Ahmedabad: Filing taxes has remained a complex exercise for businesses and professionals who fall in higher tax brackets. Between audits, record-keeping requirements, and compliance deadlines, the paperwork was already extensive. Now, taxpayers who maintain electronic books have one more obligation to worry about: taking daily backups of their accounts and ensuring those backups are stored on servers located in India.
The new requirement came into effect on April 1 under the Income-Tax (I-T) Rules, 2026. Tax experts say the provision, introduced through Rule 46(8), effectively turns data storage into a tax compliance issue. Businesses that keep their books electronically will now have to ensure that a backup copy is created every day and that it must be capable of being restored as a genuine copy of the books.
Who is Affected?
Chartered accountant Karim Lakhani said the provision covers a large section of organised taxpayers. “Every taxpayer maintaining electronic books who falls within Section 62 or Section 63 requirements, must ensure that daily backups are taken and stored on servers physically located in India. This is a tough ask,” he said.
The rule applies to taxpayers who are required to maintain books of account under Section 62 of the I-T Act, 2025. “This includes companies, LLPs, partnership firms, proprietorships, and professionals crossing the specified thresholds. Individuals and Hindu Undivided Families (HUFs) engaged in business are also covered if their income exceeds Rs 2.5 lakh or their annual turnover exceeds Rs 25 lakh in a financial year,” Lakhani added.
The requirement extends to taxpayers covered under Section 63 relating to tax audits. Broadly, this includes businesses with turnover above Rs 1 crore and professionals with gross receipts exceeding Rs 50 lakh. For businesses where at least 95% of receipts and payments are routed through banking channels or prescribed electronic modes, the audit threshold goes up to Rs 10 crore.
Implications for Cloud-Based Systems
Tax experts say the rule could have significant implications for businesses that rely on cloud-based accounting software and enterprise resource planning (ERP) systems. These companies may need to ensure that the backup location satisfies the “physically in India” condition.
According to experts, simply accessing a system from India may not be enough if the designated backup server is located overseas. Similarly, relying on global cloud replication may not satisfy the rule if the backup copy ultimately resides outside India.
Practical Concerns
Not everyone is convinced the new requirements are practical. International tax expert Mukesh Patel said: “It is highly impractical to expect small businesses to maintain daily backups of electronic data. The rules also require businesses to preserve physical bills worth Rs 250 or more for seven years. Medical practitioners are still required to maintain daily registers of patients and treatments. These provisions need to be reconsidered,” Patel said.
The change is also expected to increase the compliance burden during tax audits. Auditors are likely to seek details about accounting software, server locations, and proof that daily backups are being maintained in accordance with the rules.
Penalties for Non-Compliance
Failure to comply may attract a penalty of Rs 25,000 for not maintaining the prescribed backups. Incorrect certification in a tax audit report could result in a separate penalty of Rs 10,000, apart from possible audit qualifications and increased scrutiny by tax authorities.
“The rule should apply only to businesses with a turnover limit of more than Rs 3 crore as those with lesser turnover may find it difficult to comply,” Sandeep Engineer, president of the Gujarat Chamber of Commerce and Industry (GCCI).
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About the Author: Parag Dave is Principal Correspondent at The Times of India, Ahmedabad. He reports on textiles, real estate, chemicals, pharmaceuticals, Information Technology, Taxation, Renewable Energy, food processing and trade and industry associations.
