Category: Accounting

Partners’ Remuneration and Interest under the Income-tax Act, 2025: Section 35(e) Limits, Book Profit and Partner’s Tax (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 03 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A firm can deduct remuneration only to working partners and only if it is authorised by the partnership deed for the period concerned (section 35(e)); the total for all working partners is limited to 90% of book profit on the first ₹6,00,000 (or ₹3,00,000 in case of a loss, if higher) and 60% of the balance.
  • Interest to partners is deductible only if authorised by the deed, and only up to 12% simple interest a year; remuneration to a partner who is not a working partner is not deductible at all.
  • Book profit is the net profit of the profit and loss account computed under the business rules, increased by the total remuneration to all partners if it was deducted; a working partner is an individual actively engaged in conducting the affairs of the firm’s business or profession.
  • In the partner’s hands, the share of profit in the profit-sharing ratio is exempt (Schedule III, Sl. No. 2), while remuneration and interest from the firm are business income and not salary (section 15(4)).

A partnership firm that pays salary, commission or interest to its partners can deduct those payments only within limits fixed by the Act. In the Income-tax Act, 2025 (from 01/04/2026) the limits are in section 35(e), in the group of “amounts not deductible”, replacing the old section 40(b).

The conditions for a deduction

Payment Deductible if
Remuneration to a partner who is not a working partner Never (section 35(e)(i))
Remuneration to a working partner Authorised by the partnership deed applicable for the period for which it is paid. Remuneration that relates to a period before the date of the deed, or that the earlier deed did not authorise, is not deductible (section 35(e)(ii))
Interest to any partner Authorised by the partnership deed on the same conditions, and within 12% simple interest a year (section 35(e)(ii) and (iv))
Aggregate remuneration to all working partners Within the limit below (section 35(e)(iii))

Limit on remuneration to working partners

The aggregate remuneration to all working partners, as authorised by the deed, is allowed up to:

Slice of book profit Allowed remuneration
On the first ₹6,00,000 of book profit ₹3,00,000 in case of a loss, or 90% of the book profit, whichever is higher
On the balance of the book profit 60%

Book profit and working partner

  • Book profit is the net profit as shown in the profit and loss account for the tax year, computed as per Chapter IV-D, increased by the aggregate remuneration to all partners if it has been deducted in arriving at that net profit (section 35(e)(v)(A)).
  • A working partner is an individual who is actively engaged in conducting the affairs of the business or profession of the firm (section 35(e)(v)(B)).

Example. A firm has a net profit of ₹16,00,000 after deducting remuneration of ₹8,00,000 to its two working partners. The partnership deed authorises that remuneration. Book profit is ₹16,00,000 + ₹8,00,000 = ₹24,00,000. The allowed remuneration is 90% of the first ₹6,00,000 = ₹5,40,000, plus 60% of the balance ₹18,00,000 = ₹10,80,000, so ₹16,20,000 in total. The ₹8,00,000 paid is within that limit and is fully deductible. If the firm paid ₹20,00,000, only ₹16,20,000 would be allowed.

Interest to partners in a representative capacity

If an individual is a partner on behalf of, or for the benefit of, another person, interest paid to him in that representative capacity and interest paid to the person represented are both counted for the 12% limit, while interest paid to him otherwise is left out. Where a partner receives interest on behalf of another person but is not a representative partner, his interest is also left out (section 35(e)(iv)(A) and (B)).

Associations of persons and bodies of individuals

Section 35(f) applies a similar rule to an association of persons or body of individuals (other than a company, co-operative society or registered society): interest, salary, bonus, commission or remuneration to a member is not deductible, except that interest is disallowed only to the extent the interest paid by the association exceeds the interest the member paid to it.

How the partner is taxed

  • Share of profit: the sum received by a partner as his share in the total income of the firm is exempt under Schedule III, Sl. No. 2, if the firm is separately assessed and the share is as per the profit-sharing ratio in the partnership deed.
  • Remuneration, bonus, commission and interest from the firm are not salary, even if called salary (section 15(4)). The partner reports them under the head profits and gains of business or profession, as under the old section 28(v); the corresponding clause of the 2025 Act was not separately checked for this post. The partner’s share of profit is not taxed again.
  • If a firm’s remuneration is later found not deductible, the partner’s assessment is amended to remove the income, within four years from the end of the financial year of the order on the firm (section 288, Table Sl. No. 1).

Practical points

  1. Update the partnership deed before the year starts. A clause that comes into force later does not support a deduction for the earlier period.
  2. State the working partners and the remuneration formula clearly in the deed, with the 12% interest ceiling.
  3. Compute book profit each year before deciding the remuneration, because the limit depends on it.
  4. Compare firm and company structures. The tax cost of a firm depends on the rate at which the firm is taxed under the Finance Act; check the current rate when planning.

How CSM & Co LLP can help

We draft and update partnership deeds, compute book profit and partner remuneration, and file the returns of firms and partners. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section limits the remuneration and interest a firm can deduct?

Section 35(e) of the Income-tax Act, 2025, which replaces section 40(b) of the 1961 Act. Section 288 refers to it when the assessment of a partner is amended after the firm’s assessment changes.

What is the limit on partners’ remuneration?

The aggregate remuneration to all working partners, as authorised by the partnership deed, is allowed up to: on the first ₹6,00,000 of book profit, ₹3,00,000 in case of a loss, or 90% of the book profit, whichever is higher; and on the balance of the book profit, 60% (section 35(e)(iii)).

Who is a working partner?

An individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner (section 35(e)(v)(B)). Remuneration to a partner who is not a working partner is not deductible (section 35(e)(i)).

What is the limit on interest to partners?

Interest authorised by the partnership deed is allowed up to 12% simple interest a year; the excess is not deductible (section 35(e)(iv)). Rules apply where an individual is a partner in a representative capacity, so that interest paid to him in that capacity and to the person he represents is taken into account together.

What is book profit?

The net profit shown in the profit and loss account for the tax year, computed under Chapter IV-D (the business and profession rules), increased by the aggregate remuneration to all partners if it has been deducted in arriving at that net profit (section 35(e)(v)(A)).

How is a partner taxed?

The sum received by a partner as share in the firm’s total income is exempt in the partner’s hands, provided it is as per the profit-sharing ratio in the partnership deed (Schedule III, Sl. No. 2). Remuneration, bonus, commission and interest received from the firm are not salary (section 15(4)); they are business income of the partner, and the firm’s payment of them is deductible only as above.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 34

Expenditure Relating to Exempt Income under the Income-tax Act, 2025: Section 14 and Rule 14 (Old Section 14A and Rule 8D) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 15 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 14 of the Income-tax Act, 2025 (old section 14A) disallows any expenditure incurred in relation to income that does not form part of the total income, even if the exempt income was not earned in that year (section 14(3)).
  • If the Assessing Officer is not satisfied with the assessee’s claim of expenditure, or with a claim that none was incurred, he determines the amount by the prescribed method, which is Rule 14: expenditure directly related to exempt income plus 1% of the annual average of the monthly averages of the opening and closing value of investments that yield exempt income, subject to a cap at the total expenditure claimed.
  • The old Rule 8D had separate parts for interest and a 0.5% charge; Rule 14 of the Rules 2026 is shorter and uses 1% of the investment value.
  • Dividend income is taxable and no deduction is allowed against it at all from 01/04/2026 (section 93(2)), so the disallowance in section 14 matters for genuinely exempt income such as agricultural income, exempt interest and exempt capital gains.

A taxpayer cannot claim a deduction for the cost of earning income that is not taxed. In the Income-tax Act, 2025 (from 01/04/2026) this is section 14, which replaces the old section 14A, and the method for working out the amount is in Rule 14, which replaces Rule 8D.

What section 14 says

  1. No deduction is allowed for expenditure incurred by the assessee in relation to income that does not form part of the total income (section 14(1)). This applies irrespective of anything to the contrary in the Act.
  2. Determination by the Assessing Officer (section 14(2)): if he is not satisfied with the correctness of the expenditure claimed in relation to the exempt income, or with the assessee’s claim that no expenditure was incurred, he determines the amount by a method that is prescribed.
  3. Year of the expenditure (section 14(3)): the section applies where the expenditure was incurred in a tax year even though the exempt income has not accrued, arisen or been received in that year.

Rule 14: the prescribed method

The expenditure in relation to income that does not form part of total income is the sum of:

  • (a) the expenditure directly relating to such income; and
  • (b) an amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments, income from which does not or will not form part of total income.

The total of (a) and (b) cannot exceed the total expenditure claimed by the assessee (Rule 14(2)).

Compared with the old Rule 8D

The old rule worked in three parts: direct expenditure, interest not directly attributable (by a formula on investments and total assets) and 0.5% of the average investment. Rule 14 of the Rules 2026 has only two parts, direct expenditure and 1% of the investment value, so there is no separate interest apportionment. Check the text of the Rule if a case turns on a particular head, such as interest.

Example. A company’s investments that yield exempt income (for example, tax-exempt bonds) had an annual average of the monthly averages (of opening and closing balances) of ₹1,00,00,000. The 1% charge is ₹1,00,000. If direct expenditure on those investments (such as demat charges) is ₹20,000, the disallowance is ₹1,20,000, provided the company has claimed at least that much total expenditure. If it claimed only ₹90,000 in total, the disallowance is capped at ₹90,000.

What is “income that does not form part of total income”

This covers income excluded under section 11 and Schedules II to VII, agricultural income and other exempt receipts. Dividend is not exempt: it is taxed under section 92(2)(a), and Finance Act 2026 substituted section 93(2) to say that no deduction at all is allowed against dividend income or income from units of specified mutual funds and UTI units. So the earlier practice of claiming interest up to 20% of the dividend is gone, and the section 14 question for dividend does not arise.

