Start with the contract method, not the invoice date
Section 57 of the Income-tax Act, 2025 governs the stated construction and service-contract profit computation. Its general method is percentage of completion, subject to the service exceptions and the notified ICDS framework referred to in subsection (1). Checked on 28 October 2026, this guide concerns current tax year 2026–27, not mechanical renumbering of FY 2025–26 / AY 2026–27 returns. The purpose is a contract-level method and revenue/cost bridge, distinct from a general overview of all ten ICDS. Income-tax Act, 2025 as amended by Finance Act 2026: section 57.
Test the service exceptions separately
Subsection (2)(a) specifies project completion for a service contract whose duration is not more than ninety days. Equality at ninety days is included. Subsection (2)(b) specifies straight-line treatment for a service contract involving an indeterminate number of acts over a specified period. Identify the actual promised service, duration, amendments and acts rather than relying on invoice milestones or a client's payment cycle. A contract failing the short-duration exception should still be screened for the separate indeterminate-acts provision. The examples isolate cases whose applicable classification is stipulated and do not decide a disputed overlap. Income-tax Act, 2025 as amended by Finance Act 2026: section 57.
Keep completion evidence and measurement evidence together
For a percentage-of-completion case, obtain the supported stage-of-completion method and the inputs permitted by the applicable standards. A cost ratio should not be fabricated from the bank balance or a gross budget including unrelated items. For a valid straight-line case, identify the specified service period and elapsed service; for project completion, prove actual completion. The statutory method is not an instruction to ignore the other applicable ICDS recognition, measurement or disclosure conditions. Billing, cash collection, contract asset/liability and taxable revenue can move on different dates. Income-tax Act, 2025 as amended by Finance Act 2026: section 57.
Retention is part of the contract-revenue population
Section 57(3)(a) includes retention money in contract revenue for the stated methods. Do not remove a contractual retention merely because a customer withholds its payment. Establish the actual contract terms, revenue amount and applicable recognition conditions; inclusion in the revenue population does not mean every gross retained amount is recognised immediately without the applicable method. Maintain gross contract revenue, the stage or period recognised, billed amounts, collections and retention receivable as separate lines. Income-tax Act, 2025 as amended by Finance Act 2026: section 57.
Do not net the specified incidental income against cost
Subsection (3)(b) states that contract costs shall not be reduced by incidental interest, dividends or capital gains. Classify that income separately under its own applicable provisions. Netting it against cost can distort both the stage-of-completion denominator and the contract profit bridge. The numerical models assume all stated contract costs and revenue inputs are otherwise valid; they do not determine the tax head, rate or availability of deductions for a particular incidental receipt. Income-tax Act, 2025 as amended by Finance Act 2026: section 57.
Reconcile book recognition and tax computation
Record the supported method, recognised contract revenue and costs, separately classified incidental income, book amounts and resulting differences. A book policy is evidence of accounting treatment, not a substitute for the tax rule. Keep current-year effects distinct from cumulative recognised amounts so a contract adjustment is not claimed again in the next year. If the applicable notified standard or contract eligibility cannot be established, resolve that issue before treating a model calculation as a return-ready amount. Income-tax Act, 2025 as amended by Finance Act 2026: section 57.
Applicable primary references
Income-tax Act, 2025 as amended by Finance Act 2026: section 57
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Ninety days is within the stated test
Assume the legally established duration of a qualifying service contract is exactly 90 days and no competing classification issue exists. It satisfies the not-more-than-90-days duration condition. A 91-day contract exceeds that boundary by one day and does not qualify through this short-duration limb alone.
Illustrative example 2: Straight-line service period
Assume a valid subsection (2)(b) service contract has ₹12,00,000 revenue over twelve equal monthly service periods, with three completed in the tax year. The isolated revenue model is ₹12,00,000 × 3/12 = ₹3,00,000, irrespective of a separately stipulated ₹5,00,000 cash advance.
