Tax Audit in India AY 2025-26: Guidance Note, Clause 26 & The Real Changes You Should Know

Introduction

As the tax season comes about every year, the same number of questions that businesses and professionals have to answer is: Do I require a tax audit this year? What exactly changes for AY 2025-26? Are there any deadline extensions?

Tax audit may sound like a frightening term, but in reality, it is nothing more than an accountability mechanism. It makes sure that taxpayers who exceed a specified income or turnover limit maintain records, report their figures correctly, and that they abide by the provisions of the Income Tax Act. This financial check has to be done by a qualified Chartered Accountant (CA), and the resultant audit report is part of your compliance documents with the Income Tax Department.

In Assessment Year (AY) 2025-26, you need to know the audit framework, not just to escape sanctions but also to become more financially smart. This blog takes you through the important aspects: the limits of eligibility and deadlines, the Guidance Note on Tax Audit published by ICAI, including the main Clause 26, and the constant discussion regarding the ITR tax audit extension requests.

What is a Tax Audit and Why Does it Matter?

A tax audit is a compulsory examination of the accounts of taxpayers under Section 44AB of the Income Tax Act, 1961. Once your income crosses the threshold, the government steps in to validate the authenticity of your books of accounts. 

Account auditing is more than a mere formality. It is a safeguard against errors, inflated expenses, or under-reporting of income. Auditing also builds credibility- investors, banks, and regulators all rely on audited financials as evidence of genuine performance. For taxpayers, a thorough tax audit gives protection in case of scrutiny. It shows that a professional has already reviewed the accounts and marked any discrepancies found.

Applicability of Tax Audit in AY 2025-26

The regulations regarding the necessity of tax audit have not changed drastically, but it is necessary to be specific in terms of thresholds:

Businesses: A Tax audit is obligatory in case the total sales, turnover, or gross receipts are above 1 crore in the financial year. However, when the transaction volume (via banking, UPI, card, etc.) is at least 95 per cent digital, the limit increases to 10 crore. This was added to promote digitisation and applies to FY 2024- 25.

Professions: Those having a background in professions such as lawyers, doctors,  consultants, or architects must undergo an audit if gross receipts exceed ₹50 lakh.

Presumptive Taxation Cases: Taxpayers who choose to use presumptive taxation under section 44AD, 44ADA or 44AE also come under audit when they report lower profits as compared to the stipulated rate and their income is higher than the basic exemption limit.

Guidance Note on Tax Audit AY 2025-26

An annual report by the Institute of Chartered Accountants of India (ICAI) includes a Guidance Note on Tax Audit, which is similar to a technical manual for auditors. Although it is primarily addressed to Chartered Accountants, it is also relevant to taxpayers because it describes what auditors seek and how such disclosures should be presented.

The guidance note restates several significant points in AY 2025-26:

Online vs offline payments: With the government’s push toward digitalisation, proper categorisation of receipts and payments is critical.

Definition of turnover: It is clarified how the indirect taxes, incentives and discounts are to be handled when calculating turnover.

Related party disclosures: Transparency in related party/entity transactions remains a point of concern.

New reporting conditions: Due to the changing nature of compliance, the auditors should make sure that the businesses are changing to meet updated disclosure standards.

For taxpayers, this means that the audit would not be a surface-level check. When your CA requests you to provide particular transaction details or other related supporting documents, it is probable that the guidance note is demanding them to do so. In practice, it introduces uniformity in the preparation of thousands of audit reports in the country.

Clause 26 of Tax Audit: Why it Matters

Within Form 3CD, which forms the backbone of the audit report, Clause 26 contains the gist of the audit report. It assesses the adherence to the tax-deducted-at-source (TDS) regulations and emphasises situations when the expenses are not deducted and deposited on schedule.

Let’s understand this with an example: suppose a contractor who is paid 10 lakh by a business in a year without deduction of the required TDS. This has to be disclosed under clause 26, and the expense may not be deducted when determining taxable profits. The implication is direct: as the income of the taxpayer rises, the amount of tax required also goes up.

To the professionals and businesses, Clause 26 reminds them that TDS compliance is not a post-consideration. It should be integrated into the daily financial operations, or the impact may be imposed on profitability directly.

ITR Tax Audit Extension Requests: The Annual Question

Debates on ITR tax audit extension requests become normal every September and October as the time runs out. Taxpayers and professionals will usually expect that the Central Board of Direct Taxes (CBDT) may extend due dates on a range of excuses, such as slower portal, system glitches, or even the sheer number of audits underway.

Though there are indeed cases of extensions being granted in the past, it is worth mentioning that they are not automatic. All the extensions are policy decisions that are declared officially by a notification of the CBDT. It is a risky move to count on an extension. The safer approach is to plan for existing deadlines:

• 31st October 2025 for filing ITR in audit cases, and
• 30th November 2025 in cases relating to transfer pricing.

Timely filing not only helps to evade penalties, but it also helps to decrease stress in the last minutes. The viable solution is to treat extensions as an incentive and not as a form of guarantee.

Penalties in case of a Missing Tax audit

When he/she does not adhere to issues requested by the tax audit, there can be serious financial consequences. Section 271B Income Tax Act provides that the penalty is the lesser of:

• 0.5% of turnover or gross receipts, or
   
• ₹1.5 lakh.

In the case of most businesses, this is not a trifle amount. The punishment adds to the financial burden in the short term. Also, it draws the taxpayer's attention to non-compliance with taxation, which may be subject to stricter investigation in the coming years.

Why a Tax Audit Is Good for You?

Although one can readily see tax audit as yet another regulatory burden to businesses and professionals, it has a positive aspect to it. Audited accounts create order and discipline and make sure that the financial statements are actually a mirror of the business reality.

Practically, it means that the audited accounts:

• Strengthens credibility with investors and banks,
• Minimises the risk of disputes with tax authorities,
• Makes it easier to access loans or raise capital, and
• Encourages better financial planning.

In this sense, a tax audit is less about catching mistakes and more about ensuring sustainability.

Checklist to Prepare for Tax Audit

As in the case of those who come under the audit net, preparation is key. It is just a few questions on a checklist that will streamline the process. Preparation is essential to those who fall within the audit net.

• Make sure that the books of accounts are updated and balanced with bank statements.
• Check on TDS compliance in deduction and deposit.
• Keep proper invoices and vouchers of expenses.
• Maintain digital transaction records.
• Make sure that statutory dues (such as GST, PF, and ESI) are paid on time.
• Early commencement enables businesses to act in a prompt manner to the questions posed by the auditors and not to face the last-minute rush.

Conclusion

The world of taxation is constantly changing, and tax audit is one of the instruments with the help of which the government can uphold transparency and accountability. To operate in AY 2025-26, a business and a professional should be aware of the turnover thresholds, implications of the clauses like Clause 26, and be prepared according to the Guidance Note on Tax Audit.

One is always tempted to wait until they receive an ITR tax audit extension request. However, astute taxpayers understand that being proactive is always worth the compliance cost. It is not only in terms of penalty avoidance but also in terms of enhancing the validity of their financial statements.

After all, a tax audit is not meant to be an obstacle. It is a gateway, such that when you become bigger, your financial reporting becomes responsible with you. To people who choose to get into business and not compliance, some companies can help them partner with professionals, such as the CA partners of NiyoFin, and make the task hassle-free and precise