Maintaining precise books of accounts is essential for effective financial management, tax compliance, and informed strategic business decision-making. It is also mandated by law. Whether you’re a self-employed professional, a salaried individual with side income, or a small business owner, understanding what books to keep, when to maintain them, and the applicable laws will help you stay audit-ready and avoid penalties.
what are books of accounts?
Books of accounts are systematic records of all financial transactions for an individual, business, or profession. These records include details of sales, purchases, earnings, assets, liabilities, and other economic activities. In India, maintaining books of accounts is mandatory under several laws:
Income Tax Act: Requires individuals or professionals to maintain books if their turnover or gross receipts exceed specific thresholds.
Companies Act, 2013: Mandates all registered companies to maintain accurate books, regardless of turnover.
CGST Act, 2017: Requires all GST-registered taxpayers to keep detailed records of purchases, taxes paid, and input credits used.
These records ensure accountability, transparency, accurate tax returns, and deduction claims, and facilitate audits.
Who Is Required to Keep Books of Accounts Up to Date?
The requirement to maintain books of accounts depends on the type of income and the relevant legislation.
Under the Income Tax Act
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Section 44AA mandates that individuals engaged in business or specified professions (e.g., doctors, lawyers, architects) must maintain books if:
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Business turnover exceeds ₹10 lakh in any of the three preceding years.
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Professional gross receipts exceed ₹2.5 lakh in any of the three preceding years.
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Salaried individuals with additional income (e.g., freelancing, investments) exceeding these thresholds must also comply.
Specified Professions
The Income Tax Rules identify “specified professions,” including physicians, attorneys, chartered accountants, architects, engineers, interior designers, technical consultants, and authors. These professions must maintain books due to the potential for unaccounted income, regardless of income level in some cases.
Under the Companies Act, 2013
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All registered companies must maintain books of accounts, with no threshold limit. This includes preparing financial statements, such as the balance sheet and profit and loss account, as per Schedule III.
Under the GST Act
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All GST-registered taxpayers are required to maintain books of accounts, regardless of their turnover. No exemption based on income level exists.
Threshold Limits for Maintaining Books of Accounts
The requirements for maintaining books of accounts vary by regulatory framework:
Legislation | Category | Threshold Limit |
|---|---|---|
Income Tax Act | Businesses | Turnover > ₹25 lakh |
Professionals | Gross receipts > ₹2.5 lakh | |
Companies Act, 2013 | All companies | No threshold; mandatory for all |
GST Act | GST-registered taxpayers | No threshold; mandatory for all |
Income Tax Act: Books are mandatory if thresholds are exceeded unless opting for presumptive taxation schemes.
Companies Act: All companies must maintain books, regardless of size or profitability.
GST Act: All GST-registered taxpayers must maintain books, with no exemptions.
When Is a Tax Audit Required?
A tax audit is mandatory when a taxpayer’s income or turnover exceeds specific thresholds.
Mandatory Audit Under Section 44AB
Type of Entity | Audit Trigger |
|---|---|
Businesses | Turnover > ₹1 crore for businesses with minimal cash transactions >₹2 crore |
Professionals | Gross receipts > ₹50 lakh |
If you opt out of presumptive taxation schemes and your income exceeds the basic exemption limit, an audit may also be required.
Chartered accountants conduct audits to ensure accurate income reporting and proper maintenance of books.
Exemptions Under Presumptive Taxation Schemes
To reduce compliance burdens, the government offers presumptive taxation schemes:
Section 44AD: For Businesses
Eligible: Resident individuals, partnership firms (excluding LLPs), HUFs.
Conditions:
Turnover ≤ ₹2 crore.
Income is presumed at 8% of turnover (6% for digital transactions).
No books are required if income is declared at the prescribed rate.
Section 44ADA: For Professionals
Eligible: Specified professionals (e.g., legal, medical, engineering).
Conditions:
Gross receipts ≤ ₹50 lakh.
Income is presumed at 50% of gross receipts. No books are required unless declaring lower income and exceeding the taxable limit.
If taxpayers declare income at the prescribed rates, they are exempt from maintaining books. However, if they declare lower income and their total income exceeds the basic exemption limit, they must maintain books and may be subject to audit.
