The transition from the existing Tax Audit formats (Forms 3CA/3CB/3CD) to the proposed Form No. 26 under the Income-tax Act, 2025 introduces significant changes in digital data governance and audit transparency.
Effective from Tax Year 2026–27, the audit framework places renewed emphasis on data sovereignty, traceability, and jurisdictional control over financial records. Based on an analysis of the Draft Rules, businesses now face a rigorous two-fold compliance mandate concerning electronic books of account.
Page Contents
1. The Disclosure Requirement – Form No. 26
The proposed Form 26 moves beyond generic statements that books are maintained in “computerized” form.
If books of account are maintained using cloud-based software or digital platforms, the auditor must specifically disclose:
- The IP Address of the storage server, and
- The Country where the data is physically stored.
This marks a fundamental shift in tax audit reporting. The audit will no longer be limited to verifying accounting entries — it will also certify the digital location of financial data.
Accordingly, businesses using ERP systems, SaaS platforms, or cloud hosting solutions must be capable of identifying and substantiating their server location and digital storage infrastructure.
2. The Substantive Mandate – Draft Rule 46(8)
Beyond disclosure, the Draft Income Tax Rules, 2026 introduce a binding compliance requirement under Rule 46(8).
The rule provides:
“The books of account and other documents specified in sub-rules (1), (4) and (6) maintained in electronic mode shall remain accessible in India at all times, and the back-up of such books of account and other documents maintained in electronic mode, shall be kept in servers physically located in India, and shall be updated on a daily basis.”
This requirement has three clear components:
- Continuous accessibility in India
- Back-up servers physically located in India
- Daily updating of such records
The mandate effectively embeds data localization within the income-tax compliance framework. It is not merely procedural — it is structural.
Broader framework of Rule 46 – Maintenance of Books under Section 62
To understand the scope of Rule 46(8), it is necessary to examine the broader framework of Rule 46:
Rule 46(1)
Every person required to maintain books under section 62(1) of the Act must maintain such books and documents as enable the Assessing Officer to compute total income under the Act.
Rule 46(4) – Mandatory Books of Account
The prescribed books include:
- A cash book
- A journal (where mercantile system is followed)
- A ledger
- Copies of bills or receipts issued for sums ≥ ₹250
- Original bills/receipts for expenditure ≥ ₹250
- Payment vouchers where expenditure does not exceed ₹250 and adequate particulars are not recorded in the cash book
Rule 46(6) – Additional Requirement for Medical Professionals
In addition to the above:
- A daily case register in Form No. 25
- Inventory (opening and closing) of drugs, medicines and consumables
Rule 46(8) – Electronic Maintenance
Where these books are maintained electronically:
- They must remain accessible in India at all times
- Back-ups must be stored on servers physically located in India
- Data must be updated daily
This provision applies to all categories of prescribed books under sub-rules (1), (4) and (6).
Compliance Implications for Businesses
The implications are immediate and significant.
Organizations using:
- Global ERP platforms
- Overseas cloud infrastructure
- Multi-region server architecture
- International SaaS accounting solutions
must verify whether:
- Their primary and backup servers are physically located in India
- Data remains continuously accessible within Indian jurisdiction
- Systems are configured for daily updates
- Vendor contracts support compliance certification
This is no longer an IT preference — it is a statutory requirement.
Governance and Risk Perspective
The new framework reflects a broader policy shift towards:
- Strengthening digital sovereignty
- Enhancing audit transparency
- Ensuring jurisdictional control over financial records
- Reducing dependency on offshore data infrastructure
From Tax Year 2026–27 onward, tax audits will intersect directly with IT governance and cloud architecture decisions.
Conclusion
The proposed Form 26 and Draft Rule 46(8) fundamentally redefine tax audit compliance in India.
The question for businesses is no longer limited to:
Are our books accurate?
It now extends to:
Do we know the physical location and IP address of our financial data?
CFOs, CIOs, and tax heads must act proactively to assess infrastructure readiness before the new regime becomes operational.
The new tax audit is not merely about accounting — it is about data accountability.
Relevant Extract of Rule 46 of Draft Income Tax Rule, 2026 – Maintenance of books of accounts under section 62 of the Act
(1) Every person required to keep and maintain books of account and other documents under section 62(1) of the Act shall maintain such books of account and other documents that enable the Assessing Officer to compute his total income under the Act.
(4) The books of account and other documents referred to in sub-rule (2) shall be the following, namely:—
(i) a cash book;
(ii) a journal, if the accounts are maintained according to the mercantile system of accounting;
(iii) a ledger;
(iv) for sums equal to or exceeding two hundred and fifty rupees, copies of bills or receipts issued by him;
(v) original bills and receipts in respect of expenditure equal to or exceeding two hundred and fifty rupees incurred by the person and issued to him;
(vi) payment vouchers prepared and signed by the person, where the expenditure incurred does not exceed two hundred and fifty rupees, and the cash book maintained by the person does not contain adequate particulars in respect of such expenditure.
6) A person carrying on medical profession shall, in addition to the books of account and other documents specified in sub-rule (4), keep and maintain the following, namely :—
(i) a daily case register in Form No. 25;
(ii) an inventory under broad heads, as on the first and the last day of the tax year, of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession.
8) The books of account and other documents specified in sub-rules (1), (4) and (6) maintained in electronic mode shall remain accessible in India at all times, and the back-up of such books of account and other documents maintained in electronic mode, shall be kept in servers physically located in India, and shall be updated on a daily basis.
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