Practical points

  1. Show the exempt-income expenditure in the accounts. An assessee who shows that no expenditure was incurred must be able to support the claim, because the Assessing Officer can disbelieve it under section 14(2)(b).
  2. Separate funds. Using separate bank accounts and clearly separate investments helps show that borrowed funds were not used for exempt investments.

How CSM & Co LLP can help

We compute the section 14 disallowance, plan investments and funding and defend the claim in assessment. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section replaces 14A and Rule 8D?

Section 14 of the Income-tax Act, 2025 and Rule 14 of the Income-tax Rules, 2026.

What is the rule in section 14?

No deduction is allowed for expenditure incurred in relation to income that does not form part of the total income (section 14(1)). It applies even where the expenditure was incurred in a tax year in which the exempt income was not earned, accrued or received (section 14(3)).

How is the disallowed amount computed?

If the Assessing Officer is not satisfied with the correctness of the assessee’s claim of expenditure, or with a claim that no expenditure was incurred in relation to exempt income, he determines the amount as prescribed (section 14(2)). Under Rule 14 it is the sum of (a) expenditure directly relating to exempt income and (b) 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments, income from which does not or will not form part of total income. The total cannot exceed the expenditure claimed (Rule 14(2)).

Does the 1% apply to all investments?

Only to investments whose income does not or will not form part of the total income. Investments that give taxable income are left out of the average.

Is interest on borrowings to buy shares separately disallowed?

Rule 14 does not have a separate interest limb; the 1% of investment value covers the indirect expenses. Interest that relates directly to an investment giving exempt income is part of the direct expenditure in (a).

What about dividend income?

Dividend is taxable under section 92(2)(a), and from 01/04/2026 no deduction is allowed against it (section 93(2)). The section 14 disallowance therefore concerns income that is genuinely outside the total income, such as agricultural income and exempt interest or gains under the Schedules.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 25

Transfer Pricing under the Income-tax Act, 2025: Arm’s Length Price, Documentation, Form 48 Report and Fee (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 31 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Transfer pricing rules (sections 161 to 173 of the Income-tax Act, 2025, old sections 92 to 92F) require income, expense and interest from an international transaction or a specified domestic transaction to be worked out at the arm’s length price.
  • Associated enterprises are linked by shareholding of 26% or more of the voting power, a loan of 51% or more of total assets, guarantees of 10% or more of borrowings, control of the board, dependence on intangibles or raw materials, and similar tests (section 162).
  • The method is chosen from comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin or a prescribed method (section 165); a variation of up to 3% (as notified) from the arm’s length price is tolerated when one price is determined.
  • The accountant’s report goes in Form 48 at least one month before the return due date (Rule 85); late filing now attracts a fee of ₹50,000 (up to one month) or ₹1,00,000 (section 428(d)), since the penalty in section 447 was omitted by Finance Act 2026, and a penalty of 2% of the transaction value applies for failing to keep documents (section 442).

When two related businesses deal with each other, the price they charge may not be the price independent parties would have agreed. Transfer pricing rules make sure the profit is not shifted out of India by such pricing. In the Income-tax Act, 2025 (from 01/04/2026) they are in Chapter X, sections 161 to 173 (old sections 92 to 92F), and the Rules in Rules 84 and 85.

Section map

Old New Subject
92 161 Income and expense at arm’s length price
92A 162 Associated enterprise
92B 163 International transaction
92BA 164 Specified domestic transaction
92C 165 Determination of arm’s length price
92CA 166 Reference to Transfer Pricing Officer
92CB 167 Safe harbour
92CC, 92CD 168, 169 Advance pricing agreement
92CE 170 Secondary adjustment
92D 171 Information and documents
92E 172 Accountant’s report
92F 173 Definitions
3CEB Form 48 Accountant’s report

Who is an associated enterprise (section 162)

Two enterprises are associated if, for example:

  • the same persons take part in the management, control or capital of both;
  • one holds 26% or more of the voting power of the other, or a person holds 26% or more in each;
  • one has lent a loan that is 51% or more of the book value of the other’s total assets, or guarantees 10% or more of its total borrowings;
  • one appoints more than half of the other’s board or an executive director;
  • one depends wholly on intangibles owned by the other, or 90% or more of its raw materials come from the other on influenced terms, or its goods are sold to the other on influenced terms;
  • common control by an individual or relatives, or a HUF and a member;
  • one is a firm, association or body of individuals and the other holds 10% or more interest in it; or
  • they have a prescribed relationship of mutual interest.

International and specified domestic transactions

An international transaction (section 163) is a transaction between associated enterprises, one of which is necessarily a non-resident, covering tangible and intangible property, capital financing (borrowing, lending, guarantee, marketable securities, advances), services (market research, management, technical, legal, accounting and others), business restructuring, cost-sharing arrangements and any other transaction having a bearing on profits, income, losses or assets. A transaction with an outsider is deemed an international transaction if a prior agreement exists with an associated enterprise, or its terms are determined in substance between the outsider and the associated enterprise (section 163(2)).

A specified domestic transaction (section 164) includes certain transactions between the assessee and related persons (for example those covered by sections 122, 140(9), 140(13) and 205(4)) and prescribed ones, where the aggregate of such transactions in the tax year exceeds ₹20 crore.

Determining the arm’s length price (section 165)

  1. Choose the most appropriate method from: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin, or another method the Board prescribes (section 165(1) and (2)).
  2. If one price results, it is the arm’s length price; but the price actually charged is accepted if it differs by no more than a notified percentage, not exceeding 3% (section 165(3)(a)). If more than one price results, the price is determined as prescribed (section 165(3)(b)).
  3. The Assessing Officer can determine the arm’s length price if the price was not determined correctly, documents were not kept, the data used is unreliable or information was not furnished in time, after giving a show-cause notice (section 165(4) and (5)). No deduction under Chapter VIII is allowed on the income that is increased (section 165(7)).
  4. Where the AO makes the adjustment on a payment from which tax was deducted, the other associated enterprise’s income is not recomputed (section 165(8)).
  5. The Assessing Officer can refer the case to the Transfer Pricing Officer (section 166), and a secondary adjustment can be required to align the books with the transfer price (section 170).

Safe harbour rules (section 167) and advance pricing agreements (sections 168 and 169) can give certainty in advance.

Documentation (section 171, Rule 84)

Every person who has entered into an international or specified domestic transaction, and every constituent entity of an international group, must keep and maintain information and documents as prescribed. Rule 84(1) lists them: ownership structure, group profile, business description, terms of each transaction, functional analysis (functions, risks, assets), forecasts, comparability analysis, methods considered, the reasons for the method chosen, and the computation of the arm’s length price.

  • Exemption: the list does not apply to international transactions whose aggregate value in the books for the year does not exceed ₹1 crore, but the assessee must substantiate that the income from them was computed at arm’s length (Rule 84(2) and (3)).
  • Retention: nine years from the end of the relevant tax year (Rule 84(8)).
  • On request: documents must be furnished within ten days of a notice, extendable by up to thirty days on application (section 171(2) and (3)).

The accountant’s report: Form 48 (section 172, Rule 85)

Every person who entered into an international or specified domestic transaction in the tax year must obtain a report from an accountant and furnish it in Form 48, at least one month before the due date of the return (Rule 85). “Specified date” is one month before the due date for the return under section 263(1) (section 173(d)). For a company or an audited assessee with a return due date of 31 October, that is 30 September (and one month before 30 November where the return is due on 30 November).

Consequences of default

Default Consequence Section
Report not furnished by the specified date Fee of ₹50,000 (up to one month) or ₹1,00,000 thereafter 428(d)
Failure to keep documents, to report a transaction or incorrect information Penalty of 2% of the value of each transaction 442(1)
Failure to furnish information required for an international group Penalty of ₹5,00,000 442(2)
Adjustment of income Assessed after notice and the AO’s determination 165(4) to (6)

The old penalty of ₹1,00,000 for not furnishing the report (section 447) was omitted by Finance Act 2026 from 01/04/2026 and replaced by the fee under section 428(d).

Practical points

  1. Build the transfer pricing file during the year, not at filing time.
  2. Check whether the 26%, 51% or 10% tests apply to every group company, since a small shareholding can still make two companies associated.
  3. Treat management fees, royalties, loans to subsidiaries and guarantees as international transactions.
  4. Keep the Form 48 date in the compliance calendar, one month before the return.

How CSM & Co LLP can help

We prepare transfer pricing documentation, benchmarking studies and the accountant’s report in Form 48 for businesses with related party dealings. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections of the 2025 Act deal with transfer pricing?

Sections 161 to 173 in Chapter X: section 161 (income at arm’s length price), 162 (associated enterprise), 163 (international transaction), 164 (specified domestic transaction), 165 (determination of arm’s length price), 166 (reference to the Transfer Pricing Officer), 167 (safe harbour), 168 and 169 (advance pricing agreements), 170 (secondary adjustment), 171 (information and documents), 172 (accountant’s report) and 173 (definitions).

Who is an associated enterprise?

An enterprise that participates in the management, control or capital of the other, or in which the same persons do; or one holding 26% or more of the voting power of the other (or a person holding 26% in both); or one that has lent 51% or more of the other’s total assets (book value); or guarantees 10% or more of its borrowings; or appoints more than half its board; or the business of which depends wholly on the other’s intangibles or on 90% or more of raw materials supplied by the other; and certain cases of common control by an individual or HUF (section 162).

What is an international transaction?

A transaction between two or more associated enterprises, one of which is necessarily a non-resident, covering the purchase, sale or use of tangible or intangible property, lending and borrowing, provision of services, business restructuring, cost sharing and any other transaction affecting profits, income, losses or assets (section 163). A transaction with an outsider can be deemed an international transaction if there is a prior agreement with an associated enterprise, or its terms are in substance determined with it (section 163(2)).

