Retention, TDS, GST and Other Deductions on Bills

A contractor raises an invoice of Rs. 11,80,000 and the bank shows a credit of Rs. 11,00,000. A first-time owner deducts nothing, then discovers at year end that the income-tax department expected TDS from him. Both problems have the same cure: knowing exactly which deductions apply to a construction bill, at what rate, computed on what base, and where each rupee eventually goes. This lesson maps every common deduction on Indian bills. Everything tax-related here is commonly applied practice, not advice — rates change with Finance Acts and project types differ, so confirm your specific case with a CA.

Retention money: the deduction that comes back

Retention (also called security deposit when deducted from bills) is a percentage withheld from every RA bill as security for quality. Common private-sector practice: 5 per cent of each bill's work value, sometimes 10 per cent with a cap. Standard release: half at virtual completion, half after the defect liability period (DLP) — commonly 6 to 12 months on residential work. Public-works practice differs in structure: under CPWD conditions of contract, a performance guarantee of 5 per cent of the tendered value is furnished at award, and a security deposit of 2.5 per cent of the gross amount of each running bill is deducted separately — always read the actual contract, because departments and older manuals vary.

Two disciplines make retention painless:

• Track it. A retention tracker (one line per bill: amount withheld, cumulative, release events with dates) prevents both classic failures — the client who forgets to release after DLP, and the contractor who cannot prove what was withheld. Our downloadable tracker below does exactly this.
• Price it. Retention is working capital. On a Rs. 2 crore contract at 5 per cent, Rs. 10,00,000 sits with the client for roughly 15 months (from mid-project to DLP end). At a 12 per cent cost of funds that is 10,00,000 x 0.12 x 1.25 = Rs. 1,50,000 — about 0.75 per cent of contract value that must exist inside the contractor's margin. A bidder who ignores this discovers it in the overdraft.

Income-tax TDS: the 194C regime

Anyone paying a contractor (beyond individuals building purely for personal use who fall outside the thresholds and conditions — check applicability) must deduct income tax at source on works-contract payments. As currently applied:

• 1 per cent where the payee is an individual or HUF; 2 per cent for firms, LLPs and companies.
• Triggered when a single payment exceeds Rs. 30,000 or the year's aggregate to that payee exceeds Rs. 1,00,000.
• 20 per cent if the payee gives no PAN.
• Computed on the work value excluding GST when GST is shown separately on the invoice.
• The new Income-tax Act, 2025 (in force from 1 April 2026) renumbers these provisions — the familiar "Section 194C" label is retired — but the rates and thresholds carry over as currently applied. Confirm current numbers with your CA.

TDS is not a cost: the contractor claims it as prepaid tax. But it is cash gone from this bill, and the deductor must actually deposit it and file returns so the credit appears in the contractor's Form 26AS. A contractor should reconcile 26AS quarterly — TDS deducted but never deposited is a real and common leak.

GST on works contracts

Under GST, a works contract (construction with material and labour together) is treated as a supply of services. As applied after the September 2025 rate rationalisation: the standard rate on works contract services is 18 per cent with input tax credit for the contractor; certain notified government infrastructure works attract 5 per cent; and RERA-registered developers selling under-construction homes operate under the separate real-estate scheme (1 per cent affordable / 5 per cent other residential, without ITC, with its 80 per cent registered-procurement rule). A small labour-only thekedar below the services registration threshold (Rs. 20 lakh turnover in most states) is typically unregistered and bills without GST. Project types differ enormously here — this is the single most important item to confirm with a CA before contract signing, because a wrong GST assumption of even a few per cent dwarfs every other deduction on this page.

On government contracts, the payer additionally deducts GST TDS of 2 per cent on payments where the contract value exceeds Rs. 2.5 lakh (credited to the contractor's GST cash ledger).

BOCW cess and the rest

• BOCW cess: 1 per cent of the cost of construction, levied under the Building and Other Construction Workers Welfare Cess Act. On government works it is routinely deducted from bills; on private projects the liability sits with the employer/developer and is often collected through bills — check who bears it in your contract.
• Recoveries: mobilisation/material advance instalments, free-issue material debits, client-supplied water and electricity (commonly 0.5–1 per cent of work value when the client provides them), rework and debris-removal debits, and liquidated damages if levied. Each must appear as a named line on the bill — never as an unexplained round adjustment.

Worked example: one bill, every deduction

Work value Rs. 10,00,000 (excluding GST), contractor is a private limited company. Client is a private developer; water and electricity are the contractor's own arrangement, advance already fully recovered.

If this were a government contract, add GST TDS: 2 per cent of A = Rs. 20,000 more withheld, net Rs. 10,80,000. Where each rupee goes: retention returns after DLP; income-tax TDS becomes a 26AS credit; GST TDS lands in the GST cash ledger; the cess funds construction-worker welfare and does not return.

How this protects your money in a dispute

Deductions are where silent losses hide, on both sides. For the contractor: a bill-wise deduction ledger plus quarterly 26AS reconciliation catches TDS that was deducted but never deposited, retention over-withheld beyond the contract percentage, and advances recovered twice. For the owner or developer: deducting TDS and cess correctly is not optional courtesy — the deductor carries the default, interest and penalty exposure, not the contractor. And for both: when a relationship sours, the retention tracker with its named release events is what turns "release my security deposit" from a shouting match into a diary entry. Every deduction named, computed on a stated base, and ledgered — that is the whole game.

Common mistakes

• TDS on the GST-inclusive amount — over-deducts 0.36 per cent of every bill (2 per cent of the 18 per cent); it compounds.
• Retention on the invoice total instead of work value — read the clause; the base matters.
• No retention release diary. DLP ends, nobody notices, and the money sits until someone fights for it.
• Round-figure "adjustments" on bills with no named basis — every rupee deducted needs a line and a reason.
• Assuming one GST rate fits all projects. An 18 per cent works-contract assumption applied to a developer's 5 per cent no-ITC scheme (or vice versa) is a contract-breaking error; confirm before pricing, not after.

What comes next

You can now build a bill from measurement to net cash. One event remains: the last bill of all, where retention, variations, reconciliations and every loose thread meet — the final account and project closure.