Illustrative example 3: Include retention in the revenue pool
Assume otherwise valid contract revenue consists of ₹20,00,000 payable without retention and ₹2,00,000 contractual retention. The total population is ₹22,00,000. At an independently supported 40% recognition stage, model cumulative revenue is ₹8,80,000, not ₹8,00,000 from excluding retention first.
Illustrative example 4: Separate incidental interest
Assume current recognised contract revenue ₹15,00,000 and valid recognised contract cost ₹10,00,000, with incidental interest ₹1,00,000 requiring separate treatment. Contract margin is ₹5,00,000. Netting interest against cost to display ₹9,00,000 cost misstates the contract bridge; if the interest is separately taxable in the same model period with no other differences, combined income is ₹6,00,000.
Illustrative example 5: A stipulated cost-to-cost model
Assume a valid percentage-of-completion case where the applicable standards permit the supported cost-to-cost inputs: eligible costs incurred ₹4,00,000, estimated eligible total cost ₹10,00,000 and valid contract revenue ₹20,00,000. Stage is 40%; cumulative revenue is ₹8,00,000 and cumulative margin ₹4,00,000. This assumes all other recognition conditions are met.
Illustrative example 6: Separate current from cumulative revenue
Assume supported cumulative recognised revenue at the current close ₹8,00,000 and the previous close ₹5,00,000, with no other revenue movement. Current-year recognised revenue is ₹3,00,000. Entering cumulative ₹8,00,000 as an additional current-year amount would duplicate the earlier ₹5,00,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Establish tax period and scope | Current law, taxpayer and applicable notified standards |
| 2 | Read the actual contract | Services/construction, acts and amendments |
| 3 | Determine the duration | Supported legal start/end and ninety-day screen |
| 4 | Test indeterminate-acts classification | Specified service period and actual obligations |
| 5 | Select the valid measurement method | Completion, straight line or supported stage of completion |
| 6 | Reconcile contract revenue | Terms, variations and retention population |
| 7 | Verify eligible contract costs | Relevant cost classification and estimation evidence |
| 8 | Remove improper cost netting | Separate interest, dividend and capital-gain amounts |
| 9 | Bridge cumulative to current figures | Prior recognition and book-to-tax differences |
| 10 | Close the computation evidence | Method conclusion, source records and applicable disclosures |
Sixteen practitioner FAQs
1. Which period is addressed?
Current tax year 2026–27 under the 2025 Act.
2. Does the article renumber the earlier AY mechanically?
No.
3. What is the general statutory method?
Percentage of completion, subject to the stated exceptions and framework.
4. Is ninety days included in the service-duration condition?
Yes, the wording is not more than ninety days.
5. Does ninety-one days qualify through that limb alone?
No.
6. Can a longer service contract have a separate statutory method?
Check the indeterminate-acts provision separately.
7. Does an invoice milestone by itself determine contract duration?
No. Establish the actual contractual service period.
8. Is cash collection automatically recognised contract revenue?
The applicable method and conditions govern.
9. Is a cost ratio always the required completion measure?
No. Establish the permitted and supported method.
10. Must retention enter the stated contract-revenue population?
Section 57(3)(a) includes it.
11. Does that inclusion override every recognition condition?
No. Apply the method and other relevant standards.
12. May incidental interest simply reduce contract cost?
Subsection (3)(b) prohibits the stated reduction.
13. Does this guide prescribe the tax head for every incidental receipt?
No. Determine that separately.
14. Is book recognition always identical to tax recognition?
Reconcile the actual differences.
15. Should cumulative recognised revenue be claimed as new revenue every year?
No. Derive the current-period movement.
16. What makes the model return-ready?
Verified applicability, method, inputs, recognition and retained evidence.
Conclusion
Choose the applicable contract method, keep retention in contract revenue and prevent incidental interest, dividend or capital-gain income from being netted against contract cost.