Is there a minimum value for documentation?

Rule 84(2) says the detailed documentation list does not apply to an international transaction where the aggregate value recorded in the books for the tax year does not exceed ₹1 crore, but the assessee must substantiate that income from them was computed at arm’s length. Specified domestic transactions count only where the aggregate in the year exceeds ₹20 crore (section 164). Documents are kept for nine years from the end of the tax year (Rule 84(8)).

What is the tolerance for the arm’s length price?

Where one price is determined by the most appropriate method, the price actually charged is accepted if the difference from that price is not more than a percentage, not exceeding 3%, notified by the Central Government (section 165(3)(a)(ii)).

What if the accountant’s report is late?

A fee of ₹50,000 for a delay up to one month and ₹1,00,000 thereafter (section 428(d)). The separate penalty of ₹1,00,000 in section 447 was omitted by Finance Act 2026 from 01/04/2026. A penalty of 2% of the value of each transaction applies for failure to keep and maintain documents, to report a transaction, or for incorrect information (section 442(1)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 22

Freelancer Income Tax in India: Presumptive or Actual Books, TDS, Advance Tax and Audit (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 23 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A freelancer’s fees are income from business or profession. For a specified profession (which now lists information technology) the Income-tax Act, 2025 lets a resident individual declare 50% of gross receipts up to ₹50 lakh (₹75 lakh if cash receipts are at most 5%) under section 58, with no books or audit.
  • The alternative is actual books: income is receipts less allowable expenses and depreciation, and an audit is needed once gross receipts in a profession exceed ₹50 lakh (section 63).
  • Clients deduct tax at source from professional fees at 10% (technical services at 2%) when the payment crosses ₹50,000 (section 393(1) Table Sl. No. 6); this is credited against your tax.
  • A presumptive taxpayer pays the whole advance tax by 15 March (section 408(2)); everyone else pays in four instalments.

A freelancer (a software developer, designer, consultant, writer, chartered accountant or similar) earns income from business or profession. This post explains the choices open to a resident individual freelancer under the Income-tax Act, 2025, which applies from 01/04/2026: whether to use the presumptive scheme or actual books, what tax clients deduct, when advance tax is due and when an audit is needed.

Step 1: Two ways to compute the income

Point Presumptive (section 58) Actual books (section 62)
Who Resident individual, HUF or firm other than an LLP, in a specified profession Anyone
Receipts limit ₹50 lakh; ₹75 lakh if cash receipts are 5% or less of the total No limit, but an audit applies above ₹50 lakh
Income 50% of gross receipts (or more, if the actual profit is higher) Receipts less allowable expenses and depreciation
Expenses None to prove; all are taken as covered by the 50% Must be actually incurred for the work and supported by bills
Books Not required Required in the form prescribed (Rule 46)
Audit None (section 63(2)) Needed if gross receipts exceed ₹50 lakh
Advance tax Whole amount by 15 March Four instalments

Who is a “specified profession”?

Section 62(4) lists legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology and company secretary, plus any other profession the Board notifies. A freelance developer or IT consultant is therefore covered. For another kind of freelance work, check whether it fits the list or can be treated as a business under the business scheme in section 58 (6% or 8% of receipts, up to ₹2 crore).

Books requirement

A person in a specified profession must always keep books (section 62(1)(a)). For other professions and business, books are required if income exceeds ₹1,20,000 or receipts exceed ₹10 lakh in any of the three preceding years (or likely in the current year if newly started). For an individual or HUF the figures are ₹2,50,000 of income and ₹25 lakh of receipts (section 62(2)). Rule 46 lists what a professional must keep.

Step 2: Worked example

Asha is a resident freelance software consultant (a specified profession). In the tax year 2026-27 she receives ₹30,00,000 from clients, all through the bank. She has no other income. She is in the new tax regime. Her actual expenses are ₹12,00,000.

Particulars Presumptive (section 58) Actual books
Gross receipts ₹30,00,000 ₹30,00,000
Income ₹15,00,000 (50%) ₹18,00,000 (receipts less ₹12,00,000)
Tax on slabs (section 202(1)) ₹1,05,000 ₹1,60,000

Slab calculation, presumptive: nil up to ₹4,00,000; 5% on the next ₹4,00,000 is ₹20,000; 10% on the next ₹4,00,000 is ₹40,000; 15% on the next ₹3,00,000 is ₹45,000; total ₹1,05,000. For actual books the same slabs give ₹20,000 plus ₹40,000 plus ₹60,000 (15% on ₹4,00,000) plus ₹40,000 (20% on ₹2,00,000) which is ₹1,60,000. The rebate under section 156(2) does not help at these incomes: it gives full relief only up to a total income of ₹12 lakh, and above ₹12 lakh it applies only if the tax is more than the income above ₹12 lakh (here ₹1,05,000 is less than ₹3,00,000, and ₹1,60,000 is less than ₹6,00,000). Health and education cess applies on top.

The presumptive route gives the lower tax here because her expenses (40% of receipts) are less than half of her receipts. If her expenses were 70% of receipts, actual books would show income of ₹9,00,000, less than the presumptive ₹15,00,000. Declaring that lower figure means keeping books under section 62 and getting an audit under section 63 (Table Sl. No. 2). Compare both every year.

Step 3: TDS from clients

Companies and many other clients deduct tax at source from your fees (section 393(1), Table Sl. No. 6(iii)):

Nature of payment Rate Threshold
Fees for professional services 10% ₹50,000
Fees for technical services that are not professional services 2% ₹50,000
Payee engaged only in the business of a call centre 2% ₹50,000

“Professional services” are services in legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising or other notified professions (definition in section 393). An individual or HUF who pays a freelancer and is not otherwise required to deduct tax is liable only when the payment exceeds ₹50 lakh in a year, at 2% (Table Sl. No. 6(ii)). Check the “TDS” credit in your tax statement before filing; it reduces your tax, and a refund arises if the TDS is more than the tax.

Step 4: Advance tax

  • If you declare income under section 58(2) (business or specified profession), the whole advance tax is due on or before 15 March of the financial year (section 408(2)).
  • Otherwise, advance tax is paid in four instalments: 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March (section 408(1)). Any amount paid by 31 March counts for the year (section 408(3)).
  • Interest is charged for a shortfall or delay under the interest provisions of the Act, which were not examined for this post.

Step 5: Audit and return

  • No audit if you declare the section 58 income (section 63(2)).
  • Audit if you keep actual books and gross receipts in the profession exceed ₹50 lakh (section 63, Table Sl. No. 1(c)), or if you claim a lower profit than the presumptive figure (Table Sl. No. 2). The audit report is in Form 26.
  • Return: a freelancer files the return of income each year. The ITR form depends on the Rule 164 conditions; the presumptive income is normally reported in the form for presumptive business income, and a freelancer with actual books and other heads uses the general business form.
  • Due date: 31 August for a person whose accounts are not required to be audited (section 263(1)(c) Table Sl. No. 3 as substituted by Finance Act 2026), and 31 October if the accounts are audited.

Common mistakes

  1. Treating foreign client receipts as not taxable: a resident is taxed on income from all sources; export of services is a separate topic (including the GST side) that this post does not cover.
  2. Forgetting the 15 March advance tax under presumptive taxation, and then paying interest.
  3. Claiming lower profit than 50% without books or an audit.
  4. Mixing personal and business payments, which makes actual-book claims difficult to support.
  5. Taking cash receipts above 5% and assuming the ₹75 lakh limit still applies.

How CSM & Co LLP can help

We help freelancers choose between presumptive and actual taxation, maintain books, file returns, plan advance tax and handle tax audits. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Is a freelancer’s income salary or business income?

Fees from clients are income from business or profession, not salary, even if all the work is for one client. If you keep actual books, the expenses of earning it are deductible; a freelancer who also has a job reports the salary separately.

Can a freelancer use presumptive taxation?

Yes, if the freelancer is a resident individual, HUF or firm other than an LLP and the profession is a “specified profession”: legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology, company secretary, or any other profession the Board notifies (section 62(4)). Income is taken as 50% of gross receipts, up to ₹50 lakh of receipts, or ₹75 lakh if cash receipts are at most 5% of the total (section 58). Other freelancers, such as writers or designers, should check whether their work falls in the list or can use the business scheme.

When is advance tax due?

A freelancer who declares income under section 58(2) (business or specified profession) pays the whole advance tax on or before 15 March of the financial year (section 408(2)). Everyone else pays 15% by 15 June, 45% by 15 September, 75% by 15 December and the full amount by 15 March (section 408(1)).

How much TDS will clients deduct?

10% of fees for professional services, 2% for fees for technical services that are not professional services, and 2% for a call centre, in each case once a payment crosses ₹50,000 (section 393(1), Table Sl. No. 6(iii)). An individual or HUF client who is not otherwise required to deduct tax is liable only above ₹50 lakh in a year, at 2% (Table Sl. No. 6(ii)). The TDS appears in Form 26AS and the annual tax statement and is credited against your tax.

Is an audit needed?

Not if you declare the section 58 presumptive income (section 63(2)). Otherwise a person carrying on profession must get accounts audited if gross receipts exceed ₹50 lakh in the tax year (section 63, Table Sl. No. 1(c)); if you declare less than the presumptive profit, books under section 62 and an audit under section 63, Table Sl. No. 2, can also apply.

Does GST apply to freelancers?

