Small Company under Sec 2(85) — the audit-relief threshold and what it means

The Sec 2(85) thresholds — FA 2022 update

Condition	Before FA 2022	After FA 2022
Paid-up share capital	≤ ₹2 Cr	≤ ₹4 Cr
Turnover (as per previous FY P&L)	≤ ₹20 Cr	≤ ₹40 Cr

BOTH conditions must be met. Cross either one — paid-up jumps above ₹4 Cr, OR turnover crosses ₹40 Cr — and small-company status is lost from that financial year. The relief flips off, and full Companies Act compliance applies.

The four exclusions — automatically out of "small company"

Even if your paid-up and turnover are within thresholds, you're not a small company if you're:

1. A public company
2. A holding company OR a subsidiary of any other company
3. A company governed by special legislation (Banking Regulation Act, Insurance Act, etc.)
4. A Section 8 (not-for-profit) company

The subsidiary exclusion is the most-missed. A small operating company that's a wholly-owned subsidiary of a holding company — even if both are family-owned — doesn't qualify. This often surprises group entities post-restructuring.

The reliefs — what you save

1. Annual return — MGT-7A instead of MGT-7

Small companies and OPCs file the abridged MGT-7A annual return (introduced FA 2021). Compared to MGT-7:

• Fewer fields to populate
• No mandatory professional certification (DSC by director is enough)
• Simpler disclosure of shareholding pattern, board structure

Time saving: ~3 hours per filing. See our ROC annual filing brief.

2. AOC-4 — no cash-flow statement

Small companies are exempt from preparing a cash-flow statement under Sec 2(40). Only profit-loss + balance sheet + notes go into AOC-4 attachment. For most early-stage / steady-state private companies, this is a meaningful audit-prep time saving.

3. Audit rotation — relaxed

Sec 139(2) mandatory rotation of auditors (5-year individual / 10-year firm cap) does not apply to small companies. You can retain the same auditor indefinitely. Larger companies must rotate.

4. Internal Auditor — not mandatory

Sec 138 (internal auditor) doesn't apply to small companies. You only appoint internal auditor if: turnover ≥ ₹200 Cr, OR outstanding loans/borrowings ≥ ₹100 Cr at any time, OR outstanding deposits ≥ ₹25 Cr at any time. Small company thresholds put you well below all three.

5. CSR — no Committee mandate

Sec 135 CSR Committee is required if (a) net worth ≥ ₹500 Cr, OR (b) turnover ≥ ₹1,000 Cr, OR (c) net profit ≥ ₹5 Cr in the immediately preceding FY. Small companies almost universally fall below these. If CSR-obligated (typically by net profit ≥ ₹5 Cr), only the spending obligation applies; no Committee needed.

6. Board meetings — minimum 2 instead of 4

Sec 173(5) — OPCs, small companies, dormant companies, and Sec 8 companies need to hold at least 2 board meetings per year (one in each half of the year, with a gap of at least 90 days). Other companies need 4 quarterly meetings.

7. Director's responsibility statement — simpler form

Sec 134(3)(c) Director's Responsibility Statement is shorter for small companies — doesn't need to cover internal financial controls explicitly.

Loss of small-company status

If you cross either threshold in any FY, you lose small-company status for the FY in question and forward. The day the new threshold is crossed, the reliefs end. Effectively:

• Plan for the transition 6-12 months ahead — auditor onboarding, internal audit setup, MGT-7 transition
• The classification is checked annually based on PREVIOUS FY data — so growth in FY 25-26 affects classification for FY 26-27

OPC parallel benefits

One Person Company (OPC) — single-member company — gets a parallel set of reliefs even outside the "small company" definition (because OPCs can have any paid-up). Most OPC compliance mirrors small-company compliance.

The Finclar take

The Sec 2(85) classification is automatic — no application, no certification needed. But the reliefs are real: a small company spends ~30-40% less on annual compliance than a comparable non-small company. The trap is the subsidiary exclusion: a small family-run operating entity that's been positioned as a "subsidiary" for tax-grouping reasons loses the small-company reliefs. If you're restructuring, factor in this hidden cost. We track classification status annually for every retainer client — it's a 60-second check that prevents accidental over-compliance.