95% Digital Receipts Test: How to Calculate for Section 44AB Exemption

The ₹10 crore s.44AB threshold requires two independent ratios: cash receipts ≤ 5% of total receipts and cash payments ≤ 5% of total payments — both must hold for the whole year. Apex Pvt Ltd, with ₹8 crore turnover, ₹20 lakh cash receipts (2.5%) and ₹15 lakh cash payments (2%), qualifies, so no tax audit is required under s.44AB.

The two ratios, precisely

The proviso to s.44AB (Finance (No. 2) Act 2019) keys the exemption to two aggregates, each computed for the entire financial year:

What counts as "digital". The statutory digital modes are an account-payee cheque, an account-payee bank draft, or the use of an electronic clearing system through a bank account. In practice this covers NEFT, RTGS, IMPS, UPI and bank transfers. The converse — what counts as "cash" — is the wider catch: physical cash, bearer instruments, cheques that are not account-payee, and payments routed outside a bank account.

The three most common errors:

• Computing the ratio on turnover instead of total receipts/payments. The denominator is the aggregate of all receipts (including advances and other income received) and all payments — not turnover alone.
• Ignoring petty cash. A small-cash ledger can quietly push a company over 5% on the payment side.
• Averaging the two tests. There is no set-off — each ratio must independently be ≤ 5%.

Worked example: Apex Pvt Ltd

Apex Pvt Ltd has turnover of ₹8 crore in FY 2025-26. Its books show:

Result: cash receipts ratio 2.5% ≤ 5% and cash payments ratio 1.97% ≤ 5%. Both conditions are met, so the ₹10 crore threshold applies. Apex's turnover of ₹8 crore is below ₹10 crore — tax audit NOT triggered under s.44AB.

Sensitivity — one large cash receipt changes everything. Suppose Apex additionally takes a ₹25 lakh related-party advance in cash, raising cash receipts from ₹20 lakh to ₹45 lakh (5.6%). The receipts ratio now fails, the ₹1 crore threshold applies, and Apex needs a tax audit at ₹8 crore turnover. A single transaction can flip the outcome. A cash advance of this size also independently attracts s.269SS / s.271D (cash-loan/deposit ≥ ₹20,000 attracts penalty equal to the amount) — the transaction is unlawful on that count alone; do not use it merely to illustrate the ratio.

Reconciling the working with the books

The two ratios are only as credible as the registers behind them. Three reconciliations keep the no-audit position defensible:

• Bank reconciliation. Every deposit and withdrawal in the bank statement should be tagged digital or cash and should tie to the receipts and payments registers; the untagged residual is usually the missing cash.
• GSTR-3B cross-check. The total-receipts figure should broadly reconcile with the turnover reported in GSTR-3B. A large unexplained gap between the two is a first-order scrutiny trigger for the AO. (Note: CGST Rule 88C is a separate rule restricting ITC where GSTR-3B ITC exceeds GSTR-2B by more than the specified limit — it does not automatically flag a receipts/turnover mismatch.)
• Cash book vs balance sheet. The cash-payments aggregate should reconcile with the cash book and with the closing cash balance in the balance sheet. An unaccounted cash balance is a red flag independent of the s.44AB question.

A company that can produce these three reconciliations in an afternoon is a company that will not be caught off guard if the no-audit position is questioned in scrutiny.

Practical implications

• The calculation is a bank-statement exercise. Tag every receipt and payment in the year as "digital" (cheque/draft/ECS/NEFT/RTGS/UPI) or "cash" (everything else), then compute the two ratios. Keep the working in the CA file — it is your answer if the audit trigger is questioned.
• Advances count in the year received. The test is on the aggregate of amounts received during the year, not on turnover of sales made. Cash advances inflate the numerator and can break the ratio.
• The audit report and ITR must be consistent. Where the company files without a tax audit because of the digital exemption, the cash-percentage working should reconcile with the turnover reported in ITR-6 and with Form 3CD fields if one is prepared.
• Statutory audit still applies. A pvt ltd exempt from the tax audit is still statutorily audited under s.143 CA 2013 and must file AOC-4.
• Border-line years deserve a written position. If a ratio sits at 4.9%, document the classification of each borderline transaction; the AO may test it in scrutiny.

Changed FY 2025-26: The rule itself is unchanged. The enforcement shift is that the income-tax portal and scrutiny workflows now probe the cash-percentage working behind a no-audit position — a company claiming the ₹10 crore threshold without a documented receipts/payments split is more exposed than when the proviso was new.

Step-by-step: what to do

• Pull the full-year bank statements and the cash book for FY 2025-26.
• Build the receipts register: every receipt, tagged digital vs cash; total receipts = the aggregate.
• Build the payments register: every payment, tagged digital vs cash; include petty cash; total payments = the aggregate.
• Compute both ratios. Cash receipts ÷ total receipts and cash payments ÷ total payments.
• Test against the table: both ≤ 5% and turnover ≤ ₹10 crore → no tax audit; otherwise audit required.
• Keep the working papers in the CA file, reconciled to the balance sheet, so the position is defensible in scrutiny.
• If audit is required, complete Form 3CA/3CB + 3CD before the 30 September (non-TP) / 31 October (TP) due date.

FAQ

Do I compute the cash ratio on turnover or on total receipts?
On the aggregate of all receipts during the year (and separately, all payments) — not on turnover alone. Advances and other income received count in the denominator.

Does petty cash count in the 5% test?
Yes. Petty cash payments are payments not made through a banking channel and must be included in the cash-payments numerator.

Are UPI payments "digital" for this test?
The statutory phrase is "electronic clearing system through a bank account." NEFT, RTGS and ECS are squarely within it; UPI and IMPS are generally accepted as covered in practice — confirm against current CBDT guidance before quantifying a borderline ratio. Bearer cheques and non-account-payee instruments are not.

What if receipts are 5% digital-safe but payments are 6% cash?
The exemption fails. Both ratios must independently be ≤ 5%; there is no averaging or set-off between them.

What if a cash ratio fails by a small margin?
The ₹1 crore threshold applies and the audit is mandatory. A borderline year is worth documenting carefully — a 5.1% ratio driven by one transaction may be tested by the AO, but the statutory test is mechanical.

Is the test computed monthly, quarterly or for the full year?
For the full year. Each ratio uses the whole financial year's aggregate — total cash receipts over total receipts for the entire FY, and the same for payments. There is no monthly or quarterly averaging, and no set-off between quarters.

Sources

• Income Tax Act 1961, s.44AB (proviso — ₹10 crore digital threshold), s.271B
• Finance (No. 2) Act 2019 — insertion of the 5% cash receipts/payments proviso
• Income Tax Rules 1962 — Form 3CA/3CB, Form 3CD
• CBDT clarifications on digital modes of payment for the 5% test [VERIFY current guidance with CA before publish]

For a compliance audit of your company, visit pvtltd.co

Need help with this?

Our team handles the paperwork. You focus on your business.