GST is under a separate law with its own registration threshold and rules, and was not examined for this post. Check the current position at gst.gov.in before you cross the registration limit, or when you serve clients outside India.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 22

Cash Transaction Limits under the Income-tax Act, 2025: Sections 185 to 188 and Section 36(4) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 31 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Sections 185 to 188 of the Income-tax Act, 2025 replace the old sections 269SS, 269ST, 269SU and 269T: loans, deposits and property advances of ₹20,000 or more must come and go through banking modes, and receipts of ₹2,00,000 or more must not be in cash.
  • The penalty for breaking sections 185, 186 or 188 is equal to the full amount taken, received or repaid (sections 450, 451 and 453); not offering UPI and similar modes when turnover exceeds ₹50 crore costs ₹5,000 a day (section 452).
  • Separately, section 36(4) disallows an expense if more than ₹10,000 is paid to one person in a day by cash (₹35,000 for goods carriage hire), and section 36(5) treats the same cash payment of an earlier year’s liability as income.
  • Banking mode means an account payee cheque or draft, electronic clearing through a bank account, or a prescribed electronic mode.

Cash dealings above certain limits are barred or penalised under the income tax law. The 1961 Act scattered these rules in sections 269SS, 269ST, 269SU, 269T and 40A(3). In the Income-tax Act, 2025, which applies from 01/04/2026, the first four sit together in Chapter XII (sections 185 to 189), with penalties in sections 450 to 453, and the business expense rule is section 36(4) to (7).

Old and new sections

Old section New section Subject Limit
269SS 185 Taking or accepting a loan, deposit or specified sum ₹20,000 or more
269ST 186 Receiving money in cash ₹2,00,000 or more
269SU 187 Facility for digital payment modes Turnover above ₹50 crore
269T 188 Repaying a loan, deposit or specified advance ₹20,000 or more
40A(3) and 40A(3A) 36(4), (5), (6), (7) Expense paid in cash More than ₹10,000 in a day
271D, 271DA, 271E 450, 451, 453 Penalty Equal to the amount

Section 185: loans, deposits and property advances

No person may take or accept a loan, deposit or specified sum except by an account payee cheque, an account payee bank draft, electronic clearing through a bank account, or another prescribed electronic mode, if:

  • the amount (or aggregate amount) is ₹20,000 or more; or
  • the earlier loans, deposits or specified sums from the same person that remain unpaid, whether due or not, are ₹20,000 or more; or
  • the total of the two is ₹20,000 or more.

A specified sum is any sum receivable, as advance or otherwise, in relation to a transfer of immovable property, whether or not the transfer takes place. “Loan or deposit” means a loan or deposit of money (section 185(5)).

Example. Mr P took a loan of ₹10,000 by cheque from ABC and repaid ₹3,000 in cash, leaving ₹7,000 unpaid. If he now takes a further ₹15,000 in cash from ABC, the amount (₹15,000) plus the unpaid earlier loan (₹7,000) is ₹22,000, which is above ₹20,000. Section 185 is broken and the penalty is equal to the ₹15,000 accepted.

Exceptions

Section 185 does not apply to loans, deposits or sums taken from or by the Government, a banking company, the post office savings bank, a co-operative bank, a corporation established by a Central, State or Provincial Act, a Government company, or a body notified by the Central Government. It also does not apply where both parties have agricultural income and neither has income chargeable to tax under the Act. For a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the limit with its members is ₹2,00,000 (section 185(4)).

Section 186: receipts of ₹2,00,000 or more

No person may receive ₹2,00,000 or more in aggregate from a person in a day, for a single transaction, or for transactions relating to one event or occasion from a person, except by account payee cheque, account payee bank draft, electronic clearing through a bank account or another prescribed electronic mode. It does not apply to receipts by the Government, banks, the post office savings bank and co-operative banks, to transactions covered by section 185, or to persons or receipts the Central Government notifies.

Section 187: digital modes for large businesses

A person carrying on business or profession whose total sales, turnover or gross receipts exceeded ₹50 crore in the preceding tax year must give customers the facility to pay through the prescribed electronic modes in addition to any others. Rule 133 prescribes RuPay debit card, UPI (BHIM-UPI), UPI QR code and Tier III full KYC Central Bank Digital Currency wallets. The penalty is ₹5,000 a day (section 452).

Section 188: repayment of loans, deposits and advances

A bank branch, another company, a co-operative society, a firm or any other person must not repay a loan or deposit, or return a specified advance, except by account payee cheque, account payee bank draft drawn in the name of the person who made it, or electronic clearing or another prescribed electronic mode, where the amount with interest, or the total held from that person, is ₹20,000 or more. A bank branch may also repay by crediting the depositor’s savings or current account at that branch. The same exceptions as in section 185 apply, and for a primary agricultural credit society the limit with its members is ₹2,00,000. The penalty is the amount repaid (section 453).

Penalties

Section broken Penalty section Amount
185 (loan, deposit, specified sum) 450 Equal to the amount taken or accepted
186 (receipt) 451 Equal to the sum received
187 (digital modes) 452 ₹5,000 for every day of failure
188 (repayment) 453 Equal to the amount repaid

The Assessing Officer “may” impose these penalties, and the general rules of the penalty Chapter apply:

  • Reasonable cause: no penalty under sections 450, 451, 452 or 453 is imposed if the person proves there was reasonable cause for the failure (section 470).
  • Hearing: the order cannot be made without hearing the assessee, and a show-cause notice is required (section 471(1), as amended by Finance Act 2026).
  • Approval: the prior approval of the Joint Commissioner is needed where the penalty exceeds ₹10,000 (by the Income-tax Officer) or ₹20,000 (by the Assistant or Deputy Commissioner) (section 471(2)).
  • Time limit: the order must be passed within six months from the end of the quarter in which the proceedings are completed, the appeal order is received or the penalty notice is issued, as the case may be (section 472(1)).

Section 36(4) to (7): cash business expenses

Separate from the above, a business or professional expense is not allowed as a deduction if the payment, or the aggregate of payments made in a day to a person, exceeds ₹10,000 and is not made through a specified banking or online mode (section 36(4)). If a liability was allowed in an earlier year and is later paid in cash above the same limit, the amount is deemed to be business income of the year of payment (section 36(5)). For plying, hiring or leasing of goods carriages the limit is ₹35,000 (section 36(6)). The Rules can exempt cases having regard to banking facilities and business expediency (section 36(7)). The “specified banking or online mode” means an account payee cheque or bank draft, electronic clearing through a bank account, or another prescribed electronic mode (section 2).

A payment of more than ₹10,000 in a day in cash for acquiring an asset is also left out of the actual cost for depreciation (section 39(2)).

Reporting in the tax audit report and ITR

The tax audit report (Form 26) has a clause (clause 45 of the form) asking whether any loan, deposit or specified sum was taken or accepted above the section 185 limit, whether any receipt or payment above the section 186(1) limit was made otherwise than by the permitted modes, and whether any repayment above the section 188(1) limit was made otherwise than by those modes. The auditor reports these as facts, so keep proof of the mode of every large entry.

How CSM & Co LLP can help

We review cash entries before the tax audit, reply to penalty notices under sections 450 to 453 and set up payment practices that keep a business within the limits. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What is the cash limit for taking a loan or deposit?

A loan, deposit or specified sum must come by account payee cheque, account payee bank draft, electronic clearing through a bank account or another prescribed electronic mode if the amount, or the amount together with the earlier loans and deposits from the same person that are still unpaid, is ₹20,000 or more (section 185(1)). This is the old section 269SS.

Can I receive ₹2,00,000 in cash for a sale?

No. Receiving ₹2,00,000 or more in a day from one person, for a single transaction, or for transactions relating to one event or occasion, is allowed only through banking modes (section 186). The penalty is equal to the sum received (section 451). Receipts by the Government, banks, post office savings banks and co-operative banks are outside the section.

Does the ₹20,000 limit apply to advances for property?

Yes. “Specified sum” means any sum receivable, as advance or otherwise, in relation to a transfer of immovable property, whether or not the transfer takes place (section 189(c)). Accepting it in cash at ₹20,000 or more attracts section 185 and a penalty equal to the amount.

What is the limit for cash business expenses?

If more than ₹10,000 is paid to one person in a day other than through a specified banking or online mode, the expenditure is not allowed as a deduction (section 36(4)). The limit is ₹35,000 for plying, hiring or leasing of goods carriages (section 36(6)).

Which payments are exempt from sections 185 and 188?

Dealings with the Government, banks, post office savings banks and co-operative banks, corporations created by a Central, State or Provincial Act, Government companies, and bodies notified by the Central Government. Section 185 also does not apply where both parties have agricultural income and neither has income chargeable to tax. The limit is ₹2,00,000 for loans and deposits between a primary agricultural credit society (or a primary co-operative agricultural and rural development bank) and its members.

Who must offer UPI and other digital payment modes?

A person carrying on business or profession whose total sales, turnover or gross receipts in the preceding tax year exceeded ₹50 crore (section 187). The modes listed in Rule 133 are RuPay debit card, UPI, UPI QR code and Tier III full KYC Central Bank Digital Currency wallets. The penalty is ₹5,000 for every day of failure (section 452).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 49

Charitable Trusts and NGOs under the Income-tax Act, 2025: Registration, Exemption and Compliance (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 10 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • From 01/04/2026 a trust, society or section 8 company claims its tax benefit as a “registered non-profit organisation” under sections 332 to 355 of the Income-tax Act, 2025 (the old sections 11, 12, 12A, 12AB and 13).
  • Registration is applied for in Form 104 (provisional) or Form 105, and the order in Form 106 carries a 16 digit Unique Registration Number.
  • Regular income is taxed only on the part of 85% that is not applied or accumulated; specified income such as anonymous donations and benefits to related persons is taxed at 30%.
  • Books (Rule 187), audit in Form 112 and the return in ITR-7 are compulsory when income before the exemption exceeds the maximum amount not chargeable to tax.
  • Donors’ deduction needs a separate approval under section 354, Form 113 by 31 May and Form 114 donation certificates.

