Exempt Income explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Exempt income does not remove the section 44AB obligation. Chapter 6 of the Guidance Note records that neither section 44AB nor any other provision exempts a person whose income is exempt, so section 10 and section 11 entities, section 80P co-operative societies and non-residents are all inside the section once the thresholds are met.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the Eleventh and concluding edition under the Income-tax Act, 1961. From the first audit under the Income-tax Act, 2025 the obligation sits in section 63 and the report in Form No. 26 under rule 47 of the Income-tax Rules, 2026. Charitable and religious institutions have their own audit route under the 2025 Act, and rule 188 of the 2026 Rules prescribes the report and its timing.
The general position — exemption is not an exclusion
Paragraph 6.1 puts the question and answers it. Where an assessee's income is not chargeable to tax by reason of a specific exemption in the law or otherwise — whether the person is wholly outside the purview of income-tax law, or has exempt income under the Act — the Guidance Note's conclusion is:
"It appears that neither section 44AB nor any other provision of the Act stipulate exemption from the compulsory tax audit to any person whose income is exempt from tax."
The section is framed as a duty on every person carrying on any business or profession whose facts satisfy the conditions. It does not carry an exemption keyed to the taxability of the resulting income.
Section 10 and section 11 entities
Paragraph 6.2 records the CBDT's view: where income is exempt under section 10 — the examples given are sections 10(21), 10(23A), 10(23B), 10(23BB), 10(23C) and 10(26AAA) — or under section 11, the exemption does not extend to:
- maintaining books of account under section 44AA; or
- getting accounts audited under section 44AB.
The Guidance Note asks stakeholders to take note of this view. For a research association, a professional body, a khadi or village industry institution or an educational or medical institution running a business activity, exempt income under one of those clauses does not answer the section 44AB question.
A section 11 institution that is already audited under section 12A/12AB is not thereby relieved of section 44AB where it carries on a business crossing the threshold. The third proviso to section 44AB allows an audit under another law to serve, but it still requires a further report by an accountant in the form prescribed under this section — that is, the section 44AB report on top of the other one.
Co-operative societies and section 80P
A co-operative society carrying on business may enjoy a deduction under section 80P. Paragraph 6.2 states that such institutions or associations of persons will have to get their accounts audited and furnish the audit report for the purposes of section 44AB if their turnover in business exceeds the prescribed limit — presently Rs 1 crore, and Rs 10 crore in certain specified cases.
A full section 80P deduction that reduces total income to nil does not answer the section 44AB test either. Exempt income and a deduction that removes the tax both leave the audit obligation intact.
Income below the taxable limit
Paragraph 6.3 addresses the smallest-scale version of the same argument. The object of the audit under section 44AB is only to assist the Assessing Officer in computing the total income of an assessee in accordance with the different provisions of the Act. Therefore, even if the total income of a person is below the taxable limit laid down in the relevant Finance Act, he will still have to get his accounts audited and furnish the report if any condition prescribed under section 44AB is satisfied.
A loss-making business with Rs 3 crore of turnover is squarely inside section 44AB. So is a business whose entire profit is absorbed by brought-forward losses.
Non-residents
Paragraph 6.4 treats non-residents separately:
- Section 44AB makes no distinction between a resident and a non-resident. A non-resident assessee is therefore required to get accounts audited and furnish the report if turnover, sales or gross receipts exceed the prescribed limits.
- The audit is confined to the Indian operations carried out by the non-resident, since the non-resident is chargeable to income-tax in India only on income accruing or arising or received in India.
Two exclusions from a different direction still apply: by the second proviso to section 44AB, the section does not apply to a person deriving income of the nature referred to in section 44B (shipping) or section 44BBA (aircraft), and paragraph 5.18 excludes such turnover from the aggregate in any event.
Worked example
| Assessee | Facts | Section 44AB? |
|---|---|---|
| Charitable trust registered under section 12AB | Runs a printing press as a business incidental to its objects; turnover Rs 2.10 crore; income exempt under section 11 | Yes — exempt income does not exclude the audit, and the section 12A audit does not substitute for it |
| Co-operative credit society | Business turnover Rs 1.40 crore; entire income deducted under section 80P | Yes |
| Proprietor of a loss-making trading business | Turnover Rs 3.60 crore; loss of Rs 18 lakh; no taxable income | Yes |
| Non-resident with an Indian project office | Indian receipts Rs 1.85 crore; global receipts far higher | Yes, confined to the Indian operations |
| Non-resident shipping operator | Income of the nature referred to in section 44B | No — second proviso to section 44AB |
Audit checklist
- Test section 44AB on turnover, never on whether the income is taxable.
- Apply the section to section 10 and section 11 entities carrying on business, per the CBDT view in paragraph 6.2.
- Apply it to section 80P co-operative societies once the business turnover crosses the limit.
- Apply it to loss cases and below-taxable-limit cases.
- For a non-resident, scope the audit to the Indian operations only.
- Check the second proviso — section 44B and 44BBA income is outside the section.
- Where another law already requires an audit, remember the third proviso still requires the further report under section 44AB.
Common mistakes
- Treating exempt income under section 10 or 11 as an exemption from section 44AB.
- Relying on the section 12A audit as a substitute for the section 44AB report.
- Skipping the audit in a loss year or where section 80P wipes out the income.
- Auditing a non-resident's global accounts instead of the Indian operations.
- Assuming residence status changes the threshold.