Financial and tax due diligence before acquiring a company in India (2026)

Last updated: 21 October 2026

Quick Answer: Financial and tax due diligence is the buyer's review of a target's accounts, tax filings, secretarial records and hidden liabilities before signing. It tests filings against bank data. Under section 149 of the Income-tax Act, 1961, a year stays open three years and three months after the assessment year, or five years and three months where ₹50 lakh or more escaped.

Buying a company in India means buying its history, not only its business. Unpaid taxes, pending assessments and overstated receivables stay with the company after a share purchase, so the buyer pays for them.

What should financial due diligence cover before you sign?

Financial due diligence tests whether the reported earnings, assets and cash flows are real and repeatable. It usually reviews three or more years of audited financial statements, management accounts, bank statements, statutory registers and loan documents, and reconciles them against each other.

Does the accounting framework change what the numbers mean?

Yes. A company following the Companies (Accounting Standards) Rules, 2021 reports differently from one on Ind AS, so adjustments and reserves are not directly comparable. The 2021 Rules superseded the 2006 Rules, so a target still citing the older set needs a closer look.

Under the Ministry of Corporate Affairs roadmap of 16 February 2015, Ind AS applies to listed companies and to unlisted companies with net worth of ₹250 crore or more, plus their parents, subsidiaries, associates and joint ventures. SME-exchange listings are excluded, and banks, NBFCs and insurers sit outside this roadmap.

Which red flags should financial due diligence trace?

The red flags that matter most turn reported profit into cash the buyer never receives. Five deserve a line each on the checklist, and each should be traced to bank records, contracts or the notes to accounts before the price is agreed.

• Revenue quality: sales without matching bank credits, or concentrated in one customer or related party.
• Working capital: rising receivables and slower cash conversion, which the buyer funds after closing.
• Related-party balances: loans to promoters or group entities that may never return.
• Off-book items: capital commitments, lease obligations and security given for group loans.
• Contingent liabilities: pending litigation, disputed tax demands and claims not acknowledged as debts.

What does a tax due diligence checklist include?

The checklist works through every tax the target should have paid, year by year, and compares what was filed with what the records support. It covers income tax returns and assessments, tax audit reports, TDS and GST returns, input tax credit and, where international or specified domestic transactions exist, transfer pricing reports.

How do you test whether the target's tax filings are complete?

Start with the tax audit. Section 44AB of the Income-tax Act, 1961 requires an audit for FY 2020-21 to FY 2025-26 where business turnover exceeds ₹1 crore, or ₹10 crore where cash receipts and payments each stay within 5%. For a profession the limit is gross receipts above ₹50 lakh.

From tax year 2026-27 the same limits sit in section 63 of the Income-tax Act, 2025. A person who declares presumptive profits under section 44AD(1) or 44ADA(1) of the 1961 Act is outside section 44AB. If the target crossed a threshold and filed no audit report, the default itself is a liability.

What tax exposures survive the change of ownership?

In a share purchase the company keeps its past, so every year still open to reassessment remains the buyer's problem. Section 149 of the Income-tax Act, 1961, as substituted from 1 September 2024, bars a reassessment notice once three years and three months have passed from the end of the relevant assessment year.

Reopening is allowed up to five years and three months only where the Assessing Officer holds evidence that escaped income amounts to, or is likely to amount to, ₹50 lakh or more. Under section 536(2)(c) of the Income-tax Act, 2025, the 1961 Act keeps governing reassessment of every tax year that began before 1 April 2026, even when the notice comes later.

How do you verify GST and indirect tax compliance?

GST exposure is often the largest hidden item, because unpaid tax and reversed input credit stay with the company after closing. Diligence reconciles GSTR-1, GSTR-3B and the annual return against purchase and sales registers, and checks e-invoicing compliance on a sample of invoices.

Notification No. 10/2023-Central Tax dated 10 May 2023 extended e-invoicing, from 1 August 2023, to taxpayers whose aggregate turnover exceeded ₹5 crore in any preceding financial year from 2017-18 onward. Exempt classes above the threshold must say so on their invoices.

How do you verify the target's secretarial records?

Secretarial record verification confirms that the company was formed, run and owned as its records say. It starts with the statutory registers kept under section 88 of the Companies Act, 2013, including the register of members, which proves the seller's title to the shares being bought. It then reads the minutes of board and general meetings that section 118 requires, to confirm that borrowings, share allotments and related-party contracts were approved, and that the meetings followed the Secretarial Standards that section 118(10) makes binding.

The registers are then matched with the company's filings with the Ministry of Corporate Affairs: annual returns under section 92, financial statements under section 137, share allotment returns and the charges registered under section 77. Under section 77(3), an unregistered charge is not taken into account by the liquidator or any other creditor, but section 77(4) keeps the secured debt payable, so the buyer should read every loan document, not only the charges shown on the MCA portal. Missing filings or meeting records usually need late fees, compounding or rectification before closing.

How do deal documents protect the buyer?

Findings protect the buyer only if they reach the share purchase agreement, whose warranties, indemnities and escrow terms carry the risk allocation. Warranties state that the seller has disclosed all liabilities, and indemnities make the seller pay for defined tax shortfalls found after closing.

A price adjustment or escrow can hold back part of the consideration until the open years close, and a fresh valuation for a share transfer should reflect what diligence found. For exposures that cannot be quantified, a buyer can require the seller to clear the demand before completion, or walk away.

As HSAG Consulting's note on the financial truth behind every deal explains, gaps found in diligence lead to valuation adjustments or deal restructuring.

Common Mistakes in Due Diligence Before Acquisition of a Company

The costliest mistakes in due diligence before acquisition come from trusting documents unchecked, scoping the review too narrowly and starting too late. Each leaves a liability inside a company the buyer has already paid for, and most are avoided by fixing the scope before the term sheet is signed.

• Relying on the seller's summary: a sale-time tax schedule is a claim; trace each figure to the return, challan and assessment order.
• Ignoring the change of Act: section 282 of the Income-tax Act, 2025 lets a tax year from 2026-27 reopen for four years and three months from its end. The window is six years and three months where ₹50 lakh or more escaped.
• Starting after signing: late findings can no longer move the price, only the indemnity claims.

In practice, the gap often shows at manufacturing targets, where book stock does not agree with physical counts or with the quantities the GST returns imply. Part of the working capital the buyer pays for is then absent, so stock should be counted, not read from the ledger.

Who performs due diligence and when should it start?

Due diligence services in India are typically provided by chartered accountants, company secretaries and deal advisory teams, working alongside the buyer's legal counsel. Financial due diligence and the tax review usually run in parallel, beginning after the term sheet and before any binding commitment, so findings can still move the price.

HSAG Consulting lists financial and tax due diligence among its mergers and acquisitions advisory services. Its taxation services page also lists tax diligence and advisory for mergers, acquisitions and restructuring.

What happens to the tax due diligence report after closing?

After closing, the diligence report becomes the new owner's working list. Each open finding is settled, provided for in the accounts or tracked against an indemnity or escrow, and the release of any held-back consideration is timed to the reassessment windows of the years concerned.

The new owner should also close the filing gaps diligence found before its first year-end. For that year, assess tax audit applicability early, now under section 63 of the Income-tax Act, 2025. An indemnity that ends before a year can no longer be reopened leaves the buyer carrying the rest alone.

Planning to acquire a company in India?

Share the target's name and the stage of the deal through the contact page to discuss the scope of a financial and tax review.