A charitable trust, a society or a section 8 company does not pay tax on its charitable income, but only if it is registered and follows a set of conditions. From 01/04/2026 those rules sit in sections 332 to 355 of the Income-tax Act, 2025, in a scheme that replaces the old sections 11, 12, 12A, 12AB and 13. The law calls such a body a registered non-profit organisation. This post follows the new Act and the Income-tax Rules, 2026, and explains where the old form numbers have gone.

Where the old sections have gone

Old (1961 Act) New (2025 Act and Rules 2026)
Sections 12A and 12AB (registration), Forms 10A and 10AB Section 332; Form 104 (provisional) and Form 105 (all other cases); order in Form 106 (Rule 181)
Sections 11 and 12 (exemption of property income and voluntary contributions) Sections 334 to 343 (regular income, 85% application, accumulation)
Section 11(1)(d) (corpus donations) Sections 339 and 340
Section 13 (denial of exemption) Sections 337 (specified income), 351 (specified violation), 353 (other violations)
Tax on accreted income (section 115TD) Section 352
Section 80G approval Section 354 (approval for donor deduction under section 133(1)(b)(ii))
Form 10B and 10BB (audit report) Form 112 (Rule 188)
Form 10 and 9A (accumulation, option) Forms 109 and 108 (Rules 185 and 184)
Forms 10BD and 10BE (donation statement and certificate) Forms 113 and 114 (Rule 190)

Section 11 of the 2025 Act is not the trust section: it is the general list of exempt income in Schedules II to VII. The older notes that call it the trust exemption refer to the 1961 Act.

Who can register (section 332)

The following may apply: a public trust, a society, a section 8 company, a university or an educational institution affiliated to it or recognised by the Government, an institution financed wholly or partly by the Government or a local authority, and certain bodies listed in Schedules III and VII. To be eligible the applicant must be constituted in India for one or more charitable purposes (section 2(23): relief of the poor, education, yoga, medical relief, preservation of environment, preservation of monuments or places of artistic or historic interest, and advancement of any other object of general public utility) or public religious purposes, and its properties must be held under an irrevocable trust for the benefit of the general public.

Forms, time limits and validity

Applications are filed electronically in Form 104 (provisional registration, to the Commissioner, CPC) or Form 105 (to the jurisdictional Principal Commissioner or Commissioner). The order in Form 106 carries a 16 digit Unique Registration Number (URN).

Case (section 332(3)) When to apply Order within Valid for
1. Activities not started, never registered Any time in the tax year from which registration is sought One month from the end of the month Three tax years
2. Activities started, never registered Any time in the tax year from which registration is sought Six months from the end of the quarter Five tax years
3. Provisional registration, activities started Within six months of commencement Six months from the end of the quarter Five tax years
4. Provisional registration about to expire, activities not started At least six months before expiry Six months from the end of the quarter Five tax years
5. Registration about to expire At least six months before expiry Six months from the end of the quarter Five tax years
6. Registration inoperative after a switch of regime Any time in the tax year from which it is to operate Six months from the end of the quarter Five tax years
7. Objects modified so that they no longer fit the registration Within thirty days of the modification Six months from the end of the quarter Five tax years

If the total income (without the benefit of this Part) did not exceed ₹5 crore in each of the two preceding tax years, the validity in cases 3 to 7 becomes ten years (section 332(5)). A late application can be condoned for reasonable cause (section 332(4)); if it is not, tax on accreted income can follow (section 332(6)). A trust that held registration before 01/04/2021 and let it lapse can ask for condonation under section 332(9).

How the income is taxed

The tax is the total of two parts (section 334): 30% on “specified income”, and the normal rate on taxable regular income and residual income.

  1. Regular income (section 335) is income from the charitable or religious activity, income from property, deposits or investments held for those purposes, voluntary contributions and the gains of permitted commercial activity. Corpus donations are left out (section 338(b)).
  2. Taxable regular income (section 336) is nil if 85% or more of the regular income is applied under section 341 or accumulated under section 342. If less is applied, the tax falls on 85% of the regular income reduced by the amount applied or accumulated.
  3. Specified income (section 337) is taxed at 30% in the year shown in the table of that section. It includes:
    - anonymous donations, except those up to ₹1,00,000 or 5% of total donations (whichever is higher), and except for bodies set up wholly for religious purposes or wholly for charitable and religious purposes (with a carve-out for donations directed to a university, other educational institution, hospital or medical institution that the body runs);
    - income applied directly or indirectly for the benefit of a related person (Rule 183);
    - income applied outside India (other than as the Board allows under section 338(a));
    - investments outside the permitted modes in Schedule XVI (section 350);
    - income applied for a purpose other than the one for which it is registered, and accumulated income that is misapplied, not applied in time, or paid to another organisation.
  4. Residual income is any other income, taxed at the normal rate (section 355(j)).

What counts as application (section 341)

  • Sums paid in India for the charitable or religious purpose in the year, and 85% of a donation to another registered non-profit organisation. Cash payments above the limits in sections 35(b)(i) and 36(4) to (7) do not count.
  • Repayment of a loan or re-deposit of a corpus withdrawal within five years can count as application, subject to the conditions in section 341(2).
  • A claim of depreciation on an asset whose cost was already counted as application is not allowed again (section 341(3)(a)).
  • If the regular income applied is below 85%, the shortfall can be treated as deemed application by opting in Form 108 by the due date of the return, and then it must be applied in India in the tax year of receipt or the next one (section 341(5) to (7), Rule 184).
  • Capital gains on a charitable asset are treated as applied if the net consideration is invested in another such asset (section 341(9)).

Accumulation (section 342) and the 15% balance (section 343)

Income can be set apart for up to five years by filing a statement in Form 109 by the due date of the return. The accumulated money must be held in the modes in Schedule XVI. A change of purpose needs an application in Form 110 (order in Form 111). The 15% of regular income that is neither applied nor accumulated is deemed accumulated income and must also be held in permitted modes (section 343).

Business income

A registered non-profit organisation must not carry on commercial activity unless it is incidental to its objects and separate books are kept (section 345). A body whose objects are in the nature of “advancement of any other object of general public utility” may earn at most 20% of its total receipts from commercial activity, and only in the course of that object (section 346). The gain from such activity is worked out as if the activity were a separate entity (Rule 182). Where a business undertaking is part of the trust property, the Assessing Officer can determine its income (section 344).

Compliance every year

Item Rule Detail
Books of account Section 347, Rule 187 Cash book, ledger, journal, bills and receipts, plus records of every project and institution, of each type of income and of specified and residual income
Audit Section 348, Rule 188 Report in Form 112, one month before the due date of the return (so 30 September when the return date is 31 October)
Return Section 349, Rule 164(10) ITR-7, within the time in section 263(1)(c), or the extended period in section 263(4) after Finance Act 2026
Option and statements Rules 184 and 185 Form 108 (deemed application) and Form 109 (accumulation), both by the return due date

Books, audit and return are required when the total income, without giving effect to this Part, exceeds the maximum amount not chargeable to income tax in the year. Missing any of the three, or a commercial activity that breaks section 346, makes the whole regular income taxable (less allowed expenditure in India for the objects) under section 353.

Violations and accreted income

A specified violation (section 351) includes applying income other than for the objects, commercial activity in breach of section 345, application for private religious purposes, benefits for a particular religious community or caste (for bodies created after commencement of the Act), activity that is not genuine, non-compliance with another law that has been finally held against the body, and false information in the application. The Commissioner can cancel the registration for that and all later years, after a hearing, within six months from the end of the quarter in which the first notice is issued.

Tax on accreted income (section 352) is charged at the maximum marginal rate on the market value of all assets less all liabilities (valued under Rule 189), after removing specified assets. It arises when registration is cancelled, when objects are changed and do not fit, when the body fails to apply for renewal, when it converts into a form that cannot be registered, when it merges with an entity that does not fit the rules (as amended by Finance Act 2026) or when assets are not transferred to another registered non-profit organisation within twelve months of dissolution. A merger with another registered non-profit organisation of the same or similar objects, meeting the prescribed conditions, is outside section 352 (section 354A).

Donor deduction (section 354)

Registration alone does not give donors a deduction. A registered non-profit organisation applies separately for approval under section 354 (approval for section 133(1)(b)(ii)), using Form 104 or Form 105 with the same time limits and validity as registration. The conditions include: no benefit for a particular religious community or caste, religious expenditure not above 5% of total income, no transfer of assets to a non-charitable purpose, regular accounts, and a donor certificate. The body must furnish the statement of donations in Form 113 and issue the certificate in Form 114 by 31 May after the financial year in which the donation is received (Rule 190).

Practical checklist

  1. Note the expiry of your registration and approval; file the renewal at least six months earlier.
  2. Plan the year so that at least 85% of regular income is applied or accumulated; file Form 108 or Form 109 before the return date.
  3. Keep corpus donations in a separate, permitted investment.
  4. Check every related person transaction (trustees, relatives, founders, donors above ₹1,00,000 in a year or ₹10 lakh in aggregate).
  5. File Form 112 and the return on time; file Form 113 and issue Form 114 by 31 May.

How CSM & Co LLP can help

We handle registration and renewal applications, yearly audit reports, ITR-7 filing and donor-approval compliance for trusts, societies and section 8 companies. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section of the new Act replaces sections 11 and 12A for charitable trusts?

Chapter XVII, Part B (sections 332 to 355) of the Income-tax Act, 2025. Section 332 deals with registration, sections 334 to 343 with the taxation of income, and sections 347 to 349 with books, audit and return. Section 11 of the 2025 Act is a different section: it is the general list of exempt income (Schedules II to VII).

Does an existing 12A or 12AB registration continue?

The 2025 Act refers to registration under any “specified provision”, and a person with a valid registration that has not been cancelled is a registered non-profit organisation (section 355(g)). Check the expiry date on your registration order, because renewal is due at least six months before it ends (section 332(3), Table Sl. No. 5).

