Draft Income Tax Rules 27 and 28 Specify Audit Report for Section 44 Deductions

(INDIA) — Indian business owners, professionals, and startups who plan to claim deductions for preliminary expenses under Section 44 or support those deductions with an audit report should prepare now for the compliance shift introduced by Draft Income Tax Rules 27 and 28.

The Central Board of Direct Taxes (CBDT) released these drafts on February 8, 2026, as part of the new Income Tax Rules, 2026. They are intended to take effect April 1, 2026, alongside the Income Tax Act, 2025, replacing the long-running Income Tax Rules, 1962. For many assessees, the headline issue is simple: deductions that were often “papered” with older formats are moving to prescribed, redesigned electronic forms, with tighter disclosures and reconciliation checks.

This filing guide explains who must file, what the new rules expect, what documents to gather, and how to complete the filing process in a way that also stays clean for U.S. tax reporting (a common pain point for U.S.-based Indians and returning NRIs).

📅 Deadline Alert: The draft rules were open for public consultation until February 22, 2026, with final notification expected before the April 1, 2026 rollout.

1) Overview: Draft Income Tax Rules 27 and 28 (effective April 1, 2026)

Draft Income Tax Rules 27 and 28 are operational rules. They prescribe the forms and formats you must submit to claim or support certain deductions.

Here is what changes in practice:

• Rule 27: Requires a prescribed statement to claim deductions for preliminary expenses under Section 44.
• Rule 28: Requires a prescribed audit report to support deductions under Sections 44 and 51, including verification linked to TDS-type compliance.

The drafts sit within a broader redesign. CBDT has described the new ecosystem as “smart forms” with pre-filling and automated reconciliation. That matters because mismatches may surface earlier and more often than under older workflows.

Tax year context (requested): This guide is written for planning around tax year 2026 (returns filed in 2027). In India, the April 1, 2026 effective date lines up with the start of the financial year beginning in 2026, with returns generally filed in 2027.

2) Rule 27: Statement of Preliminary Expenses (Section 44)

Rule 27 targets assessees who want to deduct preliminary business expenses under Section 44.

Section 44, as described in the draft context, covers allowable business expenses incurred before commencement and certain other startup-stage costs. The key compliance change is not the concept of preliminary expenses. It is the requirement to file a prescribed statement in a prescribed form to claim the deduction.

Who is most exposed to Rule 27?

• New businesses and startups with incorporation or setup costs.
• Expanding businesses that incurred eligible pre-commencement expenses for a new unit.
• Assessees planning to claim Section 44 deductions while also using presumptive-type reporting positions.

What typically triggers questions in assessment

• Weak linkage between the expense and business commencement.
• Missing underlying invoices, contracts, or proof of payment.
• Claims that do not reconcile with books, bank statements, or GST-style trails.

Under the smart-form approach, expect more standard fields. Expect less room for narrative. Your documentation must do more of the work.

3) Rule 28: Audit report for deductions (Sections 44 & 51)

Rule 28 requires submission of an audit report in a designated form to support deductions under:

• Section 44 (including positions connected to presumptive schemes and business deductions), and
• Section 51 (linked to tax deduction at source style provisions, as summarized in the draft material).

The practical point is that your deduction support is no longer only “books plus audit.” It becomes “books plus audit report in a prescribed e-format with expanded disclosures.”

What the audit report is expected to support

• The validity of the deduction claim under Section 44.
• Compliance checks tied to Section 51 (TDS-type requirements), where applicable.

If you are used to audits being “file and forget,” the new format may feel more like a reconciliation statement. It can be easier to file, but harder to explain later if your data is sloppy.

⚠️ Warning: If your deduction claim depends on TDS-style compliance, a missing certificate trail or late deposit record can spill into your deduction support and invite scrutiny.

4) Forms and format changes: smart forms, consolidation, and expanded disclosures

CBDT’s draft package describes 190 redesigned smart forms, aimed at pre-filling and automated reconciliation. Two items stand out for assessees focused on deductions:

1) Tax audit forms consolidated into Form 26
The draft context notes that tax audit reporting previously done across Forms 3CA/3CB/3CD is consolidated into Form 26. Even with this consolidation, Rules 27 and 28 still introduce dedicated formats for preliminary expense statements and the audit report support for deductions.

2) Expanded disclosures for presumptive schemes and specific transactions
The draft context also notes added disclosures connected to presumptive-type schemes under Section 44.

It also notes that Form 28 includes:

• Net worth certification for slump sales, and
• FMV (fair market value) disclosures under valuation rules.

Even if you are not planning a slump sale, be careful. If your business restructuring is on the horizon, new disclosures can drag additional work into what looks like a routine deduction filing.

5) Section 51 and TDS compliance: audit report highlights

The draft summary highlights that the audit report under Rule 28 verifies specific compliance behaviors tied to Section 51, including:

• 1% deduction on specified payments (as described in the draft),
• Deposit/payment within 10 days after the end of the month, and
• Issuance of certificates to deductees.

In a smart-form system, these are the types of fields that can be validated quickly. If your payment dates, deduction dates, and deposit dates do not line up, mismatches are more likely to surface.

6) Consultation timeline and rollout dates to watch

• Draft release date: February 8, 2026
• Public consultation open until: February 22, 2026
• Expected go-live: April 1, 2026, with the Income Tax Act, 2025

Current as of: February 25, 2026.

