Revenue recognition for construction and service contracts
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 57(1) of Income Tax Act 2025
57(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, as per the income computation and disclosure standards notified under section 276(2).
Section 57(2) of Income Tax Act 2025
57(2) The profits and gains arising from a contract for providing services under sub-section (1) 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.
Section 57(3) of Income Tax Act 2025
57(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.
FAQs on Section 57 of Income Tax Act 2025
1. What is the method of revenue recognition for construction contracts under the Income Tax Act, 2025?
Revenue from construction contracts must be recognized using the percentage of completion method, as per the income computation and disclosure standards notified under section 276(2).
2. How is income from service contracts recognized under Section 57(1)?
Income from service contracts is also recognized using the percentage of completion method, subject to exceptions provided under Section 57(2).
3. What is the exception for short-duration service contracts?
If the duration of the service contract does not exceed ninety days, the project completion method may be applied for revenue recognition.
4. When is the straight line method used for service contracts?
The straight line method is applicable when the service contract involves an indeterminate number of acts over a specified period of time.
5. What does the term ‘percentage of completion method’ imply?
It refers to recognizing revenue and expenses in proportion to the work completed during the accounting period.
6. Is retention money included in the contract revenue?
Yes, contract revenue includes retention money as per Section 57(3)(a).
7. Should incidental income like interest or dividends be deducted from contract costs?
No, incidental income such as interest, dividends, or capital gains should not reduce the contract costs, as per Section 57(3)(b).
8. Can a contractor choose any method of revenue recognition for service contracts?
No, the method depends on the contract characteristics as specified under Section 57(2).
9. Is the percentage of completion method mandatory for all construction contracts?
Yes, construction contracts must use the percentage of completion method without exception under Section 57(1).
10. Are there different recognition methods for construction and service contracts?
Yes. Construction contracts follow only the percentage of completion method, while service contracts may follow percentage of completion, project completion, or straight line method based on specific conditions.
11. What are the notified standards referred to under Section 276(2)?
These are the Income Computation and Disclosure Standards (ICDS) prescribed by the Central Board of Direct Taxes for tax computation.
12. What happens if a service contract duration is 100 days?
It will not qualify for the project completion method and must follow the percentage of completion method unless it falls under the straight line method condition.
13. Can contract costs be adjusted for gains from investments?
No, contract costs should be considered exclusive of incidental investment incomes like capital gains.
14. What is the effective date for implementation of Section 57 provisions?
These provisions are effective from 1st April, 2026.
15. Is revenue recognition under Section 57 applicable for accounting purposes too?
No, it is applicable for income tax computation and not for financial reporting under accounting standards.
16. Are multiple methods allowed within a single contract?
No, only one method based on contract type and duration should be consistently applied for a particular contract.
17. How should a taxpayer report revenue if a contract has multiple components?
Each component should be analyzed separately to determine the applicable recognition method as per Section 57.
18. What is retention money?
It is the portion of the payment withheld by the client until the contract is completed or certain conditions are met.
19. What is the rationale behind not adjusting contract costs for incidental income?
To ensure that such incomes are treated under their respective heads and not netted off against contract expenses.
20. Are the provisions under Section 57 mandatory or optional?
They are mandatory for the purpose of computing profits and gains from specified contracts under the Income Tax Act, 2025.
Section 57 of the Income Tax Act, 2025 lays down a structured and standardized approach for revenue recognition from construction and service contracts, effective from 1st April, 2026. It mandates the use of the percentage of completion method for both types of contracts, with specific exceptions for service contracts that are either short-term or involve repetitive acts.
The inclusion of retention money in revenue and exclusion of incidental income from contract costs ensures consistency and clarity in tax computation. These provisions aim to align tax reporting with economic activity, prevent revenue deferral, and maintain transparency in contract-based income reporting.