How much of the income must a trust spend?

Taxable regular income is nil if 85% or more of the regular income is applied for charitable or religious purposes (section 341) or accumulated under section 342. Otherwise the shortfall below 85% is taxed (section 336). A shortfall can be treated as deemed application by opting in Form 108, and then must be applied in India within the time in section 341(6).

Is an audit compulsory?

Yes, when total income without giving effect to this Part exceeds the maximum amount not chargeable to income tax in the year (section 348). The report is in Form 112, due one month before the due date of the return (Rule 188). The return is ITR-7 (section 349, Rule 164(10)).

Can a trust run a business?

Only if the activity is incidental to its objects and separate books are kept (section 345). A trust whose object is “any other object of general public utility” may earn at most 20% of its total receipts from commercial activity, and only in the course of carrying out that object (section 346).

What happens if registration is cancelled?

The organisation becomes liable to tax on accreted income at the maximum marginal rate, which is the market value of its assets less its liabilities, payable within fourteen days of the due date in the table in section 352(4). The same tax can arise on a change of objects, a merger with an ineligible entity or a failure to transfer assets on dissolution.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 39

Set-Off and Carry Forward of Losses: Business, House Property, Capital Gains and Depreciation (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 20 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A loss is set off first within the same head, then against income under other heads, then carried forward (sections 108 to 115 of the Income-tax Act, 2025).
  • House property loss: ₹2 lakh against other heads, balance for 8 years against house property income. Business loss: against any head except salary, then for 8 years against business profits. Speculation loss: 4 years, only against speculation profit. Capital loss: not against other heads; 8 years against capital gains.
  • Unabsorbed depreciation carries forward without any time limit (section 33(11)).
  • Business, capital gains and speculation losses can be carried forward only if the return of the loss year was filed by the due date (section 121); a company with a change of 51% or more in voting power loses its brought forward losses (section 119).

A loss reduces tax only if it can be set off or carried forward. The Income-tax Act, 2025 deals with this in Chapter VII (sections 108 to 121). The sections replace sections 70 to 80 of the 1961 Act.

Step 1: set off within the same head (section 108)

If the result from one source under a head (other than capital gains) is a loss, it is set off against income from any other source under the same head in the same tax year. For capital gains (section 108(2)):

  • a short-term capital loss is set off against any capital gain, short-term or long-term;
  • a long-term capital loss is set off only against long-term capital gains.

Step 2: set off against other heads (section 109)

If a head (other than capital gains) shows a loss after step 1, it is set off against income under any other head, including capital gains, with two limits:

  • a business or profession loss cannot be set off against salary (section 109(1)(a));
  • a house property loss can be set off against other heads only up to ₹2,00,000 (section 109(1)(b)).

A capital loss cannot be set off against any other head (section 109(2)).

Step 3: carry forward

Loss Carry forward Set off against Section
House property 8 tax years House property income only 110
Capital gains 8 tax years Capital gains, short-term loss against any gain, long-term loss against long-term gains 111
Business or profession (not speculation) 8 tax years Profits of any business or profession 112
Speculation business 4 tax years Profits of speculation business only 113
Specified business under section 46 Not limited in the text Profits of another specified business only 114
Specified activity (owning and maintaining race horses) 4 tax years Income from that activity only 115
Unabsorbed depreciation No time limit Added to the depreciation of the next year, effect first being given to the business loss under section 112(3) 33(11)

Order of set off: brought forward business loss is given effect first; any unabsorbed depreciation is then added to the next year’s depreciation (section 112(3)).

The eight years are counted from the year after the year in which the loss was first computed (“eight tax years immediately succeeding”).

Conditions

File the return on time (section 121)

Irrespective of anything contained in the Chapter, a loss that has not been determined in a return filed under section 263(1) cannot be carried forward and set off under sections 111(1), 112(1), 113(2), 114(2) or 115(2). That is, to carry forward a capital gains, business, speculation, specified business or specified activity loss, the return of the loss year must be filed by the due date, and the loss must be shown in it.

House property loss (section 110) and unabsorbed depreciation (section 33(11)) are not in the list of section 121.

Changes in constitution (section 119)

  • Partner leaves or dies: the firm cannot carry forward the portion of the loss proportionate to a retired or deceased partner’s share that exceeds his share of profits in the year (section 119(1)).
  • Succession of business: where a business or profession is taken over by another person other than by inheritance, only the person who incurred the loss can carry it forward (section 119(2)).
  • Change in shareholding of a company (a company in which the public are not substantially interested): the loss of an earlier year can be set off only if, on the last day of the tax year, shares carrying at least 51% of the voting power are beneficially held by the same persons who held at least 51% on the last day of the year in which the loss was incurred (section 119(3)(a)).
    - Eligible start-ups (section 140) can carry forward losses incurred in the first ten years from incorporation if all the shareholders on the last day of the loss year continue to hold their shares at the end of the current year (section 119(3)(b)).
    - The rule does not apply when the change is due to the death of a shareholder, a gift to a relative, certain amalgamations or demergers of a foreign parent, and the other cases in section 119(4).

Reorganisations

On amalgamation or demerger of specified companies, the accumulated losses and unabsorbed depreciation pass to the successor if the conditions of sections 116 to 118 are met (an industrial undertaking or a ship or hotel company amalgamated with another company, public sector company amalgamations, a firm or proprietorship succeeded by a company, and others).

New regimes and loss set-off

A person who is taxed under the new regime (section 202), or under the concessional rates for companies and co-operative societies (sections 200, 201, 203, 204), computes income without certain deductions and without set off of losses or depreciation attributable to them; those losses are deemed to have been given effect to and lapse. House property loss cannot be set off against other heads in the new regime (section 202(2)(b)(ii)). See our posts on the regime option and on corporate tax.

Examples

1. Order of set off. Tax year 2026-27, old regime. Salary ₹10,00,000, house property loss ₹2,50,000, business loss ₹3,00,000, no other income.

  • House property loss: only ₹2,00,000 can be set off against other heads, here against salary, leaving taxable salary of ₹8,00,000. The other ₹50,000 is carried forward for 8 years against house property income.
  • Business loss: cannot be set off against salary. The whole ₹3,00,000 is carried forward for 8 years against business profits, provided the return is filed by the due date.

2. Unabsorbed depreciation. Profit before depreciation ₹3,00,000, depreciation ₹5,00,000: ₹3,00,000 is allowed, ₹2,00,000 is carried forward with no time limit.

3. Late return. Business loss of ₹4,00,000 in tax year 2026-27, return filed on 15/12/2027 (belated). Under section 121, the loss cannot be carried forward, because the return was not under section 263(1). It could still have been set off in 2026-27 against other income (not salary).

Practical points

  • Always file the return on time in a loss year, even if no tax is due.
  • Show the loss in the loss schedules of the return, by year of origin.
  • Track expiry: the 8 year clock runs from the year the loss was computed.
  • A company should watch the 51% shareholding test at each change in ownership.

Frequently asked questions

In what order are losses set off?

First against other income under the same head in the same year (section 108), then against income under other heads, subject to the limits (section 109), and the balance is carried forward (sections 110 to 115).

Can a business loss be set off against salary?

No. A loss under Profits and gains of business or profession cannot be set off against salary income (section 109(1)(a)). It can be set off against other heads, such as house property, capital gains or other sources.

For how long can a business loss be carried forward?

For eight tax years immediately after the year in which it was first computed, against profits of any business or profession (section 112). A speculation loss can be carried forward for four years, only against speculation profits (section 113).

Does unabsorbed depreciation lapse?

No. It is added to the depreciation allowable in the next year and so on, without a time limit (section 33(11)).

Do I need to file the return on time to carry forward a loss?

For losses under sections 111, 112, 113, 114 and 115 (capital gains, business, speculation, specified business and specified activity), yes: a loss not determined in a return filed under section 263(1) by the due date cannot be carried forward and set off (section 121).

What happens to a company’s losses if the shareholding changes?

For a company in which the public are not substantially interested, a loss of an earlier year cannot be set off against the income of a year in which the shareholders holding 51% of the voting power on the last day of the loss year no longer hold that 51% on the last day of the current year. Eligible start-ups have an exception (section 119(3)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 26

Deductions Allowed Only on Actual Payment: Section 37 (Earlier 43B) and Dues to Micro and Small Enterprises (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 29 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 37 of the Income-tax Act, 2025 allows certain expenses only in the year they are actually paid, whatever the accounting method: taxes, duties and cess, employer’s contribution to provident, superannuation and gratuity funds, leave encashment, interest to specified financial entities, railway dues and dues to micro and small enterprises.
  • Most of these are allowed in the year of accrual if paid on or before the due date for filing the return (section 37(3)); the exception is the amount owed to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act, which is allowed only when it is actually paid.
  • Interest converted into a loan or debenture is not treated as paid.
  • A deduction allowed in the year of accrual is not allowed again when it is paid (section 37(5)).

Many businesses account for expenses when they are incurred, but the Income-tax Act, 2025 allows a short list of expenses as deductions only when they are actually paid. This was section 43B of the 1961 Act, including the clause (h) added in 2023 for dues to micro and small enterprises. It is now section 37.

The rule (section 37(1) and (2))

The sums listed below, which are otherwise allowable as deductions, are allowed while computing business or professional income only in the tax year in which they are actually paid, irrespective of any contrary provision, the method of accounting regularly followed, or the year in which the liability was incurred:

  1. Tax, duty, cess, surcharge or fee, by whatever name called, levied under any law in force.
  2. The employer’s contribution to a provident fund, superannuation fund, gratuity fund or any fund for the welfare of employees.
  3. The amount payable by an employer in lieu of leave at the credit of an employee (leave encashment).
  4. Any sum referred to in section 32(a).
  5. Interest on loans, advances or borrowings from specified financial entities, as per the terms of the loan agreement.
  6. An amount payable to Indian Railways for use of railway assets.
  7. An amount payable to a micro or small enterprise beyond the time limit in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.

