Tax Audit for Businesses with Cash Transactions: New Act 2025 Compliance Checklist

Introduction

Cash transactions remain a regular part of business operations, particularly for retailers, traders, contractors, manufacturers, local businesses and SMEs.

However, when a business approaches the tax-audit threshold, cash receipts and cash payments can become an important compliance consideration.

Under the Income Tax Act, 2025, tax audit is governed by Section 63, which broadly corresponds to Section 44AB of the Income-tax Act, 1961.

One of the most important provisions for businesses is the distinction between the general ₹1 crore tax-audit threshold and the enhanced ₹10 crore threshold available where the prescribed cash transaction conditions are satisfied. The Income Tax Department has confirmed that the threshold remains unchanged under the new Act.

In simple terms:

If a business has turnover above ₹1 crore, it may still be able to use the ₹10 crore threshold if its cash receipts and cash payments remain within the prescribed 5% limits.

But this is where many businesses make mistakes.

The 5% test should be calculated carefully, supported by accounting records and reviewed before concluding whether tax audit is applicable.

This article explains the rule and provides a practical Tax Audit 2026-27 compliance checklist for businesses.

What Is Tax Audit Under the Income Tax Act 2025?

Tax audit is an examination of specified books and financial information by a Chartered Accountant where the taxpayer falls within the prescribed audit provisions.

Under the new Income Tax Act, 2025, the relevant provision is:

Section 63 – Audit of Accounts

For businesses, the general threshold is:

₹1 crore

However, this threshold can increase to:

₹10 crore

where cash transactions do not exceed the prescribed 5% of total receipts and total payments.

This distinction is particularly important for businesses with turnover between ₹1 crore and ₹10 crore.

₹1 Crore vs ₹10 Crore Tax Audit Threshold

The basic framework can be understood as follows:

Business Situation	Tax Audit Threshold
General business	₹1 crore
Business satisfying specified cash conditions	₹10 crore
Cash receipts/payments exceed prescribed 5% limits	Enhanced threshold may not be available
Turnover exceeds ₹10 crore	Tax audit applies based on threshold
Specified professionals	₹50 lakh, subject to applicable provisions

The ₹10 crore threshold is therefore not an automatic threshold for every business.

It depends on satisfying the prescribed cash-transaction conditions.

What Is the 5% Cash Transaction Rule?

The enhanced ₹10 crore threshold is available where:

Cash receipts do not exceed 5% of total receipts

AND

Cash payments do not exceed 5% of total payments

The Income Tax Department's tax-audit guidance expressly describes the ₹10 crore threshold in these terms.

This means businesses need to examine both sides:

Cash Receipts

and

Cash Payments

It is not sufficient to check only cash sales.

Example: Business With ₹2 Crore Turnover

Suppose ABC Traders has:

Turnover: ₹2 crore

Cash receipts:

₹4 lakh

Cash payments:

₹5 lakh

Cash receipts percentage

₹4 lakh ÷ ₹2 crore × 100

= 2%

If the relevant total receipts are ₹2 crore, the cash receipts are within the 5% limit.

The business should separately calculate the cash-payment percentage against total payments, rather than automatically using turnover as the denominator.

If both prescribed conditions are satisfied, the enhanced threshold may be available.

Why the Denominator Matters

One common mistake is calculating everything against sales turnover.

For example:

Cash payments ÷ Sales

is not necessarily the correct test.

The relevant statutory condition refers to:

Cash receipts ÷ Aggregate receipts

and

Cash payments ÷ Aggregate payments

Therefore, businesses should maintain a proper working based on their accounting records.

Example: Cash Receipts Are Below 5%, But Payments Are Above 5%

Consider:

Turnover: ₹3 crore

Cash receipts:

2% of total receipts

Cash payments:

7% of total payments

The business satisfies the cash-receipt condition but fails the cash-payment condition.

Therefore, the business cannot simply claim the enhanced ₹10 crore threshold on the basis that its cash receipts are below 5%.

