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Section 57 Income Tax Act 2025: How Is Revenue Recognised for Construction and Service Contracts?

Section 57 prescribes how profits and gains from construction contracts and contracts for services are recognised for income-tax purposes. The general rule is the percentage of completion method, with two specific methods for certain service contracts.

Legal position: Section 57 of the Income-tax Act, 2025 applies under the Act effective from 1 April 2026. This article explains the statutory provision and should be read with the applicable Income Computation and Disclosure Standards (ICDS) notified under section 276(2).

What is the general rule under Section 57(1)?

Profits and gains arising from a construction contract or a contract for providing services are determined on the percentage of completion method, subject to the exceptions in section 57(2) and the ICDS notified under section 276(2). Accordingly, the recognition of income generally follows progress in performing the contract rather than waiting for final completion or cash receipt.

Section 57 deals with recognition and computation under the relevant tax standards; it does not itself prescribe a universal formula for measuring the percentage completed. The applicable ICDS and reliable project records must be consulted.

When can a service contract use another method?

Section 57(2)(a): Service contracts of not more than 90 days

Where a contract for providing services has a duration of not more than ninety days, the profits and gains are determined on the project completion method. This statutory exception is expressly for service contracts; it should not automatically be applied to construction contracts.

Section 57(2)(b): Indeterminate acts over a specified period

Where a service contract involves an indeterminate number of acts over a specified period, profits and gains are determined using the straight line method. For example, a continuous support service supplied uniformly over a defined term may fall within this rule, depending on the contract's actual obligations.

Relevant terms and mandatory adjustments

Percentage of completion method: Revenue and related results are recognised by reference to the stage of completion of contractual performance, as determined under applicable ICDS.
Project completion method: Recognition is based on completion of the qualifying short-duration service project, subject to the relevant tax accounting rules.
Straight line method: Recognition is spread systematically over the specified period where services involve an indeterminate number of acts.
Retention money: Under section 57(3)(a), contract revenue includes retention money, even though the customer may withhold payment pending contractual milestones or conditions.
Incidental income: Under section 57(3)(b), contract costs must not be reduced by incidental income in the nature of interest, dividends or capital gains. Such income must be considered separately under the applicable charging and computation provisions.

Practical illustrations

Example 1: Construction contract

Suppose a construction contract has a contract value of Rs. 1 crore and the stage of completion, measured under the applicable ICDS, is 40% at the reporting date. An illustrative revenue amount is Rs. 40 lakh, subject to the contract terms, reliable measurement, ICDS adjustments and other applicable tax rules. The entire Rs. 1 crore is not automatically recognised merely because the contract has been signed.

Example 2: Short service engagement

A consultancy contract lasts 60 days. Section 57(2)(a) directs use of the project completion method for determining profits and gains from this service contract, subject to the applicable standards.

Example 3: Continuing service contract

A business agrees to provide ongoing monitoring for 12 months through an indeterminate number of acts. Section 57(2)(b) directs the straight line method. If the total service consideration is Rs. 12 lakh and services are provided uniformly, Rs. 1 lakh per month illustrates the straight-line allocation, before applicable adjustments.

Example 4: Retention and interest

A customer retains Rs. 5 lakh from certified contract consideration. The retention amount forms part of contract revenue under section 57(3)(a). Interest of Rs. 20,000 earned on temporary deposits is not deducted from contract costs under section 57(3)(b).

What records should taxpayers maintain?

  • Executed contracts, amendments, scope of work and service timelines.
  • Stage-of-completion workings and the methodology used under applicable ICDS.
  • Cost budgets, actual costs, completion certificates and progress reports.
  • Retention money schedules and customer billing reconciliations.
  • Separate accounting for incidental interest, dividends and capital gains.
  • Reconciliations between financial statements and taxable income where accounting treatment differs.
Important distinction: Section 57 of the 2025 Act concerns contract revenue recognition. Section 57 of the 1961 Act concerned deductions under income from other sources. They are different provisions; the broadly corresponding earlier provision for contract recognition is section 43CB of the 1961 Act.

Frequently asked questions

Does Section 57 apply to construction contracts?

Yes. Section 57(1) generally requires the percentage of completion method for construction contracts, subject to applicable ICDS.

Can a 90-day construction contract use the project completion method?

The express exception in section 57(2)(a) is for a contract for providing services. It does not, merely by reason of duration, extend to a construction contract.

Is retention money excluded until received?

No. Section 57(3)(a) expressly includes retention money in contract revenue for the purposes of the prescribed methods.

Can interest earned on contract funds reduce project costs?

No. Section 57(3)(b) prohibits reducing contract costs by incidental income in the nature of interest, dividends or capital gains.

Which earlier provision is comparable?

Section 43CB of the Income-tax Act, 1961 dealt with computation of income from construction and service contracts. The numbering of the two Acts should not be confused.

Official statutory references

Official Section 57 textIncome-tax Act 2025 as amended

Updated: 10 November 2026. Illustrations are simplified and do not replace contract-specific ICDS computations.