Chapter IV - Computation of Total Income
Section 57
Section 57: revenue recognition for construction and service contracts
Section 57 fixes how profits and gains from construction contracts and service contracts must be recognised for tax purposes - generally the percentage of completion method, with two specific alternatives for particular kinds of service contracts.
On this page
Need advice on Section 57?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) The profits and gains arising from a construction contract or a contract for providing services, shall be determined on the basis of percentage of completion method, subject to provisions of sub-section (2), as per the income computation and disclosure standards notified under section 276(2).
(2) For the purposes of sub-section (1), the profits and gains arising from a contract for providing services shall be determined— (a) on the basis of project completion method, if the duration of such contract is not more than ninety days; (b) on the basis of straight line method, if the contract involves indeterminate number of acts over a specified period of time.
(3) For the purposes of percentage of completion method, project completion method or straight line method under this section,— (a) the contract revenue shall include retention money; (b) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.
Introduction
Contract revenue recognition depends on the work pattern and duration. Percentage of completion is the default, with two specified service-contract alternatives and explicit treatment of retention money and incidental income.
Key takeaways
Contract revenue method
Construction and service contracts generally use the percentage-of-completion method under the notified income computation standards.
Service-contract exceptions
A service contract lasting no more than 90 days uses project completion; one with indeterminate acts over a fixed period uses straight-line recognition.
The general rule: percentage of completion method
Section 57(1) provides that 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), and as per the income computation and disclosure standards notified under Section 276(2).
Exceptions for certain service contracts
Section 57(2) carves out two situations where a different method applies specifically to contracts for providing services:
- Project completion method - if the duration of the service contract is not more than ninety days.
- Straight line method - if the contract involves an indeterminate number of acts over a specified period of time.
Common rules across all three methods
Section 57(3) applies two rules regardless of which method (percentage of completion, project completion, or straight line) is used: contract revenue must include retention money; and contract costs must not be reduced by incidental income such as interest, dividends or capital gains.
Step-by-step flow for applying Section 57
- 1
Is it a construction contract or a contract for providing services?
- No: Section 57 does not apply.
- Construction contract: Use the percentage of completion method as per the notified ICDS.
- Service contract: Go to the next step.
- 2
Is the service contract's duration not more than ninety days?
- Yes: Use the project completion method (Section 57(2)(a)).
- No: Go to the next step.
- 3
Does it involve an indeterminate number of acts over a specified period?
- Yes: Use the straight line method (Section 57(2)(b)).
- No: Use the percentage of completion method.
- 4
Apply the common rules
Include retention money in contract revenue, and do not reduce contract costs by incidental interest, dividends or capital gains (Section 57(3)).
Practical checklist
Do
- Maintain contract start, duration, performance and billing records to support the selected recognition method.
- Include retention money in contract revenue and separately classify incidental interest, dividend or capital-gain income.
Avoid
- Do not use project completion for a long service contract solely to defer income.
- Do not net unrelated incidental income against contract costs.
Illustrative example
Worked example: two contracts of a service provider
Hypothetical facts (illustration only, not a real taxpayer): An IT firm has (i) a 60-day website build contract worth ₹5 lakh, still in progress at year end, and (ii) a 12-month annual maintenance contract for ₹12 lakh that covers an unspecified number of support calls. The client withholds 10% of each bill as retention money.
Short contract
The website contract lasts not more than ninety days, so the project completion method applies; revenue is recognised on completion.
Maintenance contract
It involves an indeterminate number of acts over a fixed period, so the straight line method applies, i.e. ₹1 lakh a month.
Retention
Retention money is included in contract revenue under Section 57(3)(a), even though it is received later.
Outcome
- Revenue is recognised differently for the two contracts, as the section prescribes.
- Any interest earned on contract advances is not netted against contract costs.
Glossary
- Percentage of completion
- A method recognising contract result as performance progresses, subject to the notified ICDS.
- Retention money
- A contract amount withheld pending performance or completion, expressly included in contract revenue under Section 57(3).
Frequently asked questions
Which method is used to recognise profit on a construction contract?
The percentage of completion method, as per the income computation and disclosure standards notified under Section 276(2), unless the contract is a services contract falling under one of the two exceptions in Section 57(2).
What method applies to a short service contract?
The project completion method applies if the duration of a contract for providing services is not more than ninety days.
Does retention money count as contract revenue?
Yes - Section 57(3)(a) specifically requires that contract revenue include retention money, regardless of which recognition method is used.
Need help applying this provision to your situation?
Get expert guidance on construction and service contract revenue recognitionLast updated 9 October 2026