Types of Books to Maintain
The following books are typically required for accurate accounting:
Journal: Records all financial transactions.
Ledger: Summarizes categorized accounts.
Cash Book: Tracks cash inflows and outflows.
Bank Book: Records bank-related transactions.
Trial Balance: Lists all ledger account balances.
Profit and Loss Account: Summarizes income and expenses.
Balance Sheet: Shows the financial position at a specific time.
These books are essential for preparing annual returns, filing tax returns, and facilitating audits.
Which Is Better, Manual or Digital Accounting?
As technology has advanced, bookkeeping has evolved from manual ledger systems to digital platforms.
Accounting by Hand
It is time-consuming, prone to errors, and challenging to scale. It involves physical registers and handwritten entries. It is appropriate for small businesses or low-volume transactions.
Accounting Online
Utilising programs like Tally ERP, Zoho Books, QuickBooks, Busy, and others, it automates data entry and produces reports instantly.
• Connects with GST portals and e-filing; easier to backup and retrieve
Tax authorities now generally accept digital records as long as they are accessible and complete.
Consequences of Not Maintaining Books of Accounts
Failure to maintain proper books can lead to severe penalties:
Section 271A Penalty: Fines up to ₹25,000 for non-compliance under the Income Tax Act.
Disallowance of Expenses: The Assessing Officer may reject claimed expenses, increasing taxable income and liability.
Loss of Presumptive Taxation Benefits: Opting out of schemes may lead to mandatory audits and loss of simplified taxation benefits.
Scrutiny Assessment: Income may be estimated without consultation, leading to higher tax liabilities.
GST Impact: Non-compliance may result in denial of input tax credit, reassessment of tax liabilities, and penalties under Section 125 of the CGST Act.
Company Law Violations: Fines, director disqualification, or winding-up procedures may be imposed for non-compliance with the Companies Act.
For what length of time should books of accounts be kept?
Proper retention of records ensures compliance during audits and inspections:
Income Tax Act: Retain for 6 years from the end of the relevant assessment year.
Companies Act: Retain for at least 8 years after the fiscal year’s end.
GST Act: Retain for 6 years from the annual return filing deadline.
Digital records are acceptable if they are easily accessible and backed up.
Frequently Asked Questions (FAQs)
Do freelancers have to keep books of accounts?
Yes, provided that during a fiscal year, their gross receipts surpass ₹2,50,000. However, detailed bookkeeping may not be required for independent contractors who make less than ₹75 lakhs and are eligible under Section 44ADA.
Can I use Zoho Books or Tally?
Yes, tax authorities fully accept digital tools like Busy, QuickBooks, Zoho Books, and Tally ERP.
What happens if my turnover exceeds the threshold even though I am subject to presumed taxes?
You can stay in the program as long as you report your income at the designated rate, which is 50% for professionals and 6% or 8% for businesses. Declaring a lower income while exceeding the threshold, however, could result in further tax obligations and an audit.
Can digital records be used?
As long as digital records are correct, well-documented, and easily accessible, they can be utilised.
Is it possible to have a penalty waived?
Although penalties under Section 271A are typically challenging to waive, they may be reduced or renounced if you voluntarily correct the error and give a valid explanation.
Conclusion: Important Lessons
In India, maintaining accurate books of accounts is crucial for financial compliance. Understanding your responsibilities under the Income Tax Act, Companies Act, and GST Law helps you stay audit-ready and avoid fines, regardless of your status as a professional, business owner, or company director.
Here are some things to keep in mind:
- Constantly check if your turnover or income exceeds the threshold
- Make bookkeeping easier with digital tools
- Keep abreast of changes to presumptive taxation regulations
In addition to meeting a legal obligation, keeping accurate and comprehensive books of accounts lays a solid basis for the expansion and prosperity of your company or profession.
This blog provides comprehensive information on books of accounts under various Indian laws, including the Income Tax Act, the Companies Act of 2013, and the Goods and Services Tax (GST) Act, updated with the latest provisions as of the publishing date. Please check the official websites for the most up-to-date information.
If you want support to file your income tax return, you can contact us at https://allsums.com/contact/