GST on retention money is payable on the full certified value of your bill, not on what the client actually pays you. Retention is a deduction from the payment, not a reduction in the price, so under section 15(1) the value stays gross and under section 13(2) the liability is triggered when you invoice. On a ₹5 crore job with 10% retention, that is roughly ₹9 lakh (indicative) of tax funded years before the money comes back.

Every running account bill you submit has a line near the bottom that takes 5 or 10 per cent away. The work is measured, the value is certified, the client holds a slice until the defect liability period closes. That much most contractors budget for. What catches them is that the tax department does not wait with the client.

Why GST on retention money sits on the gross value

Section 15(1) of the CGST Act, 2017 says the value of a supply is “the transaction value, which is the price actually paid or payable for the said supply”. Note the last two words. Not paid: payable.

Retention does not reduce what is payable. The client owes you the certified amount; the contract simply lets them keep part of it in hand as security until you have cleared the defect liability period. The price agreed for the work is untouched. So your invoice, and the tax on it, sit on the gross figure.

That is the whole legal answer, and it is short because the statute leaves little room. The mechanics of the deduction itself (the usual percentages, the release schedule, swapping cash for an instrument) are covered in retention money in a construction contract, and how retention differs from the security deposit held against the same contract is set out in retention money vs security deposit.

When the liability is triggered

Section 13(2) fixes the time of supply of services as the earliest of the date of issue of invoice by the supplier, if the invoice is issued within the prescribed period, or the date of receipt of payment, whichever is earlier. Where no invoice is issued in time, the date the service was provided takes the place of the invoice date in that test.

You raise the RA bill and the invoice. The clock starts there. The retained 10 per cent might reach you eighteen months later, after the defect liability period runs out and after a release certificate is signed. The tax on it left your account in the month of the invoice.

This is the same timing logic that catches contractors on GST on mobilisation advance, only in reverse. There the money arrives before the work and the tax follows the money. Here the work is done, the tax follows the invoice, and the money trails both.

What the gap costs, in numbers

Take a ₹5 crore contract at 18%, billed evenly, with 10% retention released after a one-year defect liability period.

Line Amount (indicative)
Contract value billed ₹5,00,00,000
GST charged and remitted at 18% ₹90,00,000
Retention withheld at 10% ₹50,00,000
Tax attributable to the retained slice ₹9,00,000
Typical wait before release 12–24 months
Cost of carrying that ₹9 lakh at 12% a year ₹1.08–2.16 lakh

Figures are indicative and the rate applying to your contract may differ; why the rate has to be confirmed for your own scope is explained in GST on works contract. The ₹9 lakh is not lost. It is tax on value you will eventually receive. It is simply funded by you, from working capital, for as long as the client holds the principal. Add the interest cost and it becomes a real line in your bid, not an accounting curiosity.

Where contractors get hurt is stacking. Retention on one job, a delay deduction on another, and slow certification across both. The tax side of a delay cut is in GST on liquidated damages, and the recovery route when the underlying payment itself stalls is in contractor payment delay on government work.

Do not be tempted to bill net

The instinct is to invoice only what you expect to receive. Resist it on a normal retention clause.

Your client is certifying a gross value and, on government work, deducting tax at source against that gross value under the works contract TDS provisions, the mechanism covered in GST TDS on works contracts. The Explanation to section 51(1) takes the value for that deduction as the amount in the invoice, excluding the taxes, so the TDS is worked out on the gross bill you raised, retention included. An invoice raised net of retention will not agree with their certificate or their deduction, and a mismatch that sits unexplained across a financial year is what turns into a notice. Bill the gross value, show the retention as a deduction in the payment statement, and let the two documents tell the same story.

One running bill, line by line

Put the two documents side by side on a single bill and the gap is plain. Take a ₹50 lakh running account bill on an intra-state government contract, with 10% retention computed on the value of work and the same illustrative 18% rate used above.

Line on the bill Amount (indicative)
Value of work certified, before GST ₹50,00,000
GST on your invoice at 18% ₹9,00,000
Invoice total ₹59,00,000
Less GST TDS at 2% of ₹50 lakh (1% central plus 1% state) ₹1,00,000
Less retention at 10% of ₹50 lakh ₹5,00,000
Paid to you on this bill, before income-tax TDS and other recoveries ₹53,00,000

The invoice says ₹59 lakh and the GST on it is ₹9 lakh, all of it due for the month of the invoice. The ₹5 lakh of retention is not on the invoice as a reduction; it appears only in the payment working, which is exactly where it belongs. Your contract may compute retention on the bill including GST, or deduct other recoveries first, so rebuild this table from your own clause before you rely on the figures.

If the retention is never released

Sometimes it is not a wait, it is a fight. The defect liability period ends, the certificate does not come, and the money is quietly absorbed into a dispute.

The tax you paid does not come back on its own. Section 34(1) permits a credit note where the taxable value or the tax charged in the invoice is found to exceed what was payable, where goods are returned, or where the supply is “found to be deficient”. Whether an unreleased retention on a completed job fits any of those limbs depends on why it was withheld, and it is a question for your tax adviser on your own contract. What is not negotiable is the clock: section 34(2) requires the credit note to be declared by 30 November following the end of the financial year in which the supply was made, or the date of the annual return, whichever is earlier. A dispute that drifts past that date closes the option quietly. Older consolidated copies of the Act, including the CBIC edition linked above, still show an earlier September deadline; the 30 November date is the one that applies now.

Price the GST carry on retention money into your bid

Retention is a cash-flow instrument for your client and a financing cost for you, and GST makes that cost bigger than the headline percentage suggests. Price the carry into your bid rather than discovering it in month three, keep gross billing consistent with the client’s certificates, and diarise the credit note deadline on any retention that turns into a dispute.

If retention across two or three running jobs is what is squeezing the month, compare working capital and equipment finance options before you slow down work, and keep an eye on live tenders where the retention and release terms are visible in the document before you bid.

Tax positions, rates, contract terms and release schedules change, and the treatment of any deduction turns on your own contract wording. Confirm the current position with your tax adviser, the client department or an official source before deciding. Figures above are indicative.