Payment by the return due date (section 37(3))

For items 1 to 6, if the sum is paid after the end of the tax year but on or before the due date for filing the return under section 263(1) for that year, the deduction is allowed in the year in which the liability was incurred. Item 7 (MSME dues) is excluded from this relief.

Example. A company owes ₹4,00,000 as the employer’s PF contribution for March 2027 and pays it on 10 July 2027, before the return due date. The deduction is available for tax year 2026-27, since payment was made by the return due date. If it paid on 15 November 2027, after the due date, the deduction is allowed only in the year of payment, tax year 2027-28.

Dues to micro and small enterprises (item 7)

Under section 15 of the MSMED Act, 2006, a buyer must pay a micro or small enterprise by the agreed date, which cannot be more than 45 days from the day of acceptance of the goods or services, or within 15 days if there is no written agreement. The Income-tax Act adds a tax consequence: an amount that is payable to a micro or small enterprise beyond that time limit is deductible only in the year in which it is actually paid.

  • It applies to micro and small enterprises only, as classified under the MSMED Act (section 66(11) and (30) of the Income-tax Act refer to the classification under that Act). Medium enterprises are not covered.
  • No grace till the return due date. For MSME dues, payment after year end does not bring the deduction back to the earlier year (section 37(3)).
  • The disallowance relates to the amount payable beyond the limit. If the invoice is not yet beyond the limit on the last day of the year, we read the section as not applying to it at that date, but if it remains unpaid after the limit, it falls in the rule. Take advice on year end creditors.

Example. On 31 March 2027, a buyer owes a micro enterprise supplier ₹5,00,000 for an invoice accepted on 1 January 2027. With a 45 day agreement the due date was 15 February 2027, so the dues are beyond the limit at year end. If paid on 20 April 2027, the deduction is for tax year 2027-28, not 2026-27. Had the buyer paid before 31 March 2027, the deduction would be in 2026-27.

Other points

  • Interest converted into a loan (section 37(4)): if interest on a loan from a specified financial entity is converted into a loan, advance, debenture or any other instrument that defers the liability to a future date, it is not treated as paid.
  • No double deduction (section 37(5)): a sum deducted in the year the liability was incurred is not deducted again when paid.
  • Employee contributions (section 37(6)): the section does not apply to a sum received from an employee as a contribution to a fund. The employee’s contribution is dealt with separately in section 29(1)(e), which allows it if credited to the fund by the due date as prescribed.
  • Payment means actual payment. A journal entry or a provision is not payment. A payment by account payee cheque or electronic mode counts.

Practical steps for a business

  1. Keep a list of MSME creditors (check the supplier’s udyam registration), with invoice dates and payment due dates.
  2. Pay MSME dues within 45 days, or within the agreed shorter period, wherever possible.
  3. Pay statutory dues (GST, PF, ESI, professional tax, TDS) before the return due date.
  4. Reconcile year-end creditors and disclose the details in the tax audit report, where an audit is required (see our post on tax audit).
  5. Document the payment date with bank statements.

Frequently asked questions

Which expenses are allowed only on actual payment?

Tax, duty, cess, surcharge or fee levied under any law; the employer’s contribution to a provident, superannuation or gratuity fund or any fund for employees’ welfare; payment in lieu of leave at the credit of an employee; interest on loans from specified financial entities; amounts payable to Indian Railways for use of railway assets; and amounts owed to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act (section 37(2)).

Does a late payment by the return due date still get the deduction?

For all items except dues to micro and small enterprises, payment on or before the due date for filing the return under section 263(1) for that year gives the deduction in the year the liability was incurred (section 37(3)).

What is the rule for MSME dues?

An amount payable to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act is deductible only in the year it is actually paid. Paying it after year end but before the return due date does not bring it back to the earlier year (section 37(3) excludes clause (g)).

What is the time limit in the MSMED Act?

Section 15 requires payment by the agreed date, which cannot be more than 45 days from acceptance of the goods or services, or within 15 days if there is no agreement.

Does it apply to medium enterprises or traders?

The clause covers a micro or small enterprise supplier. It does not cover a medium enterprise.

What about interest converted into a loan?

If interest on a loan from a specified financial entity is converted into a loan, advance, debenture or similar instrument that defers payment, it is not treated as paid (section 37(4)).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

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Depreciation Under the Income-tax Act 2025: Rates, Block of Assets, Additional Depreciation and Carry Forward (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 17 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Depreciation under section 33 is allowed on buildings, machinery, plant and furniture and on intangible assets such as patents and licences, at a percentage of the written down value (WDV) of the block of assets (Rule 25 and Appendix I).
  • Key rates: residential buildings 5%, other buildings 10%, furniture 10%, plant and machinery 15%, motor cars 15%, buses, lorries and taxis on hire 30%, computers and software 40%, intangibles 25%.
  • An asset put to use for less than 180 days in the year gets half the rate, and new plant and machinery for manufacture or power generation can get additional depreciation of 20% (section 33(8) and (9)), which the new regime for individuals does not allow.
  • Unabsorbed depreciation is carried forward without a time limit and added to the next year’s depreciation (section 33(11)); land and goodwill are not depreciable.

Depreciation is a deduction in computing business or professional income for the wear and tear of assets. It is governed by section 33 of the Income-tax Act, 2025 (earlier section 32), with the rates in Rule 25 and Appendix I of the Income-tax Rules, 2026. It is a tax calculation, separate from the depreciation in the company’s accounts.

What qualifies (section 33(1))

  • Tangible assets: buildings, machinery, plant and furniture.
  • Intangible assets: know-how, patents, copyrights, trademarks, licences, franchises or other similar business or commercial rights, acquired on or after 1 April 1998.
  • The asset must be owned (wholly or partly) by the assessee and used wholly and exclusively for the business or profession.

Not depreciable: land and goodwill of a business or profession. If an asset is used only partly for the business, depreciation is restricted to a fair proportion (section 33(3)(b)).

Depreciation is allowed whether or not you claim it, so the written down value is reduced by the depreciation allowable each year (section 33(7)).

Block of assets and written down value

Assets of the same class with the same rate form a block. Depreciation is a percentage of the written down value of the block (section 33(3)(a)):

WDV = opening WDV + cost of assets bought in the year - sale proceeds of assets sold - depreciation of the year.

Half rate (section 33(4)): if an asset is acquired during the year and used for less than 180 days in that year, the depreciation on it is 50% of the prescribed rate.

Renovation of a leased building (section 33(6)): capital expenditure on a structure or renovation of a leased or occupied building is treated as a building owned by the assessee.

Rates (Rule 25 and Appendix I)

Block Rate on WDV
Buildings mainly for residence (other than hotels and boarding houses) 5%
Other buildings 10%
Purely temporary erections such as wooden structures 40%
Furniture and fittings, including electrical fittings 10%
Machinery and plant (general) 15%
Motor cars (other than those used on hire) 15%
Motor buses, lorries and taxis used on hire 30%
Aeroplanes and aero engines 40%
Computers, including computer software 40%
Containers of glass or plastic used as refills 40%
Energy saving devices, pollution control equipment, certain life saving medical equipment and certain other listed items 40%
Know-how, patents, copyrights, trademarks, licences, franchises (intangibles) 25%

“Buildings” include roads, bridges, culverts, wells and tubewells. A building is “mainly residential” if at least two thirds of its built-up area is used for residence. Assets that the table does not list separately, such as air conditioners, televisions, inverters and mobile phones, fall in the general class of machinery and plant at 15%; a laptop or desktop is a computer at 40%. Check the specific entries for special equipment.

40% ceiling for the new regimes (Rule 25(2)): the depreciation on any block cannot exceed 40% of the WDV for a domestic company that opts for the concessional rate under section 199(3), 200(5) or 201(2), for an individual, HUF, AOP, BOI or artificial juridical person whose income is taxed under section 202(1), and for a co-operative society that has exercised an option under section 203(5) or 204(2).

Additional depreciation (section 33(8) and (9))

For a business of manufacture or production, or generation, transmission or distribution of power, new machinery or plant acquired and installed and first put to use by the assessee gets, in addition:

  • 20% of the actual cost in the year of acquisition and use; or
  • 10% in that year if used for less than 180 days, and 10% more in the next year.

It is not allowed for ships and aircraft, plant that was used by another person before, plant installed in office premises or residential accommodation (including a guest house), office appliances, road transport vehicles, or assets whose whole cost is allowed as a deduction. An individual or HUF in the new regime cannot claim it (section 202(2)(a)(vi)).

Unabsorbed depreciation (section 33(11))

If profits before depreciation are less than the depreciation allowable:

  • depreciation is allowed to the extent of the profits (if there is a loss, none is allowed);
  • the balance is carried forward and added to the depreciation allowable in the next year, and so on, without any time limit; and
  • effect is given first to the brought-forward business loss under section 112(3).

Examples

1. Plant block. Opening WDV ₹10,00,000. In the year you buy plant for ₹2,00,000 and use it for 100 days.

  • Opening block: 15% × 10,00,000 = ₹1,50,000
  • Addition (less than 180 days): 7.5% × 2,00,000 = ₹15,000
  • Depreciation: ₹1,65,000. Closing WDV = 10,00,000 + 2,00,000 - 1,65,000 = ₹10,35,000.
  • If the plant is new and for a manufacturing business, additional depreciation of 10% × 2,00,000 = ₹20,000 is allowed this year, and ₹20,000 next year, other than for individuals in the new regime.

