Income tax compliance is a very important obligation for every taxpayer in India. Among the various other obligations under the Income Tax Act, the Income Tax Audit, mandated under Section 44AB, plays a vital role in promoting transparency, accuracy, credibility and accountability in the reporting of income and financial details.
But the most important question many individuals, professionals and businesses ask is: “Who is eligible for an income tax audit?”
This blog explains the eligibility criteria in detail, covering businesses, professionals, presumptive taxation cases, turnover thresholds and important exceptions.
What Is an Income Tax Audit?
An income tax audit is a detailed examination of the books and records of a taxpayer. It is conducted by a Chartered Accountant (CA) to ensure:
- The accuracy of the income reported
- Proper maintenance of books of accounts
- Compliance with tax laws
- Correct computation of deductions, exemptions and claims
After the audit, the CA issues a report in Form 3CA/3CB along with Form 3CD, which is submitted to the Income Tax Department.
Who Is Eligible for an Income Tax Audit?
Under Section 44AB of the Income Tax Act, income tax audit is mandatory for certain taxpayers based on turnover, gross receipts and profit declaration patterns.
1. Income Tax Audit for Businesses
A business must undergo a tax audit if any of the following conditions are met.
a) If Total Sales/Turnover Exceeds ₹1 Crore
A tax audit is mandatory if the total turnover of a business exceeds ₹1 crore in a financial year.
b) Turnover Between ₹1 Crore and ₹10 Crore (Cash Transactions ≤ 5%)
If the total cash receipts and cash payments are not more than 5 percent of total transactions, then the audit limit increases to ₹10 crores.
This applies when:
- Cash receipts < 5 percent of total receipts
- Cash payments < 5 percent of total payments
In such cases:
- No tax audit up to ₹10 crore turnover
- Tax audit applicable for turnover above ₹10 crore turnover
c) Presumptive Taxation Scheme Under Section 44AD
Businesses opting for presumptive taxation under Section 44AD (for eligible businesses with turnover up to ₹2 crore) are not required to maintain detailed books.
However, a tax audit becomes mandatory if:
- You opt out of the presumptive scheme in any year after opting in earlier, and
- Your income is lower than 8 percent (or 6 percent in digital transactions) of turnover, and
- Your total income exceeds the basic exemption limit.
This is known as the five-year lock-in rule.
2. Income Tax Audit for Professionals
Professionals include doctors, lawyers, accountants, architects, engineers, consultants, designers, IT professionals and other technical service providers.
a) If Gross Receipts Exceed ₹50 Lakhs
A tax audit is mandatory if gross professional receipts exceed ₹50 lakh in a financial year.
b) Under the Presumptive Taxation Scheme – Section 44ADA
Section 44ADA allows eligible professionals to declare 50 percent of gross receipts as income on a presumptive basis…!
A tax audit becomes mandatory if:
- You declare income below 50 percent of receipts, and
- Your total income exceeds the basic exemption limit.
This means professionals declaring lower profit than 50 percent must undergo a tax audit.
3. Audit for Businesses Under Presumptive Taxation – Sections 44AE, 44BB and 44BBB
a) Section 44AE – Goods Vehicles
- Applicable to transport businesses owning up to 10 vehicles.
- An audit is required if the income is declared less than the presumptive amount and the total income exceeds the basic exemption limit.
b) Section 44BB – Non-resident Service Providers in Oil Exploration
An audit is required if the income is declared below the presumptive rate.
c) Section 44BBB – Foreign Companies in Civil Construction
An audit is required if the income is declared below the presumptive rate.
4. Mandatory Tax Audit in Case of Losses
Even if there is no profit, a tax audit becomes mandatory when:
a) Business Loss + No Presumptive Scheme
If a business shows a loss but the turnover exceeds ₹1 crore (or ₹10 crore if conditions are met), a tax audit is required.
b) Loss Under Section 44AD
If a taxpayer under 44AD declares a loss and:
- Does not follow presumptive taxation, and
- Total income exceeds the basic exemption limit,
Then a tax audit becomes mandatory.
When Tax Audit Is Not Required
Tax audit is not required in the following cases:
- Individuals and businesses with a turnover below ₹1 crore (and not opting out of presumptive taxation)
- Professionals with gross receipts below ₹50 lakh
- Businesses and professionals opting for presumptive taxation with profit declared at the prescribed percentage
- Businesses with a turnover of up to ₹10 crore but with cash transactions below 5 percent
Summary of Income Tax Audit Eligibility
| Category | Turnover / Income Limit | Audit Required When |
| Business (General) | More than ₹1 crore | Always |
| Business (Low cash transactions) | More than ₹10 crore | Always |
| Presumptive Business (44AD) | Up to ₹2 crore | Profit < 8%/6% and income above basic limit |
| Professionals | More than ₹50 lakh receipts | Always |
| Presumptive Professionals (44ADA) | Up to ₹50 lakh receipts | Profit < 50% and income above basic limit |
| Transport (44AE) | Up to 10 vehicles | Profit < presumptive rate |
| Foreign Companies (44BB/44BBB) | As per the scheme | Profit < presumptive rate |
Importance of Income Tax Audit
An income tax audit ensures:
- Accurate reporting of income
- Avoidance of penalties
- Transparency in financial statements
- Smooth documentation for loans, tenders and compliance
Penalty for Not Conducting a Tax Audit
If a taxpayer fails to conduct a mandatory tax audit:
- Penalty under Section 271B
- Minimum penalty: 0.5 percent of turnover or gross receipts
- Maximum penalty: ₹1,50,000
Penalties may be relaxed for genuine reasons such as natural calamity, illness or technical issues.
Conclusion
Understanding who is eligible for an income tax audit is essential for timely and accurate compliance. Eligibility depends on turnover limits, cash transaction percentage, profit declaration and presumptive taxation rules. Evaluating these factors ensures proper filing and helps avoid penalties.
In addition to that, businesses and various professionals should regularly review and examine their financial records and data to monitor whether they fall under any audit requirements during the financial year. Being proactive not only minimises the chances of receiving notices but also ensures smooth and proper financial planning. Consulting a qualified Chartered Accountant further helps in accurate assessment and efficient tax management.
