Section 43CB of Income Tax Act and Current Section 57: Construction and Service Contracts
The law prescribes how taxable profits from construction contracts and contracts for providing services are recognised. From 1 April 2026, the current provision is Section 57 of the Income-tax Act, 2025. Section 43CB of the Income-tax Act, 1961 remains important for periods governed by the earlier Act.
Updated: 28 September 2026
Meaning and scope
Section 57 of the Income-tax Act, 2025 governs revenue recognition for a construction contract or a contract for providing services. The general rule is the percentage of completion method, subject to specified exceptions for certain service contracts.
Under ICDS III, a construction contract generally means a contract specifically negotiated for construction of an asset, or a combination of closely interrelated or interdependent assets. It also covers services directly related to construction, such as services of project managers and architects, and specified demolition or restoration work.
Current Section 57 of the Income-tax Act, 2025
Section 57(1): General rule. Profits and gains from a construction contract or a contract for providing services are determined on the basis of the percentage of completion method, subject to Section 57(2), in accordance with the income computation and disclosure standards notified under Section 276(2).
Section 57(2): Service-contract exceptions. A service contract of not more than ninety days is determined on the project completion method. A service contract involving an indeterminate number of acts over a specified period is determined on the straight line method.
Section 57(3): Contract revenue and costs. For these methods, contract revenue includes retention money, and contract costs are not reduced by incidental income in the nature of interest, dividends or capital gains.
Methods of revenue recognition
| Type of contract | Method | Basic rule |
|---|---|---|
| Construction contract | Percentage of completion method | Revenue, costs and resulting profit are recognised by reference to the stage of completion in accordance with the applicable ICDS. |
| Service contract generally | Percentage of completion method | Applies unless the contract falls within a specific exception in Section 57(2). |
| Service contract lasting not more than 90 days | Project completion method | Profit is determined on the prescribed completion basis for the short-duration service contract. |
| Service contract involving an indeterminate number of acts over a specified period | Straight line method | Revenue is spread on a straight line basis over the specified period. |
Percentage of completion under ICDS III
ICDS III provides recognised approaches for determining the stage of completion of a construction contract, including the cost proportionate method, survey of work performed and physical proportion of contract work completed. The method should reflect the stage of completion of the contract for tax computation.
Retention money and incidental income
Retention money: Section 57 expressly requires contract revenue to include retention money for the prescribed methods. This prevents the retained portion of contract consideration from being ignored merely because its release is deferred under the contract.
Incidental income: Contract costs are not reduced by incidental income in the nature of interest, dividends or capital gains. Such income must therefore be dealt with under the applicable provisions instead of being netted off against contract costs under Section 57.
ICDS III and ICDS IV
ICDS III - Construction Contracts deals with tax computation for construction contracts, including contract revenue, contract costs, recognition by stage of completion and disclosures. Contract revenue includes the agreed amount, including retentions, together with qualifying variations, claims and incentive payments where the applicable recognition conditions are met.
ICDS IV - Revenue Recognition addresses revenue from rendering of services, among other categories. Service transactions generally follow the percentage of completion method, subject to the special treatment for short-duration contracts and contracts involving an indeterminate number of acts over a specified period.
Earlier Section 43CB of the Income-tax Act, 1961
Under the earlier Section 43CB, the relevant ICDS were notified under Section 145(2) of the Income-tax Act, 1961. Under the current Act, Section 57 refers to ICDS notified under Section 276(2) of the Income-tax Act, 2025.
Practical summary
| Current provision | Section 57, Income-tax Act, 2025 |
|---|---|
| Earlier corresponding provision | Section 43CB, Income-tax Act, 1961 |
| General method | Percentage of completion method |
| Service contract up to 90 days | Project completion method |
| Indeterminate acts over a specified period | Straight line method |
| Retention money | Included in contract revenue |
| Incidental interest, dividend or capital gains | Not deducted from contract costs |
Official references
For the statutory text, notified standards and current guidance, refer to the Income Tax Department resources: Income Tax Department, Income Computation and Disclosure Standards, and ICDS IV - Revenue Recognition.
This article is a general explanation of the statutory framework. Applicability can depend on the tax year, nature and terms of the contract, accounting method and other provisions of the Income-tax law.