MSME Relaxations 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.
The MSME relaxations at Appendix XII disapply AS 3, AS 17, AS 20 and AS 24 outright for non-company entities, drop AS 18 and AS 28 below a second threshold, and reduce AS 22 to current tax alone.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961. The scheme below took effect for accounting periods commencing on or after 1 April 2024, under the ICAI Council announcement of its 433rd meeting, 13–15 August 2024.
The twenty-eight standards, and who complies in full
Appendix XII lists the Accounting Standards issued by the ICAI as AS 1 to AS 29 (there being no AS 6 or AS 8 in the current series). The first rule is short: Large entities are required to comply in full with all the Accounting Standards. Everything below concerns only Micro, Small and Medium Sized Entities.
The MSME relaxations start with four standards disapplied outright
| Standard | Status |
|---|---|
| AS 3, Cash Flow Statements | Not applicable in its entirety |
| AS 17, Segment Reporting | Not applicable in its entirety |
| AS 20, Earnings per Share | Not applicable in its entirety |
| AS 24, Discontinuing Operations | Not applicable in its entirety |
An SMC company is exempt from AS 17 only. A non-company MSME of identical size is exempt from four standards, including the cash flow statement. Two entities with the same turnover, the same borrowings and the same business can therefore produce materially different financial statements purely because one is incorporated — which matters when the auditor is comparing a proprietorship's accounts against a peer company's.
The second threshold — AS 18 and AS 28
AS 18, Related Party Disclosures and AS 28, Impairment of Assets are not applicable in their entirety to an MSME:
- whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;
- which does not have borrowings in excess of rupees ten crore at any time during the immediately preceding accounting year; and
- which is not a holding or subsidiary of an MSME not covered above.
So the MSME relaxations operate on two tiers: Rs 250 crore and Rs 50 crore of borrowings define an MSME at all; Rs 50 crore and Rs 10 crore define the smaller MSME that also escapes AS 18 and AS 28.
MSME relaxations from specific requirements
| Standard | Relaxation |
|---|---|
| AS 10, Property, Plant and Equipment | Need not comply with paragraph 87 — encouraged disclosures |
| AS 11, Effects of Changes in Foreign Exchange Rates | Need not comply with paragraph 44 — encouraged disclosures |
| AS 19, Leases | Need not comply with paragraphs 22(c), (e) and (f); 25(a), (b) and (e); 37(a), (f) and (g); 38; and 46(b), (d) and (e) relating to disclosures |
| AS 26, Intangible Assets | Need not comply with paragraphs 90(d)(iii), 90(d)(iv) and 98 relating to disclosures |
| AS 28, Impairment of Assets (where not already exempt) | May measure value in use on a reasonable estimate rather than by present value, with the consequential provisions and paragraph 121(g) falling away; and need not comply with paragraphs 121(c)(ii), 121(d)(i), 121(d)(ii) and 123 |
| AS 29, Provisions, Contingent Liabilities and Contingent Assets | Need not comply with paragraphs 66 and 67 relating to disclosures |
The AS 19 relief is wider for a non-company MSME than for an SMC — it adds paragraphs 37(g), 38, 46(e) to the list an SMC gets.
AS 15 — where the MSME relaxations go further than an SMC's
The first two limbs are identical to the SMC position: paragraphs 11 to 16 on non-vesting short-term accumulating compensated absences, and paragraphs 46 and 139 on discounting beyond 12 months.
The third and fourth limbs are not:
"(c) recognition and measurement principles laid down in paragraphs 50 to 116 and presentation and disclosure requirements laid down in paragraphs 117 to 123 of the Standard in respect of accounting for defined benefit plans. However, such entities may calculate and account for the accrued liability under the defined benefit plans by reference to some other rational method, e.g., a method based on the assumption that such benefits are payable to all employees at the end of the accounting year"
Where an SMC company must still actuarially value its gratuity liability on the Projected Unit Credit Method, a non-company MSME may use some other rational method — the illustration given being an assumption that the benefits are payable to all employees at the end of the accounting year. The same relief extends to other long-term employee benefits under paragraphs 129 to 131. For a firm, this removes the actuary from the audit file entirely; the auditor's task shifts to testing whether the method chosen is rational.
AS 22 — the MSME relaxations remove deferred tax
An MSME shall comply with the requirements of AS 22 for current tax as defined in paragraph 4.4, with recognition as per paragraph 9, measurement as per paragraph 20, and presentation and disclosure as per paragraphs 27 and 28.
And the transitional requirement:
"On the first occasion when an MSME avails this exemption, the accumulated deferred tax asset/liability appearing in the financial statements of immediate previous accounting period, shall be adjusted against the opening revenue reserves/owner's funds."
The deferred tax balance is not routed through the profit and loss account in the year of transition. It goes straight to opening reserves — which matters for the clause 40 ratios, where the current year's net profit before tax must not absorb a one-time reversal that belongs in equity.
AS 14, AS 27, and the consolidation standards
- AS 14, Accounting for Amalgamations and the jointly controlled operations and assets parts of AS 27: generally there are no such transactions in a non-company MSME, so these standards are not applicable. However, if there are any such transactions, these entities shall apply the requirements of the relevant standard.
- AS 21, AS 23, AS 27 (to the extent it deals with consolidated financial statements) and AS 25 do not require a non-company entity to present consolidated financial statements or an interim financial report. The relevant standard applies only if the entity is required or elects to prepare and present them.
The AS 14 and AS 27 position is a rebuttable presumption, not one of the MSME relaxations proper — the moment an amalgamation happens, the standard applies in full.
Worked example
| Non-company MSME under audit | Treatment |
|---|---|
| Firm, preceding year turnover Rs 38 crore, borrowings Rs 6 crore | MSME, and below the second threshold — AS 18 and AS 28 also disapplied |
| Cash flow statement | Not required |
| Gratuity liability | May be computed on some other rational method; no actuary needed |
| Deferred tax liability of Rs 14,00,000 carried forward | On first availing the exemption, adjusted against opening reserves, not against current profit |
| Trust, preceding year turnover Rs 120 crore, borrowings Rs 25 crore | MSME, but above the second threshold — AS 18 and AS 28 apply |
| Firm that absorbs another firm during the year | AS 14 applies to that transaction |
| AOP with turnover Rs 380 crore | Large entity — full compliance with all the standards |
Audit checklist
- Confirm the entity is a non-company MSME and has remained one for two consecutive years before allowing the MSME relaxations.
- Test the second threshold — Rs 50 crore turnover and Rs 10 crore borrowings — for AS 18 and AS 28.
- Confirm the note declaring MSME status is present.
- Where a rational method replaces actuarial valuation for employee benefits, document why it is rational.
- On first availing the AS 22 relief, check the deferred tax balance went to opening reserves.
- Confirm current tax is still recognised, measured and disclosed under AS 22.
- Check for any amalgamation or joint venture transaction that revives AS 14 or AS 27.
- Check the standard-by-standard disclosure where relief is availed only in part.
Common mistakes
- Applying the SMC list instead of the MSME relaxations to a firm or trust, and requiring a cash flow statement.
- Missing the second threshold and dropping AS 18 for a larger MSME.
- Routing the deferred tax reversal through the profit and loss account.
- Dropping current tax along with deferred tax under AS 22.
- Treating AS 14 as permanently inapplicable when an amalgamation has occurred.