The usual deductions on a works-contract bill
| Deduction | What it is | What decides it |
|---|---|---|
| Retention / security deposit | A share of each bill held back until the defect liability period ends | Contract clause; often 5–10% |
| Income-tax TDS | Tax the client deducts when paying a contractor: 1% for individuals and HUFs, 2% for others (section 194C of the Income-tax Act, 1961, carried into the Income-tax Act, 2025 from 1 April 2026) | Contractor’s status, individual/HUF or other |
| GST TDS | Government departments and other notified bodies deduct 2% (1% CGST + 1% SGST, or 2% IGST) under section 51 of the CGST Act when the taxable value under a contract exceeds ₹2.5 lakh | Who the client is and the contract value |
| Labour welfare cess | Cess under the Building and Other Construction Workers’ Welfare Cess Act, 1996, at 1% of the cost of construction; on government works it is typically deducted from the contractor’s bills | Client type and state practice |
| Advance recovery | Mobilisation or machinery advance recovered in instalments from running bills | Contract |
| Other recoveries | Material issued by the client, liquidated damages for delay, hindrance or rework charges | Contract and site records |
The first four are statutory or near-statutory. The last two are commercial and come straight out of your site records, which is why they are the ones most often missed on a bill.
Worked example: one ₹50 lakh RA bill
Take one monthly RA bill for work done this period, value ₹50,00,000 before GST, on a government contract. The percentages below are assumptions for illustration, not advice.
| Item | Basis (assumed) | Amount (₹) |
|---|---|---|
| Work done this bill (excl. GST) | Measured quantities × contract rates | 50,00,000 |
| Retention / security deposit | 5% of the bill | − 2,50,000 |
| Income-tax TDS | 2% of the bill | − 1,00,000 |
| GST TDS | 2% (1% CGST + 1% SGST) | − 1,00,000 |
| Labour cess | 1% of the bill | − 50,000 |
| Mobilisation advance recovery | 10% of the bill | − 5,00,000 |
| Net cash received (before GST) | 40,00,000 |
So a ₹50 lakh bill delivers ₹40 lakh, which is 80%. The other ₹10 lakh is not all lost. ₹2.5 lakh of retention comes back after the defect liability period. ₹2 lakh of TDS is credited against your tax liabilities. ₹5 lakh of advance is money you already received. Only the ₹50,000 cess is a true cost, and only if your rates were inclusive of it. But you carry the cash gap until each item comes back.
The retention alone adds up. If you bill ₹50 lakh every month, ₹2.5 lakh × 12 = ₹30 lakh of your money is sitting with the client at the end of a year, before any of it is released.
Why contractors get these wrong
- The deduction rates are typed by hand on each bill, so a client’s stack is never the same twice.
- Previous-bill quantities do not match the measurement book, so the client rejects the bill and the cash slips another month.
- Advance recovery is forgotten on one bill and over-recovered on the next.
- Retention is not tracked separately by project, so nobody remembers to claim its release.
- TDS and GST TDS deducted by the client are not matched with what shows in your tax credit statements, so credit goes unclaimed.
A checklist before you submit the bill
- Quantities this bill = quantity to date − quantity in earlier bills, item by item, against the BOQ.
- The client’s deduction stack from the agreement is written down once and applied the same way every month.
- Advance recovery schedule checked against what has already been recovered.
- Retention booked in its own ledger by project, with the release date from the contract.
- GST invoice values, HSN/SAC and the client’s GSTIN checked, so a clerical error does not delay payment.
- Net cash expected is worked out before the bill goes in, and fed into your cash-flow plan.
Setting this up in software
In Construction ERP, client RA bills are raised from BOQ items and measured quantities, and retention entries, recoveries and releases are tracked against the bill, with advances and back-charges recovered from subcontractor RA bills the same way. Whatever system you use, run one real client’s deduction stack through it end to end before you trust it. If it cannot reproduce the net payable on your last bill, it will not help on the next one.
You can test your own numbers with the construction profit calculator, which shows retention and cash profit separately, or start from the free contractor payment sheet.
Check before you rely on this
This is general information, not tax advice. Check the deductions against your agreement, read the provisions on the GST portal and the income-tax portal, and have your CA confirm the rates for your client and state.
Frequently asked questions
Is retention the same as security deposit?
The terms are often used interchangeably, but some agreements have both: a security deposit taken at award and a retention held from each running bill. Read your agreement and track each separately.
Does GST TDS apply to every contract?
No. It applies to specified deductors such as government departments and notified bodies, and where the taxable value of supplies under the contract exceeds ₹2.5 lakh. Most small private contracts fall outside it.
Who pays the BOCW labour cess on a project?
It depends on the client. On government works it is typically deducted from the contractor’s bills, and on private projects it is usually collected from the owner at plan approval.
Practical, India-specific guides from the team behind WebSoftOS cloud ERP, by Ridhi Technologies, Zirakpur, Punjab.