Tax Audit Changes in 2025 – Comprehensive Guide to the Income-tax (Eighth Amendment) Rules, 2025
The Government of India has introduced the Income-tax (Eighth Amendment) Rules, 2025, bringing significant changes to the Income-Tax Rules, 1962. These amendments, effective from April 1, 2025, impact tax audit reporting under Section 44AB of the Income-tax Act, 1961. The key focus areas include MSME payments, legal settlement expenditures, loan transactions, and share buybacks. This blog provides a detailed overview of the changes and their implications for businesses and taxpayers.
1. Short Title and Commencement
- The new rules are officially titled the Income-tax (Eighth Amendment) Rules, 2025.
- They will come into effect from April 1, 2025.
2. Key Amendments to the Income-tax Rules, 1962
The changes primarily impact Appendix II of Form No. 3CD in Part B, which is crucial for tax audit reporting. Below are the key modifications:
2.1 Additional Reporting of Legal Settlement Expenditure
- In Clause (21)(a), a new row has been inserted to include:
- Expenditure incurred for settling proceedings related to contraventions under laws notified by the Central Government.
- This ensures transparency regarding legal settlements and their tax treatment.
2.2 Amendments Related to MSME Payments
Clause (22) has been completely revised to improve disclosure on MSME payments. The new reporting includes:
- (i) Interest inadmissible under Section 23 of the MSMED Act, 2006.
- (ii) Total outstanding payments to micro and small enterprises under Section 15 of the MSMED Act.
- (iii) Breakdown of payments as follows:
- (a) Payments made within the prescribed period under Section 15.
- (b) Payments not made within the prescribed period (inadmissible for the previous year).
- These changes reinforce timely payments to MSMEs and enhance compliance with the MSME Development Act.
2.3 Clarifications and Modifications in Clause (26)
- The phrase “clause (a), (b), (c), (d), (e), (f) or (g) of” has been omitted.
- In sub-clause (A), the term “allowed” is replaced with “allowable” for better legal clarity.
- In sub-clause (B), the words “and was” have been replaced with “and (for clauses other than clause (h) of Section 43B) was” to clarify tax treatments.
2.4 Omission of Certain Clauses
- Clauses (28) and (29) have been removed, indicating that reporting requirements under these sections are no longer necessary.
2.5 Enhanced Reporting for Loans and Deposits
- In Clause (31)(a) and (b):
- New dropdown fields are introduced for specifying the nature of loans or deposits accepted.
- Each loan or deposit must now be categorized using a predefined code.
- In Clause (31)(c):
- Similar dropdown menus are provided for repayment of loans or deposits, ensuring uniform reporting.
2.6 Introduction of Note 1: Classification of Financial Transactions
A structured classification system has been introduced for financial transactions, which must be recorded under the following codes:
| S. No | Nature of Amount / Receipt / Repayment | Code |
|---|---|---|
| 1 | Cash Payment | A |
| 2 | Cash Receipt | B |
| 3 | Payment via Non-Account Payee Cheque | C |
| 4 | Receipt via Non-Account Payee Cheque | D |
| 5 | Transfer of Asset | E |
| 6 | Transfer of Liability | F |
| 7 | Conversion of Assets | G |
| 8 | Conversion of Liabilities | H |
| 9 | Journal Entry [Debit] | I |
| 10 | Journal Entry [Credit] | J |
| 11 | Any Other Mode [Debit] | K |
| 12 | Any Other Mode [Credit] | L |
These classifications ensure that transactions are systematically recorded and audited.
2.7 New Clause 36B: Reporting of Share Buybacks
- A new Clause 36B has been inserted to capture details of share buybacks under Section 2(22)(f).
- Taxpayers must disclose:
- Whether they have received any amount for buyback of shares.
- The amount received.
- The cost of acquisition of the shares bought back.
- This provision enhances tax compliance for capital gains from share buybacks.
3. Changes in Form No. 3CD – Part B
Several changes have been made to Part B of Form No. 3CD to align it with the latest tax policies:
- Clause (12): Addition of “44BBC” after “44BBB” to expand tax reporting.
- Clause (19): The following deductions have been removed:
- Section 32AC
- Section 32AD
- Section 35AC
- Section 35CCB
These modifications remove outdated tax provisions and streamline the reporting process.
4. Implications of the Amendment
The Income-tax (Eighth Amendment) Rules, 2025 introduce stricter compliance measures for businesses and individuals. Here’s what taxpayers need to keep in mind:
- Increased MSME accountability: Businesses must now report outstanding dues to MSMEs and interest payments more transparently.
- Better legal expense tracking: Settlements related to legal proceedings will now be scrutinized for tax purposes.
- More structured loan reporting: Loans and deposits must be categorized using predefined codes, reducing ambiguity.
- Enhanced scrutiny on share buybacks: Companies engaging in buybacks must disclose key financial details.
- Removal of outdated deductions: The elimination of certain deduction provisions simplifies tax audits.
5. Conclusion
The Income-tax (Eighth Amendment) Rules, 2025 mark a significant step towards improving tax compliance and transparency in India. Businesses, tax professionals, and auditors must familiarize themselves with these changes to ensure accurate reporting and avoid penalties. By implementing stricter MSME payment disclosures, enhancing legal expenditure reporting, and refining financial transaction classifications, the amendments contribute to a more robust taxation framework.
As these rules take effect from April 1, 2025, it is crucial for stakeholders to update their compliance procedures accordingly. If you need further clarification or assistance in understanding these changes, consult a tax expert or refer to official notifications from the Central Board of Direct Taxes (CBDT).
Also Read:
- Recommendations of the 55th Meeting of the GST Council
- Changes in GST and Income Tax during the Financial Year 2024-25
- TDS and TCS provisions applicable from April 1, 2025
- Rationalizing TDS: A Deep Dive into Budget 2025’s Proposals
Go To Memorandum
Go To Finance Bill 2025
Read More on Union Budget 2025
CA Cult YouTube:
1. TCS Credit of minor in the hands of Parent | Clubbing | Union Budget 2024
2. Calculation of Income Tax FY 2024-25 | Old vs New Regime | For Salaried Employees
Also Read: New Income-tax Bill 2025 Navigator