Key takeaway:

Both cash-receipt and cash-payment conditions need to be examined.

Why Cash Transactions Matter Even If the Business Is Profitable

A business may have:

Strong profits
Good GST compliance
Proper accounting
No tax arrears

and still need to evaluate tax-audit applicability because of its turnover and cash transaction profile.

Tax-audit applicability is a statutory test, not a measure of whether the business is profitable.

For example:

Turnover: ₹2.5 crore
Profit: ₹12 lakh

The business cannot determine audit applicability simply by looking at the ₹12 lakh profit.

The turnover and applicable statutory conditions must be examined.

Which Businesses Need to Pay Special Attention?

Cash-transaction analysis is particularly relevant for:

Retail Businesses

Examples:

Grocery stores
Garment retailers
Hardware shops
Electronics retailers
Jewellery businesses
Automobile-related businesses

Trading Businesses

Businesses purchasing and selling:

Commodities
Consumer goods
Building materials
Agricultural products
Other merchandise

Contractors

Businesses receiving or making payments connected with:

Labour
Materials
Subcontractors
Transporters

Manufacturing Businesses

Businesses making cash payments for:

Local purchases
Labour
Transport
Miscellaneous expenses

This does not mean cash transactions are prohibited. The issue is whether the transactions are properly recorded and how they affect tax compliance.

Cash Receipts vs Cash Payments: Understand Both

Businesses often focus heavily on cash sales.

But the tax-audit threshold requires attention to both sides.

Cash Receipts

Examples may include:

Cash sales
Cash received from customers
Cash advances
Other business receipts

Cash Payments

Examples may include:

Cash purchases
Labour payments
Cash expenses
Cash payments to vendors
Other business payments

A proper tax-audit review should therefore prepare two separate calculations.

Tax Audit Cash Transaction Checklist

Before determining whether the enhanced threshold is available, businesses should prepare:

Cash Receipt Working

Total Receipts

minus

Cash Receipts

and calculate:

Cash Receipts ÷ Total Receipts × 100

Cash Payment Working

Total Payments

minus

Cash Payments

and calculate:

Cash Payments ÷ Total Payments × 100

The results should be retained as part of the tax-audit working papers.

What Counts as a Cash Transaction?

Businesses should not assume that every non-bank transaction is automatically "cash."

The statutory provisions and prescribed rules need to be considered carefully when classifying receipts and payments.

Particular attention may be required for:

Account-payee instruments
Electronic payments
Bank transfers
Digital payment modes
Non-account-payee cheques or drafts
Cash deposits
Cash withdrawals

The treatment of a particular payment mode should be evaluated under the applicable statutory provisions rather than based solely on how it appears in the accounting software.

Cash Deposit Into Bank: Is It a Cash Receipt?

This is an area where businesses can get confused.

Suppose a retailer collects ₹1 lakh in cash from customers and deposits the amount into the bank.

The accounting flow may look like:

Customer → Cash → Bank Deposit

The fact that the cash is subsequently deposited into the bank does not change the nature of the original collection.

Therefore, businesses should maintain a clear audit trail showing:

Cash Sale → Cash Book → Bank Deposit → Bank Statement

This makes reconciliation much easier.

Cash Transactions and Books of Accounts

Businesses relying on cash should maintain accurate:

Cash book
Sales register
Purchase register
Expense records
Customer ledger
Vendor ledger
Bank book

The closing cash balance in the books should also be reasonable and reconcilable.

Example

If the books show:

Closing Cash Balance: ₹18 lakh

but the business claims that it rarely handles cash, the auditor may reasonably ask for an explanation.

The objective should therefore be:

Accurate books + supporting evidence + logical cash movement.

Cash Transactions and GST Reconciliation

Businesses should also reconcile cash sales with GST records.

For example:

Cash Sales in Books

should be appropriately reconciled with:

Sales Reported in GSTR-1

and

Turnover Reported in GSTR-3B

Differences can arise because of legitimate reasons such as:

Credit notes
Timing differences
Exempt supplies
Non-GST supplies
Accounting adjustments

But unexplained differences should be investigated.

