ITC Reversal Rules under explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rules 42 and 43 of the CGST Rules require reversal of input tax credit when inputs or capital goods are used partly for taxable and partly for exempt supplies or personal use.
Rule 42 — inputs and input services
- Applies when inputs/input services are used for both taxable and exempt supplies
- ITC attributable to exempt supplies and personal use must be reversed
- Computed monthly and finalised annually based on the exempt-to-total turnover ratio
Rule 43 — capital goods
- Applies to capital goods used for both taxable and exempt supplies
- ITC is spread over 60 months (5 years)
- The portion attributable to exempt supplies is reversed each month
Why it matters
Incorrect ITC claims attract interest at 24% and penalties, so businesses with exempt and taxable supplies must apply Rules 42/43 carefully.
Frequently Asked Questions
What is Rule 42 of GST?
It requires reversal of ITC on inputs/input services used partly for exempt supplies or personal use.
What is Rule 43 of GST?
It requires reversal of ITC on capital goods used for exempt supplies, spread over 60 months.
When must ITC be reversed?
When inputs/capital goods are used for exempt supplies or non-business purposes.
What is the interest on wrong ITC?
24% per annum on the undue or excess ITC claimed.
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