If your finance year closes soon after go-live, you may face a transition year where internal templates, auditor checklists, and e-filing steps all change at once.

7) Eligibility and filing requirements (with a clear checklist)

This is the decision point: Do you need the Rule 27 statement, the Rule 28 audit report, both, or neither?

Eligibility checklist (quick reference)

Most common “who must file” category

Assessees who claim lower presumptive income than the deemed profit benchmark (the draft example: below 8%) are the group most likely to face added reporting friction. If you take that position, expect to justify it with cleaner books and better schedules.

8) Step-by-step filing process (practical workflow)

Because the drafts focus on prescribed forms and e-filing, a clean workflow matters more than ever.

Step 1: Confirm the claim type and trigger

• Section 44 preliminary expenses claim → plan for the Rule 27 statement.
• Deduction support needing audit backing under Sections 44/51 → plan for the Rule 28 audit report.
• Lower-than-deemed presumptive income position → plan for expanded disclosures.

Step 2: Close your books with reconciliation in mind

• Turnover and receipts to bank credits.
• Major expenses to invoices and payment proofs.
• Any TDS-style deductions to deposit dates and certificate issuance records.

Step 3: Coordinate early with your auditor (if Rule 28 applies)

• Give your auditor:
• A trial balance and ledgers.
• A TDS-style compliance schedule.
• Contracts that explain the nature of “specified payments” and why the 1% rule applies.

Step 4: Prepare the prescribed statement (Rule 27) and/or audit report (Rule 28)

Use the designated form formats introduced under the draft rules. Expect:

• More standardized fields.
• Disclosures that force categorization.
• Cross-checks tied to other schedules.

Step 5: File electronically with authentication

The draft context notes electronic filing with:

• Digital Signature, or
• EVC (Electronic Verification Code).

Step 6: Keep an “audit-ready” package after filing

Store a single PDF folder (and a physical backup if needed) with all supporting evidence. This shortens response time if you receive an audit report query or a notice seeking clarifications.

Documents you’ll need (checklist)

Use this list to avoid last-minute gaps:

Business setup and preliminary expenses (Section 44)
– Incorporation/registration documents.
– Board/partner resolutions approving setup costs (if applicable).
– Invoices for legal, professional, feasibility, consulting, and registration costs.
– Proof of payment (bank statements, payment confirmations).
– A schedule showing expense date, vendor, purpose, and linkage to commencement.

Books and reconciliations
– Trial balance and general ledger.
– Bank statements for the year.
– Sales/receipt register and major customer invoices.
– Expense ledgers with supporting bills.

Section 51 / TDS-style compliance support (if applicable)
– List of specified payments subject to the 1% deduction.
– Date-wise deduction and deposit proof (including the 10-day post-month rule).
– Certificates issued to deductees and issuance logs.

If you also file U.S. taxes (common for U.S. immigrants from India)
You may need the same records to support U.S. reporting of worldwide income and foreign accounts.

U.S. starting points on IRS.gov:
– The IRS international hub for individuals: international taxpayers
– Forms and instructions lookup: forms and pubs
– IRS Publication 519 (residency rules): Publication 519

Deadlines and extensions: what to plan for (India + U.S. awareness)

The draft rules provide effective dates and consultation dates, but do not provide a single “filing deadline” in the draft summary. Your actual filing deadline will depend on your category and final notified rules.

For U.S. readers, keep these U.S. federal deadlines in mind for tax year 2026 (filed in 2027):

If you are coordinating India filings and U.S. filings, align your document collection by April. That reduces duplicate work and helps avoid inconsistencies.

Practical compliance notes for assessees (and U.S.-based Indians)

• Presumptive positions need clean support. If you claim below the deemed profit benchmark (draft example: below 8%), keep stronger contemporaneous records.
• TDS-style compliance can affect deduction support. The Rule 28 audit report checks TDS behaviors. Missing deposit timing or certificates can spill into the deduction narrative.
• Smart forms reduce typing, not responsibility. Pre-filling can lower effort. It can also surface mismatches fast.
• If you are a U.S. tax resident, India income still matters. IRS residency rules are explained in IRS Publication 519. U.S. tax residents generally report worldwide income and may need foreign account reporting.

IRS resources and professional help

• IRS international portal: https://www.irs.gov/individuals/international-taxpayers
• IRS Publication 519 (U.S. Tax Guide for Aliens): https://www.irs.gov/pub/irs-pdf/p519.pdf
• IRS forms repository: https://www.irs.gov/forms-pubs

For India-side compliance under the Income Tax Act, 2025 and the Draft Income Tax Rules 27 and 28, coordinate with a qualified Indian tax professional and your statutory auditor. For U.S. filings, use a CPA or EA experienced in immigrant and cross-border reporting, especially if you have Indian business interests, foreign bank accounts, or dual-country income.

Action items to close:
– If you claim Section 44 preliminary expenses, prepare the Rule 27 statement package now.
– If your deduction depends on Sections 44/51 support, schedule your Rule 28 audit report work early.
– If you are U.S.-based, align India schedules with your Form 1040 file for tax year 2026 (filed in 2027), and review whether FBAR applies.

⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.