Cash Transactions and TDS

Cash payments can also create TDS-related considerations.

Businesses should review whether payments made in cash or otherwise fall under provisions requiring TDS.

For example, payments may include:

Contractor payments
Professional fees
Rent
Commission
Interest

The method of payment does not automatically eliminate the TDS obligation.

Therefore:

Cash Payment → Check TDS Applicability → Deduct → Deposit → Report

where applicable.

Cash Expenses and Tax Deductibility

Another important issue is the tax treatment of cash expenses.

Even if a cash payment is genuinely incurred for business purposes, certain tax provisions may restrict the deduction when payments exceed specified limits or conditions.

Therefore, businesses should separately review:

Nature of expense
Amount
Mode of payment
Payee
Applicable exception
Supporting documentation

This is particularly important during tax-audit preparation.

New Form 26 and Cash Transaction Reporting

Tax Year 2026-27 introduces the new Form 26 under the Income Tax Act, 2025.

Form 26 consolidates the earlier:

Form 3CA
Form 3CB
Form 3CD

into a unified tax-audit report.

The new form uses structured reporting and requires businesses to provide relevant information for determining audit applicability, including the turnover range and percentages relating to cash receipts and payments. The prescribed form framework specifically asks businesses in the ₹1 crore–₹10 crore range to identify whether cash receipts and payments are up to 5% or more than 5%.

This makes accurate cash-transaction records particularly important for Tax Year 2026-27.

Tax Audit 2026-27: Practical Compliance Checklist

Here is a checklist businesses can use before finalising their tax audit.

A. Turnover

Calculate total sales.
Calculate turnover/gross receipts under applicable tax principles.
Reconcile turnover with financial statements.
Reconcile relevant figures with GST records.

B. Cash Receipts

Identify total cash receipts.
Identify aggregate receipts.
Calculate cash receipts percentage.
Check whether it exceeds 5%.
Investigate unusual cash deposits.
Reconcile cash sales with cash book.

C. Cash Payments

Identify total cash payments.
Identify aggregate payments.
Calculate cash payment percentage.
Check whether it exceeds 5%.
Review large cash expenses.
Review vendor payments.

D. Bank Reconciliation

Reconcile all bank accounts.
Match cash deposits with cash book.
Match cash withdrawals with accounting records.
Investigate unexplained bank entries.

E. GST Reconciliation

Reconcile books with GSTR-1.
Reconcile books with GSTR-3B.
Review major turnover differences.
Document legitimate differences.

F. TDS Compliance

Review applicable TDS sections.
Check cash and non-cash payments.
Reconcile TDS ledger.
Reconcile TDS returns.

G. Expense Review

Review large cash expenses.
Check supporting invoices.
Review applicable cash-payment restrictions.
Check business purpose.
Identify potentially disallowable expenses.

H. Tax Audit

Determine whether Section 63 applies.
Check ₹1 crore threshold.
Check ₹10 crore enhanced threshold.
Calculate 5% cash receipt condition.
Calculate 5% cash payment condition.
Review presumptive taxation provisions.
Prepare information required for Form 26.

A Simple Tax Audit Decision Framework

Businesses can use the following approach:

Step 1: Calculate Business Turnover

↓

Step 2: Is turnover ≤ ₹1 crore?

If yes, evaluate whether any other provision makes tax audit applicable.

If no:

↓

Step 3: Is turnover ≤ ₹10 crore?

If yes:

↓

Step 4: Calculate cash receipts percentage

≤ 5%?

↓

Step 5: Calculate cash payments percentage

≤ 5%?

↓

Step 6: If both conditions are satisfied

The enhanced ₹10 crore threshold may be available.

If either condition is not satisfied:

↓

Step 7: Evaluate the general threshold and other applicable tax-audit provisions.

This is a simplified decision framework. Actual applicability should be determined based on the taxpayer's specific facts and the statutory provisions applicable to the relevant tax year.

