Revenue Recognition for Construction and Service Contracts: Section 57 of the Income Tax Act 2025
Section 57 of the Income Tax Act, 2025 says when profit from a construction contract or a service contract is taxed. The default is the percentage of completion method, so profit is taken year by year as work progresses. Two service-contract exceptions apply: the project completion method for contracts of not more than 90 days, and the straight line method for contracts with an indeterminate number of acts over a specified period.
It sits alongside the wider cash or mercantile method of accounting rules, and matters to contractors, builders, consultants, maintenance firms and any business that bills for work spread over more than one tax year. The figures and conditions below come from section 57 (as amended by the Finance Act, 2026) and section 276. Last reviewed on 10 November 2026.
Which method applies to which contract?
| Type of contract | Method | Source |
|---|---|---|
| Construction contract | Percentage of completion | Section 57(1) |
| Service contract, duration more than 90 days, work not of the indeterminate-acts kind | Percentage of completion | Section 57(1) |
| Service contract, duration not more than 90 days | Project completion | Section 57(2)(a) |
| Service contract with an indeterminate number of acts over a specified period | Straight line | Section 57(2)(b) |
What is the percentage of completion method?
Under section 57(1), profit from a construction contract or a service contract is determined on the basis of the percentage of completion, as per the income computation and disclosure standards (ICDS) that the Central Government may notify under section 276(2). You recognise revenue and cost for each tax year in proportion to how much of the contract is done, instead of waiting for the last bill.
Section 57(3) adds two rules for this method and for the other two:
- Contract revenue includes retention money. Money the customer holds back until a later date still counts as revenue as the work is done (section 57(3)(a)).
- Contract costs are not reduced by incidental income in the nature of interest, dividends or capital gains (section 57(3)(b)). For other business income deductions and conditions, see the separate guide.
What is the project completion method for short service contracts?
If a service contract runs for not more than ninety days, section 57(2)(a) uses the project completion method. Profit is taken when the project is complete, not in slices.
What is the straight line method?
Where a service contract involves an indeterminate number of acts over a specified period of time, section 57(2)(b) uses the straight line method. A common shape is a monthly or annual maintenance contract where you do not know how many visits or calls will happen, but the period is fixed.
Worked example 1: a construction contract over two tax years
Assumptions (illustration only): Ravi, a contractor, signs a contract with total revenue of Rs 2,00,00,000, which includes Rs 10,00,000 of retention money. Estimated total contract cost is Rs 1,50,00,000. For illustration, completion is measured as cost incurred to date divided by estimated total cost; the exact measure follows the ICDS notified under section 276(2), which are not part of the section text used here. The contract starts in tax year 2026-27.
| Step | Tax year 2026-27 | Tax year 2027-28 |
|---|---|---|
| Cumulative cost incurred | Rs 60,00,000 | Rs 1,05,00,000 |
| Percentage of completion (cost / Rs 1,50,00,000) | 40% | 70% |
| Cumulative revenue (percentage x Rs 2,00,00,000) | Rs 80,00,000 | Rs 1,40,00,000 |
| Revenue for the year | Rs 80,00,000 | Rs 1,40,00,000 - Rs 80,00,000 = Rs 60,00,000 |
| Cost for the year | Rs 60,00,000 | Rs 1,05,00,000 - Rs 60,00,000 = Rs 45,00,000 |
| Profit for the year | Rs 20,00,000 | Rs 15,00,000 |
Retention money is already inside the Rs 2,00,00,000, so Ravi does not wait for the customer to release the Rs 10,00,000 before taxing it (section 57(3)(a)).
Suppose Ravi also earned Rs 1,20,000 of interest on a fixed deposit made from the customer's advance during 2026-27. Contract cost stays at Rs 60,00,000. It is not cut to Rs 58,80,000 (section 57(3)(b)). The interest is dealt with under its own head of income.
Worked example 2: a 60-day service contract
Assumptions: Meena, a consultant, takes a one-off engagement from 1 February 2027 to 1 April 2027 (28 + 31 + 1 = 60 days) for a fee of Rs 3,00,000, with costs of Rs 1,80,000. The duration is not more than 90 days, so section 57(2)(a) applies.
