions, both receipts and payments, must be through digital or banking channels like:
- UPI
- Debit/Credit Cards
- Bank Transfers
- Cheques
- Net Banking
- Mobile Wallets (with proper records)
3. And, cash transactions must not exceed 5% of the total. This move encourages businesses to adopt cashless methods.
Example:
If a firm has a turnover of ₹6 crore and receives 97% of its payments via bank transfers, then:
- It does not require a tax audit (because turnover is below ₹10 crore and cash transactions are under 5%).
But if the same firm uses 10% cash transactions, it must get audited because it doesn’t meet the “less than 5% cash” condition.
- Professional Receipts Threshold
If the partnership firm is not engaged in business but in a profession (such as law, medicine, accounting, architecture, design, etc.), then a different limit applies.
4. If the firm’s gross receipts from professional services exceed ₹50 lakh, then a tax audit is compulsory.
5. However, similar to the business category, the limit is raised to ₹75 lakh if 95% or more of the professional receipts are through digital means and cash receipts are limited to 5% or less.
But if the cash portion is higher than 5%, an audit becomes mandatory even though total receipts are below ₹75 lakh.
Presumptive Taxation Scheme (PTS)
The government offers a simpler way of taxation for small businesses and professionals known as the Presumptive Taxation Scheme (PTS). Under this scheme:
- You don’t have to maintain detailed books of accounts
- You pay tax based on a fixed percentage of your gross receipts or turnover
- Section 44AD (for small businesses): You must declare at least 8% of your turnover as income (or 6% if all payments are digital).
- Section 44ADA (for professionals): You must declare 50% of your gross receipts as income.
When does an audit become mandatory in PTS?
If you opt into the presumptive scheme, but:
- You declare income less than the prescribed minimum (i.e., below 8%/6% for business or below 50% for profession), AND
- Your total income exceeds the basic exemption limit (currently ₹2.5 lakh for individuals, ₹3 lakh for senior citizens),
Then, you must undergo a tax audit, even if your turnover is below ₹1 crore (for business) or ₹50 lakh (for profession).
Income Thresholds for Financial Year 2024–25
From Financial Year 2024–25 (Assessment Year 2025–26), the following updated limits apply:
- Business Firms:
₹1 crore if cash transactions exceed 5%
₹10 crore if 95% or more transactions are digital - Professional Firms:
₹50 lakh if cash receipts exceed 5%
₹75 lakh if 95% or more receipts are digital
These relaxed limits encourage businesses to transition to digital payment modes and reduce their reliance on cash-based operations.
Tax Audit
1. Conducted By
A Chartered Accountant (CA) with a valid Certificate of Practice. Partners, employees, or internal staff of the firm cannot perform a tax audit.
2. Audit Objectives
The tax auditor will verify:
- Proper maintenance of the books of accounts
- Recording of income and expenses
- Adherence to accounting standards and tax laws
- Validity of deductions and exemptions claimed
- Income tax return
3. Forms to File
Depending on whether the accounts are audited under any other law:
- If audited under other law: Use Form 3CA and Form 3CD
- If not audited under any law: Use Form 3CB and Form 3CD
Form 3CD contains detailed disclosures about the financials, compliances, deductions, and statutory requirements of the firm.
4. Due Dates
- Audit Report Submission: By 30th September of the assessment year
- Income Tax Return (ITR-5): By 31st October
Penalties for Non-Compliance
| Particulars | Details |
| Applicable Law | Section 271B of the Income Tax Act, 1961 |
| Reason for Penalty | Failure to: 1. Get accounts audited under Section 44AB, 2. Furnish the audit report on time |
| Who Must Comply? | Individuals, Partnership Firms, LLPs, Companies, etc., with audit requirements under Section 44AB |
| Applicable Sections Triggering Audit | Section 44AB (for turnover, receipts, or presumptive taxation limits) |
| Penalty Amount | 0.5% (½%) of total sales/turnover/gross receipts OR ₹1,00,000 – whichever is lower |
| Authority Who Imposes Penalty | Assessing Officer (AO) |
| Deadline to Furnish Audit Report | Usually 30th September of the assessment year (may vary if extended) |
| Form to Be Submitted | Form 3CA/3CB + Form 3CD (Audit Report) |
| Examples of Penalty Calculation | 1. ₹2 Cr turnover → 0.5% = ₹1,00,000 → Max penalty = ₹1,00,000 2. ₹30 L turnover → 0.5% = ₹15,000 |
When Audit Is Not Mandatory: Voluntary Audit
If the turnover of your firm or receipts is below the mandatory threshold, and your firm is in full compliance with presumptive taxation (if opted), then an audit is not compulsory.
Benefits of Conducting a Voluntary Audit in India
- Better financial credibility
- Better Compliance Readiness
- Enhanced Transparency Among Partners
- Helps during tax scrutiny
- Useful for Attracting Investors or New Partners
- Better Control Over Cash Flow and Spending
- Improve Internal Controls
ICAI Limit on Tax Audits (From 2025)
From April 2025 onwards, the Institute of Chartered Accountants of India (ICAI) has imposed a limit on the number of tax audits a Chartered Accountant can undertake:
- Each CA or partner in a firm can handle only 60 tax audits per year
Conclusion
Audit of a partnership firm is not mandatory under the Partnership Act of 1932 in India. Under the Income Tax Act of 1961, it becomes compulsory if the firm’s turnover exceeds the specified turnover or receipt limits or deviates from the presumptive taxation norms. Failure to comply attracts penalties. Many firms opt for voluntary audits to ensure financial accuracy, build trust among partners, and improve their credibility with banks and investors. Audits help detect errors and strengthen internal controls and support.
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