How to Maintain Books of Accounts for Income Tax Filing

Maintaining proper Books of Accounts is crucial for filing accurate Income Tax Returns (ITR) and staying compliant with the Income Tax Act, 1961. Here’s a comprehensive guide to maintaining books of accounts for income tax filing in India:

📚 What are Books of Accounts?
Books of accounts refer to the financial records that document all the income, expenses, assets, liabilities, and other financial transactions of a business or profession.

🧾 Who Needs to Maintain Books of Accounts?
1. Mandatory under Section 44AA (Rule 6F):
For Specified Professions (Legal, Medical, Accountancy, etc.)
If gross receipts exceed ₹1,50,000 in any of the 3 preceding years (or first year, if new):

You must maintain prescribed books under Rule 6F, like:

Cash book

Journal (if mercantile)

Ledger

Copies of bills > ₹25

Original bills/vouchers > ₹50

Inventory records (for medical professionals)

For Businesses/Non-Specified Professions:
If income > ₹2.5 lakh or turnover > ₹25 lakh in any of the 3 preceding years:

Books must be maintained, but not necessarily as per Rule 6F.

🗂️ Types of Books You Should Maintain
Book/Record Purpose
Cash Book Tracks all cash receipts and payments
Ledger Summarizes all accounts (Sales, Purchase, etc.)
Journal Chronological entry of transactions (if accrual)
Bank Book Records all bank-related transactions
Sales & Purchase Register Details of all sales/purchases with GST break-up
Expense Register Tracks all operating expenses
Inventory Register Stock movement & valuation (for traders)
Fixed Asset Register Record of all capital assets and depreciation
Payroll Register Salaries paid, TDS deducted, EPF/ESI contributions

🛠️ Tools for Maintaining Books
1. Manual Books
Suitable for very small businesses.

Risk of errors and misplacement.

2. Spreadsheet (Excel/Google Sheets)
Common for freelancers, small service providers.

Can be customized but prone to manual errors.

3. Accounting Software
Highly recommended for accuracy, GST, and tax compliance:

Tally ERP

Zoho Books

QuickBooks

Busy

Marg ERP

📌 Best Practices for Maintaining Books
✅ Record all income and expenses regularly.
✅ Keep supporting documents: invoices, bills, bank statements.
✅ Reconcile books with bank accounts monthly.
✅ Separate personal and business transactions.
✅ Maintain digital backups of your records.
✅ File GST returns timely, if applicable, as they affect income reporting.
✅ Keep records for 8 years as per the Income Tax Act (especially if you're subject to audit).

📅 When Audit is Mandatory?
Audit under Section 44AB is required if:

Business turnover > ₹1 crore (₹10 crore if cash transactions ≤5%)

Professional receipts > ₹50 lakh

Declaring income lower than presumptive scheme (44AD/44ADA) threshold

🔁 Presumptive Taxpayers (44AD/44ADA/44AE)
Not required to maintain detailed books if:

Declaring presumptive income as per law

Income declared is above threshold (8%/6% or 50% of gross receipts)

But it’s advisable to keep basic records in case of scrutiny.

📂 Conclusion
Maintaining books of accounts is not just a legal formality—it helps you:

File accurate ITR

Save on taxes through proper expense recording

Avoid notices and penalties