- Profit on completion = Rs 3,00,000 - Rs 1,80,000 = Rs 1,20,000.
- The project completes on 1 April 2027, which is in tax year 2027-28 (tax year 2026-27 ends on 31 March 2027).
- The whole profit of Rs 1,20,000 falls in 2027-28, even though most of the work was done in 2026-27.
Had the contract run 120 days, section 57(1) would have applied and profit would have been spread by percentage of completion.
Worked example 3: an annual maintenance contract
Assumptions: A firm signs a maintenance contract for 12 months from 1 October 2026 to 30 September 2027 for Rs 1,20,000. The number of service calls is not fixed. This is an indeterminate number of acts over a specified period, so section 57(2)(b) applies.
- Monthly revenue on a straight line = Rs 1,20,000 / 12 = Rs 10,000.
- Months in tax year 2026-27 (October to March) = 6, so revenue = 6 x Rs 10,000 = Rs 60,000.
- Months in tax year 2027-28 (April to September) = 6, so revenue = Rs 60,000.
The firm may have billed the full Rs 1,20,000 in October. Under the straight line method, half is still taxed in each year.
Real-life scenarios
- Retention money. A customer pays Ravi 95% of each running bill and holds 5% for a year after handover. Ravi still counts the held-back 5% in contract revenue as the work progresses.
- Mixed bag of services. Meena has a 45-day training assignment and a 2-year support retainer with no fixed number of tickets. The first is a project completion case, the second a straight line case. One firm can use different methods for different contracts.
What are the common mistakes with contract revenue?
- Waiting for the final bill on a construction contract or a service contract longer than 90 days.
- Leaving retention money out of contract revenue until it is released.
- Netting interest or dividends against contract cost. Section 57(3)(b) forbids it.
- Using the straight line method for a contract with a fixed number of acts. It is meant for an indeterminate number of acts over a period.
- Ignoring the ICDS. Under section 276(3)(c), the Assessing Officer can assess in the manner of section 271 if income has not been computed as per the notified standards.
Quick reference
| Point | Rule |
|---|---|
| Default method | Percentage of completion, section 57(1) |
| Short service contract | Not more than 90 days: project completion, section 57(2)(a) |
| Indeterminate acts over a period | Straight line, section 57(2)(b) |
| Retention money | Included in contract revenue, section 57(3)(a) |
| Interest, dividends, capital gains | Do not reduce contract costs, section 57(3)(b) |
| Standards | ICDS notified under section 276(2) |
Where is this in the Act?
- Section 57: revenue recognition for construction and service contracts.
- Section 276(1): cash or mercantile system of accounting regularly employed.
- Section 276(2): income computation and disclosure standards.
- Section 276(3): when the Assessing Officer may assess under section 271.
How do CA firms keep track of contract-based clients?
For a CA firm, the hard part is knowing which clients run long contracts, which method each one uses, and when year-end working papers are due. Finexo's practice management software keeps tasks and deadlines for each client in one place. It does not compute contract profit for you.
This article explains the Income Tax Act, 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. Confirm the position for a specific contract with a qualified chartered accountant.
Frequently Asked Questions
Which method does section 57 of the Income Tax Act 2025 prescribe for construction contracts?
The percentage of completion method, as per the income computation and disclosure standards notified under section 276(2) (section 57(1)).
When is the project completion method used for service contracts?
When the duration of the service contract is not more than ninety days (section 57(2)(a)).
What is the straight line method under section 57?
It applies to a service contract that involves an indeterminate number of acts over a specified period of time (section 57(2)(b)).
Is retention money part of contract revenue?
Yes. Section 57(3)(a) says contract revenue includes retention money for all three methods.
Can interest income reduce contract costs?
No. Section 57(3)(b) says contract costs are not reduced by incidental income in the nature of interest, dividends or capital gains.
Can one business use different section 57 methods for different contracts?
Yes. Section 57 looks at each contract: a construction contract or a long service contract goes by percentage of completion, a service contract of up to ninety days by project completion, and an indeterminate-acts contract by straight line (section 57(1) and (2)).
What happens if income is not computed as per the notified ICDS?
Under section 276(3)(c), the Assessing Officer may make an assessment in the manner provided in section 271 where income has not been computed as per the standards notified under section 276(2).