A S BANKA ADVISORS

If you run a company that files a tax audit, one line in your working papers is about to look wrong even though nothing you do has changed. From FY 2026-27, the Income-tax Act 2025 is in force, and the two sections that govern how you compute business income have been renumbered. Section 145 is now Section 276. Section 145A is now Section 277. The ten Income Computation and Disclosure Standards (ICDS) that sit under them are untouched. This is a renumbering, not a rewrite, but if your templates, notes and audit files still cite the old numbers, they are now citing repealed law.

Here is what the change means in practice, and what to fix before your first FY 2026-27 tax audit.

The switchover is period-aware

The Income-tax Act 2025 took effect on 1 April 2026, so it governs FY 2026-27 (AY 2027-28) onward. Your FY 2025-26 return (AY 2026-27) is still filed under the Income-tax Act 1961, where method of accounting lives in Section 145 and inventory valuation in Section 145A. In other words, for one more cycle you will be working with both Acts side by side: the old numbers for the year just closed, the new numbers for the year now running. Getting the citation right for each period is the first discipline to build into your team.

What Section 276 actually says

Section 276, titled Method of Accounting, carries forward the substance of the old Section 145. Income under Profits and gains of business or profession, and income under Income from Other Sources, is computed on the cash or mercantile system of accounting that you regularly employ. Section 276(2) is the enabling provision: it empowers the Central Government to notify ICDS for any class of assessee or any class of income. That single sub-section is what keeps all ten ICDS alive under the new Act.

The teeth are in the assessment power. Where the Assessing Officer is not satisfied about the correctness or completeness of your accounts, or your method of accounting has not been regularly followed, or your income has not been computed in line with the notified ICDS, the officer may make a best-judgment assessment. For a founder, that is the practical risk: an ICDS adjustment you skipped is not a soft disclosure miss, it is an opening for the department to recompute your income.

What Section 277 actually says

Section 277, titled Method of Accounting in Certain Cases, replaces Section 145A and governs valuation. Inventory is valued at the lower of actual cost or net realisable value, computed as per the ICDS notified under Section 276(2). It preserves the inclusive method: the value of purchases, sales and inventory must include any tax, duty, cess or fee actually paid or incurred to bring the goods to their location and condition on the valuation date. Securities held by a scheduled bank or public financial institution are valued as per ICDS after taking the applicable RBI guidelines into account.

The ten ICDS carry forward intact

All ten standards continue, now anchored to Section 276(2): Accounting Policies (I), Valuation of Inventories (II), Construction Contracts (III), Revenue Recognition (IV), Tangible Fixed Assets (V), Effects of Changes in Foreign Exchange Rates (VI), Government Grants (VII), Securities (VIII), Borrowing Costs (IX), and Provisions, Contingent Liabilities and Contingent Assets (X). The governing principle is unchanged: where an ICDS conflicts with your book treatment, the ICDS prevails for the purpose of computing taxable income. Your books follow accounting standards; your tax computation follows ICDS; the gap between them is what you disclose.

Who is on the hook, and who is not

ICDS applies to assessees on the mercantile system computing business or professional income, and to those reporting income from other sources. It does not apply to individuals and Hindu Undivided Families who are not required to undergo a tax audit, nor to assessees on the cash system. Income already computed under a presumptive scheme is not reopened by ICDS. For most funded startups on accrual accounting with an audit, that means ICDS is squarely in scope.

Where the book-to-tax gap bites

Four ICDS adjustments catch growth-stage companies most often. Revenue recognition under ICDS IV can pull income forward and deny the deferral of expected credit losses that your books may allow. Construction and long service contracts under ICDS III mandate the percentage-of-completion method. Government grants under ICDS VII can trigger recognition even when your books defer it. And foreign exchange under ICDS VI applies a mark-to-market treatment that often diverges from Ind AS 21 and Ind AS 109. If your company also moved to the 2026 Ind AS amendments on ESG-linked loans and renewable power contracts, expect fresh book-to-tax differences to reconcile this year.

Your FY 2026-27 action plan

1. Update your Form 3CD templates and working papers to cite Sections 276 and 277, not 145 and 145A.
2. Rebuild your ICDS adjustment schedules for all ten standards, so nothing is carried on autopilot from last year.
3. Reconcile inventory to books using the inclusive method of valuation.
4. Map the new book-to-tax differences flowing from the Ind AS 2026 amendments.
5. Document every ICDS adjustment with a clear audit trail, before a scrutiny notice asks for one.

ICDS adjustments are disclosed in Form 3CD with your tax audit, so the cleanup work has a hard downstream deadline. The renumbering itself is administrative. The exposure is in the adjustments you compute under those sections, and that exposure has not changed at all.

Download the full carousel PDF: ICDS under the Income-tax Act 2025

Need help navigating this? If you want a second pair of eyes on how the renumbered ICDS regime changes your tax computation and your Form 3CD, book a quick call with A S Banka Advisors Private Limited: https://calendly.com/asbanka-info/30min