Tax Audit Checklist for FY 2025-26: Section 63, Income Tax Act 2025

The Income Tax Act, 2025 replaced the Income Tax Act, 1961 effective 1 April 2025. For tax audit purposes, the relevant provision is now Section 63 of the new Act — the successor to the widely known Section 44AB. The core obligation is unchanged: if your business or professional income crosses the prescribed threshold, your accounts must be audited by a Chartered Accountant and the report filed by 30 September. What has changed is the section numbering, some clause-level restructuring in the report form, and updated references throughout.

This article covers who needs a tax audit for FY 2025-26, what the audit involves, the document checklist your CA will need, and what happens if you miss the deadline.

Who Needs a Tax Audit Under Section 63 for FY 2025-26?

The turnover thresholds that trigger a mandatory tax audit are:

Two points that frequently cause confusion:

• The ₹10 crore digital threshold is strict. 95% or more of both receipts and payments must be through account payee cheque, account payee bank draft, or electronic clearing. Cash receipts or payments above 5% of turnover — even a single large cash transaction — bring the threshold back down to ₹1 crore. Many businesses assume they qualify for the higher threshold but fail the 95% test on closer examination.
• Opting out of presumptive taxation has a five-year lock-in. If you declare income below the presumptive rate under Section 44AD or 44ADA (which triggers a tax audit obligation), you cannot opt back into the presumptive scheme for the next five assessment years. This is a decision that should be made with full awareness of the downstream compliance commitment.

The Tax Audit Report: Form 26

Under the Income Tax Act 2025, the tax audit report is filed in Form 26 — the updated equivalent of the former Form 3CA/3CB and Form 3CD under the old Act. Form 26 consists of two parts:

• Part A (Auditor's Report) — the CA's opinion on whether the accounts present a true and fair view, whether the prescribed books of account have been maintained, and whether the information in Part B is correct.
• Part B (Statement of Particulars) — a detailed factual disclosure covering 40+ clauses. This is the substantive part of the tax audit. Each clause requires specific information from your books of accounts.

Form 26 Checklist: What Your CA Will Need

The following documents and information are required to complete Form 26. Having these organised before the audit begins significantly reduces the time and cost of the engagement:

Financial Statements

• Audited or finalised Balance Sheet and Profit & Loss Account for FY 2025-26
• Trading account (if applicable — manufacturing or trading businesses)
• Cash flow statement
• Notes to accounts and schedules
• Previous year's financial statements (for comparative figures)

Books of Account and Supporting Records

• General ledger and all subsidiary ledgers
• Cash book and bank book with monthly totals
• Bank statements for all accounts — reconciled to books
• Sales invoices and purchase bills
• Stock register and closing stock valuation with method (FIFO, weighted average, etc.)
• Fixed asset register with additions, deletions, and depreciation schedule
• Loan and borrowing documentation — including all loan accounts, interest calculations, and repayment schedules

Tax Compliance Records

• All GST returns filed for FY 2025-26 (GSTR-1, GSTR-3B, GSTR-9 if applicable)
• TDS returns (Form 24Q, 26Q, 27Q as applicable) for all four quarters
• TDS certificates issued (Form 16 / 16A)
• Advance tax payment challans (for all four instalments)
• Self-assessment tax payment challan
• Any pending tax demand notices or assessment orders

Key Disclosures Required in Form 26 Part B

Several Part B clauses require specific information that SMEs are often unprepared for:

• Cash payments above ₹10,000 in a single day to a single person — Section 40A(3) disallows these expenses. Your CA needs a complete list of all such payments during the year.
• Loans or deposits received or repaid in cash above ₹20,000 — reportable under Section 269SS and 269T. Any such transactions must be disclosed.
• Amounts paid to related parties — payments to directors, their relatives, or associated entities above prescribed limits must be disclosed, including whether they are at arm's length.
• Payments to MSME vendors outstanding beyond 45 days — as per the MSMED Act, amounts owed to registered MSME suppliers beyond 45 days must be disclosed and are potentially disallowable.
• Deemed dividend under Section 194 — if your company has provided loans to shareholders holding 10% or more, or their relatives, this must be disclosed.
• All expenses disallowed under Section 40 and 40A — penalties, fines, income tax paid, TDS defaults, excessive payments to relatives, etc.

Due Date and Consequences of Missing It

The tax audit report in Form 26 must be filed on the income tax portal by 30 September 2026 for FY 2025-26. If your business requires a transfer pricing report (Form 3CEB), the deadline is 31 October 2026.

Consequences of missing the tax audit deadline:

• Penalty under Section 309 (successor to Section 271B) — 0.5% of total sales, turnover, or gross receipts, subject to a maximum of ₹1,50,000. The penalty is automatic unless you can demonstrate reasonable cause for the delay — illness of the CA, natural disasters, or other circumstances beyond your control may qualify.
• Loss of certain deductions. Several deductions under the Income Tax Act are available only if the return is filed on time and the tax audit is completed. Missing the audit deadline can result in forfeiture of deductions under Chapter VI-A, carried forward losses, and certain investment-linked deductions.
• Scrutiny risk increases. A late or missed tax audit is a risk flag in the tax department's case selection algorithm. It increases the probability of your return being selected for scrutiny assessment.

Common Mistakes That Trigger Issues During Tax Audit

• Books not maintained in the prescribed form. Section 63 requires specific books to be maintained — cash book, journal, ledger, and copies of bills above ₹25. If these are not maintained throughout the year, the auditor must qualify the report, which triggers scrutiny.
• Mismatch between GST turnover and income tax turnover. GST returns are cross-verified against income tax returns during processing. A significant difference in declared turnover between the two systems — without a clear reconciliation — is one of the most common triggers for income tax notices.
• Cash transactions above Section 40A(3) limits. If your business has made cash payments above ₹10,000 to a single party in a day, those expenses are disallowed. Many SMEs discover this only during the tax audit — after the financial year has closed and the transactions cannot be undone.
• Advance from customers not disclosed. Advance receipts above ₹20,000 in cash from customers must be reported. Non-disclosure is a specific Form 26 clause violation.