Practical Example: Retail Business

ABC Retail has:

Turnover: ₹6 crore

Cash receipts: 3% of aggregate receipts

Cash payments: 4% of aggregate payments

Both percentages are within the prescribed 5% limits.

Therefore, the business may be able to rely on the enhanced ₹10 crore threshold, subject to all other applicable conditions.

Practical Example: Wholesale Business

XYZ Wholesale has:

Turnover: ₹4 crore

Cash receipts: 2%

Cash payments: 8%

Although cash receipts are within 5%, cash payments exceed the prescribed limit.

Therefore, the business should not assume that the ₹10 crore threshold is available.

The business needs to evaluate tax-audit applicability under the general threshold and other applicable provisions.

Practical Example: Business With ₹12 Crore Turnover

Suppose:

Turnover: ₹12 crore

Even if cash transactions are very low, the turnover exceeds the ₹10 crore enhanced threshold.

Therefore, the business falls within the tax-audit threshold based on turnover, subject to the applicable statutory framework.

Cash Transaction Red Flags During Tax Audit

Businesses should be particularly careful where they have:

1. Large Cash Deposits

Frequent large cash deposits without clear sales records can create questions.

2. High Closing Cash Balance

An unusually high cash balance should be supported by actual business requirements and records.

3. Negative Cash Balance

A negative cash balance is a major accounting warning sign.

4. Unusual Cash Purchases

Large cash purchases should have proper invoices and supporting documentation.

5. Cash Sales Not Matching GST

Differences between cash sales and GST records should be reconciled.

6. Personal Expenses Through Business Cash

Personal expenditure should not be incorrectly recorded as business expenses.

How Businesses Can Reduce Cash-Related Compliance Risk

The objective should not be to eliminate legitimate cash transactions merely to avoid audit.

Instead, businesses should improve documentation and controls.

1. Encourage Digital Collections

Where commercially practical, encourage:

UPI
Bank transfers
Card payments
Other permitted electronic modes

2. Maintain Daily Cash Book

Don't reconstruct cash records at year-end.

3. Deposit Cash Regularly

Maintain a logical relationship between cash collections and bank deposits.

4. Restrict Unnecessary Cash Payments

Use banking channels wherever practical.

5. Reconcile Monthly

Review:

Cash Book ↔ Bank ↔ Sales ↔ GST

on a regular basis.

What Businesses Should Give Their Tax Auditor

A business with significant cash transactions should ideally provide a well-organised information pack containing:

Financial Information

Trial balance
Profit & Loss Account
Balance Sheet
General ledger

Cash Information

Cash book
Cash receipt summary
Cash payment summary
Daily cash balances
Cash deposit details

Banking

Bank statements
Bank reconciliation statements
Cash deposit reconciliation

Tax Records

GST returns
TDS returns
Tax computation
Previous tax-audit records

Supporting Documents

Sales invoices
Purchase invoices
Expense bills
Vendor/customer ledgers

This can significantly reduce back-and-forth during the audit process.

Tax Audit 2026-27: Important New Act Transition

Businesses should distinguish between:

FY 2025-26 / AY 2026-27

This period remains governed by the Income-tax Act, 1961, and the existing tax-audit forms apply.

Tax Year 2026-27

This period is governed by the Income Tax Act, 2025.

For Tax Year 2026-27:

Tax audit provision → Section 63
Tax-audit report → Form 26
Due date for tax-audit report → 30 September 2027, as currently prescribed.

The Income Tax Department has also clarified that payments relating to Tax Year 2026-27 onwards are governed by the new Act.

Common Mistakes Businesses Should Avoid

Mistake 1: Assuming ₹10 Crore Is Automatically the New Tax-Audit Limit

It is not.

The enhanced threshold is subject to the prescribed cash conditions.

Mistake 2: Checking Only Cash Receipts

Cash payments must also be examined.

Mistake 3: Using Turnover as the Denominator for Everything

The cash receipt and cash payment tests have separate bases.