2. Laptop. A laptop costing ₹60,000 is bought in June and used for the rest of the year (more than 180 days). Depreciation at 40% = ₹24,000. WDV = ₹36,000. If bought in January and used for 70 days, depreciation is 20% = ₹12,000.

3. Car. A car for the proprietor’s business costs ₹10,00,000, in use throughout the year. Depreciation at 15% = ₹1,50,000. Taxis used on hire are at 30%.

4. Unabsorbed depreciation. Profit before depreciation ₹3,00,000, depreciation due ₹5,00,000. Depreciation of ₹3,00,000 is allowed and ₹2,00,000 is carried forward, to be added to next year’s depreciation.

Presumptive taxpayers

A presumptive taxpayer under section 58 is deemed to have claimed depreciation every year, and the written down value is computed on that basis (section 58(6)). No separate depreciation is claimed (see our post on presumptive taxation).

Practical points

  1. Keep a fixed asset register by block, with the date of purchase and the date of first use (for the 180 day test).
  2. Do not mix tax depreciation with the book depreciation under the Companies Act, 2013. The tax is the block system above.
  3. Sale of an asset reduces the block’s WDV; if the sale price exceeds the block’s WDV plus additions, a short-term capital gain arises, as in our post on depreciable assets.

Frequently asked questions

What are the income tax depreciation rates?

Under Appendix I to Rule 25: residential buildings 5%, other buildings 10%, temporary erections 40%, furniture and fittings 10%, plant and machinery 15%, motor cars (not on hire) 15%, buses, lorries and taxis used on hire 30%, computers including software 40%, and know-how, patents, copyrights, trademarks, licences and franchises 25%, each on the written down value of the block.

Is depreciation allowed on land?

No. Section 33(1) covers buildings, machinery, plant and furniture, and specified intangible assets. Land and goodwill are not depreciable assets.

What if I use an asset for less than 180 days?

If the asset was acquired in the year and used for less than 180 days, the deduction is 50% of the prescribed rate (section 33(4)).

What is additional depreciation?

An extra 20% of the actual cost of new plant or machinery in the year it is acquired and put to use, for a business of manufacture or production, or generation, transmission or distribution of power; 10% in that year and 10% next year if used for less than 180 days (section 33(8) and (9)). Individuals taxed in the new regime cannot claim it (section 202(2)).

Can I skip claiming depreciation?

No. Section 33(7) says the section applies whether or not you claim depreciation, so the WDV is reduced by the depreciation allowable.

What is unabsorbed depreciation?

Depreciation that cannot be set off because profits are too low. It is added to the depreciation of the next year, with no time limit, after the business loss carry forward under section 112 is given effect (section 33(11)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 51

Books of Account and Tax Audit: Sections 62 and 63, Form 26 and the New Fee (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 20 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A business must keep books of account if its income is more than ₹1,20,000 or turnover more than ₹10 lakh in any of the previous three years (₹2,50,000 and ₹25 lakh for an individual or HUF); a specified profession must keep prescribed books (section 62).
  • A tax audit is needed if business turnover exceeds ₹1 crore (₹10 crore if cash receipts and cash payments are each 5% or less), if professional receipts exceed ₹50 lakh, or if a presumptive taxpayer declares less than the presumptive profit (section 63).
  • The audit report goes in Form 26 and is due one month before the return due date; for audited cases that is 30 September.
  • The Finance Act, 2026 replaced the penalty for failing to get accounts audited with a fee of ₹75,000 for a delay up to one month and ₹1,50,000 thereafter (section 428(c)).

Two compliance duties apply to people with business or professional income: keeping books, and, above certain limits, getting the accounts audited by an accountant. They are in sections 62 and 63 of the Income-tax Act, 2025 (earlier 44AA and 44AB). The Finance Act, 2026 also changed the consequence of missing the audit.

Books of account (section 62)

Who must keep books (section 62(1) and (2))

Person Condition
A person carrying on a specified profession Always (subject to the exception in Rule 46(3) below)
Any other person carrying on business or profession Income from the business or profession exceeds ₹1,20,000, or turnover or gross receipts exceed ₹10 lakh, in any one of the three years before the tax year; or for a new business, the income or receipts are likely to exceed those figures
An individual or HUF The same, but with the limits of income ₹2,50,000 and turnover or gross receipts ₹25 lakh
A presumptive taxpayer under section 58 who claims a lower profit than the deemed profit Always

Specified professions (section 62(4)): legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology, company secretary, and others the Board notifies.

What books (Rule 46): books that enable the Assessing Officer to compute total income. A person carrying on a legal, medical, engineering or architectural profession, accountancy, technical consultancy, interior decoration, as authorised representative or as a film artist must keep:

  • a cash book;
  • a journal, if the accounts are on the mercantile system;
  • a ledger;
  • copies of bills or receipts issued for sums of ₹250 or more;
  • original bills and receipts for expenditure of ₹250 or more; and
  • payment vouchers for smaller expenditure, where the cash book lacks adequate particulars.

These specified books are not required if gross receipts in the profession did not exceed ₹1,50,000 in any of the three preceding years, or, for a new profession, are not likely to exceed that in the year (Rule 46(3)).

Tax audit (section 63)

A person carrying on business or profession must get his accounts audited by an accountant as defined in section 515(3)(b) before the specified date if:

Case Condition
Business Total sales, turnover or gross receipts exceed ₹1 crore in the tax year
Business, with low cash The limit is ₹10 crore instead of ₹1 crore if (i) cash receipts are not more than 5% of total receipts, and (ii) cash payments are not more than 5% of total payments
Profession Gross receipts exceed ₹50 lakh in the tax year
Presumptive taxpayer A person under section 58 (Table serial 1 or 3) whose profits are claimed to be lower than the presumptive profit

For these purposes, payments and receipts by a cheque or draft that is not an account payee instrument are treated as cash (section 63(5)(b)).

No audit if the presumptive profit is declared (section 63(2)). A presumptive taxpayer who declares profits as per section 58 does not need an audit.

Audit under another law (section 63(4)). If you must get the accounts audited under another law (a company, an LLP or a co-operative society, for example), it is enough to get it done under that law before the specified date and to furnish that report with the accountant’s report in the prescribed form.

The specified date and the form

  • Specified date (section 63(5)(a)): one month before the due date of the return under section 263(1). For an audited person, the due date is 31 October, so the specified date is 30 September. Where a transfer pricing report is needed and the due date is 30 November, it is 31 October.
  • Form (Rule 47): Form 26, Part A where the person is audited under another law, Part B otherwise, with the particulars required under section 63 in Parts C and D.
  • Revised report: the audit report can be revised by getting a revised report from the accountant, to be furnished before the end of the financial year following the tax year, if a payment made after the report requires the disallowance under section 35 or section 37 to be recalculated (Rule 47(3)).

Consequence of default: a fee (section 428(c))

For the failure to get accounts audited and furnish the report under section 63, the Finance Act, 2026 provides a fee, not a penalty, from 1 April 2026:

Delay Fee
Up to one month ₹75,000
Longer ₹1,50,000

Before 1 April 2026, the penalty was the lower of 0.5% of turnover and ₹1,50,000 (old section 446). The fee on a transfer pricing report (section 172) is ₹50,000 and ₹1,00,000 on the same pattern (section 428(d)).

Examples

1. Trader. Turnover is ₹1,80,00,000, cash receipts are 3% and cash payments are 2%. Because both are within 5%, the limit is ₹10 crore, so no audit is needed. If cash payments were 8%, the limit is ₹1 crore and an audit is required.

2. Doctor. Gross receipts are ₹55,00,000. They exceed ₹50 lakh, so an audit is required, unless the presumptive scheme at 50% is used and the profit declared is the presumptive profit (the limit under section 58 is ₹50 lakh, or ₹75 lakh with low cash, so he can use it if cash receipts are at most 5%).

3. Small trader on presumptive income with turnover of ₹90 lakh declaring 8%/6% profit: no audit and no books. If he declares 4% and his income is above the exemption limit, he needs books and an audit.

Practical points

  • Count turnover carefully. Include all sales and receipts of the business, not just those in the main ledger, and watch the 5% cash tests when you are close to the limit.
  • Appoint the auditor early. The report is due on 30 September for most audited persons, one month before the return, and the return depends on it.
  • Penalty and fee are different from interest. Late filing of the return has its own fee under section 428(a) and interest under section 423.

Frequently asked questions

Who must get a tax audit?

A person with business turnover above ₹1 crore in the tax year, or ₹10 crore if cash receipts and cash payments are each at most 5%; a professional with gross receipts above ₹50 lakh; and a presumptive taxpayer under section 58 who declares profit lower than the presumptive profit (section 63(1)).

What is the ₹10 crore condition?

The limit is ₹10 crore instead of ₹1 crore if the cash received (including for sales) is not more than 5% of the total received, and the cash paid is not more than 5% of total payments. A cheque or draft that is not account payee is treated as cash (section 63(5)(b)).

What is the due date for the audit report?

The specified date: one month before the due date of the return under section 263(1). Since the return of an audited person is due on 31 October, the report is due by 30 September (31 October if a transfer pricing report is needed and the return is due on 30 November).

What is the penalty for not getting accounts audited?

From 1 April 2026 there is a fee, not a penalty: ₹75,000 for a delay up to one month and ₹1,50,000 after that (section 428(c)). Earlier, the penalty was the lower of 0.5% of turnover and ₹1,50,000.

Which form is the audit report?

Form 26 of the Income-tax Rules, 2026: Part A where the person is audited under another law, and Part B otherwise; Parts C and D carry the particulars required under section 63 (Rule 47).

Who must keep books of account?

A person with a business or profession whose income exceeds ₹1,20,000 or turnover exceeds ₹10 lakh in any of the three preceding years (₹2,50,000 and ₹25 lakh for an individual or HUF), and every person carrying on a specified profession (section 62).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Post Views: 47
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