Mistake 4: Treating Bank Deposits as Non-Cash Sales

The original mode of receipt matters.

Mistake 5: Ignoring Cash Expenses

Cash payments can affect both audit applicability and other tax provisions.

Mistake 6: Preparing the Cash Percentage Calculation at the Last Minute

Cash data should be reviewed throughout the year.

Mistake 7: Ignoring GST Reconciliation

Cash sales should appropriately reconcile with GST reporting.

Mistake 8: Assuming Tax Audit Is Only About the Auditor's Form

The quality of the tax audit depends on the quality of the underlying accounting records.

Frequently Asked Questions

1. What is the tax-audit limit for a business under the Income Tax Act 2025?

The general business threshold is ₹1 crore. An enhanced ₹10 crore threshold applies where the prescribed cash receipt and cash payment conditions are satisfied.

2. What is the 5% cash transaction rule?

For the enhanced ₹10 crore business threshold, cash receipts should not exceed 5% of total receipts and cash payments should not exceed 5% of total payments, subject to the applicable statutory conditions.

3. Do both cash receipt and cash payment conditions have to be satisfied?

Yes. Businesses should examine both conditions before relying on the enhanced threshold.

4. If my cash receipts are below 5%, can I automatically use the ₹10 crore threshold?

No. Cash payments must also satisfy the applicable condition, along with the other statutory requirements.

5. Does depositing cash into the bank make the original receipt a non-cash receipt?

No. A cash collection does not become a non-cash receipt merely because the business subsequently deposits it into a bank account.

6. Does the ₹10 crore threshold apply to every business?

No. It is an enhanced threshold available subject to the prescribed conditions.

7. Does having cash transactions automatically mean a tax audit is required?

No. The existence of cash transactions alone does not automatically trigger tax audit. The relevant turnover and statutory conditions must be evaluated.

8. What is Form 26?

Form 26 is the new unified tax-audit report for Tax Year 2026-27 under the Income Tax Act, 2025. It consolidates the earlier Forms 3CA, 3CB and 3CD.

9. What does Form 26 ask about cash transactions?

For businesses in the relevant turnover range, the prescribed Form 26 framework requires reporting of whether cash receipts and cash payments fall up to 5% or above 5% of the relevant aggregate amounts.

10. Should businesses maintain a separate cash transaction report?

It is highly advisable to maintain a clear cash receipt and payment working so that the 5% test can be calculated and supported during tax-audit preparation.

Conclusion

Cash transactions are not automatically a problem for businesses.

The real issue is how those transactions affect tax-audit applicability and whether the business maintains accurate supporting records.

Under the Income Tax Act, 2025, Section 63 retains the broad tax-audit framework applicable to businesses. The general threshold remains ₹1 crore, while businesses satisfying the prescribed cash conditions can benefit from the enhanced ₹10 crore threshold.

For businesses approaching the ₹1 crore turnover level, two calculations become particularly important:

Cash Receipts ÷ Aggregate Receipts

and

Cash Payments ÷ Aggregate Payments

Both need to be considered against the prescribed 5% condition.

For Tax Year 2026-27, this becomes even more relevant because the new Form 26 requires structured reporting around tax-audit applicability and cash-transaction percentages.

The best approach for businesses is therefore:

Maintain accurate books → reconcile cash regularly → monitor the 5% conditions → review GST and TDS → identify tax-audit applicability early → prepare Form 26 information properly.

Tax compliance should be managed throughout the year rather than becoming a last-minute exercise before the audit deadline.

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Tax Audit Applicability Review
Tax Audit Support
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Accounting & Bookkeeping
Cash Transaction Review
GST Reconciliation
TDS Compliance
Income Tax Return Filing
Tax Planning & Advisory
Financial Statement Review

If your business has significant cash transactions or turnover approaching the ₹1 crore / ₹10 crore tax-audit thresholds, our team can help review your books, calculate the applicable cash percentages and identify potential compliance issues before they become problems.

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