Rule 38 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.
Rule 38 is the procedure for a banking company or a financial institution, including a non-banking financial company, that chooses the option in section 17(4) instead of the ordinary apportionment under section 17(2). It lists what is not availed, what is availed in full, and then fixes the admissible credit on the rest at fifty per cent., with the balance reversed in FORM GSTR-3B.
This article follows the Central Goods and Services Tax Rules, 2017 as amended up to 31 October 2025 in the compilation consulted; notifications issued after that date should be checked.
A banking company or financial institution, including a non-banking financial company, engaged in supplying services by way of accepting deposits or extending loans or advances, that chooses not to comply with section 17(2) under the option in section 17(4), follows rule 38. It does not avail credit on non-business inputs or on the supplies in section 17(5); it avails credit on the inputs and input services in the second proviso to section 17(4); and fifty per cent. of the remaining amount of input tax is admissible, the balance being reversed in FORM GSTR-3B.
The section behind the rule
Rule 38 opens by naming its source: a banking company or financial institution "that chooses not to comply with the provisions of sub-section (2) of section 17, in accordance with the option permitted under sub-section (4) of that section". Section 17(2) is the apportionment of credit between taxable and exempt supplies; section 17(4) is the option; see section 17 of the CGST Act: blocked input tax credit and, on the option itself, the fifty per cent. option for banks and NBFCs under section 17(4). If your institution is deciding whether to take the option, our input tax credit reconciliation service can assess it.
Who the rule covers
"A banking company or a financial institution, including a non-banking financial company, engaged in the supply of services by way of accepting deposits or extending loans or advances".
Two conditions: the entity must be a banking company or financial institution (including an NBFC), and it must be engaged in the supply of services by way of accepting deposits or extending loans or advances. Then it must have chosen not to comply with section 17(2) under the section 17(4) option.
The three clauses
Clause (a): what is not availed. The company or institution "shall not avail the credit of, -"
(i) the tax paid on inputs and input services that are used for non-business purposes; and
(ii) the credit attributable to the supplies specified in sub-section (5) of section 17.
Clause (b): what is availed. It "shall avail the credit of tax paid on inputs and input services referred to in the second proviso to sub-section (4) of section 17 and not covered under clause (a)".
Clause (c): fifty per cent. of the remainder. "Fifty per cent. of the remaining amount of input tax shall be the input tax credit admissible to the company or the institution and the balance amount of input tax credit shall be reversed in FORM GSTR-3B."
Clause (d). Shown as omitted ("[****]"). The footnotes record that the words "and the balance amount of input tax credit shall be reversed in FORM GSTR-3B" in clause (c) were substituted, and clause (d) omitted, by Notification No. 19/2022 - CT dated 28.09.2022, with effect from 01.10.2022. The earlier wording in the footnotes is not law and is not used here. A mention of "Form GSTR 2" in clause (a)(ii) was also omitted by the same notification.
How the clauses fit together
| Step | Clause | Treatment of the input tax |
|---|---|---|
| 1 | (a)(i) | Tax on inputs and input services used for non-business purposes: not availed |
| 2 | (a)(ii) | Credit attributable to the supplies specified in section 17(5): not availed |
| 3 | (b) | Tax on the inputs and input services in the second proviso to section 17(4), not covered by clause (a): availed |
| 4 | (c) | Remaining amount of input tax: fifty per cent. admissible; balance reversed in FORM GSTR-3B |
The "remaining amount" in clause (c) is what is left after clauses (a) and (b) have been applied. The rule does not give a formula beyond the fifty per cent.
Who does what
| Who | What | Form | Clause |
|---|---|---|---|
| Banking company, financial institution or NBFC with the option | Does not avail credit on non-business inputs and input services | Not applicable | (a)(i) |
| Same | Does not avail credit attributable to the supplies in section 17(5) | Not applicable | (a)(ii) |
| Same | Avails credit on the inputs and input services in the second proviso to section 17(4) | Not applicable | (b) |
| Same | Treats fifty per cent. of the remaining input tax as admissible and reverses the balance | FORM GSTR-3B | (c) |
A worked example
The amounts below are illustrative arithmetic only; the institution is invented.
Eastern Mutual Finance Limited, an invented non-banking financial company, supplies services by way of extending loans. It has chosen the option in section 17(4). In a month, it has paid input tax on its inputs and input services as follows: a portion used for non-business purposes, a portion attributable to the supplies in section 17(5), a portion covered by the second proviso to section 17(4), and a remaining portion of ten lakh rupees.
The first two portions are not availed (clause (a)). The third is availed (clause (b)). Of the remaining ten lakh rupees, fifty per cent., that is five lakh rupees, is admissible as input tax credit (clause (c)). The other five lakh rupees is reversed in FORM GSTR-3B.
Points to watch
- The option is the gate. Rule 38 applies only to an institution that has chosen not to comply with section 17(2) under section 17(4). The rule does not describe how the option is exercised; read section 17(4).
- "Remaining amount". Clause (c) acts on what clauses (a) and (b) leave.
- The balance goes back. The reversal is in FORM GSTR-3B.
- Clause (d) is omitted. Nothing is to be read into it.
- Reconciliation. Reversals under this rule need to match the books; for returns, see rule 61 of the CGST Rules, 2017: form and manner of furnishing of return.
Need help with the banking option?
Credit for a bank or NBFC turns on the right classification of every input and input service and on reversing the balance in the right return. Our team reviews the classification, the computation and the FORM GSTR-3B reversal for you. See our input tax credit reconciliation service.
Key takeaways
- Rule 38 applies to a banking company or financial institution, including an NBFC, that has chosen not to comply with section 17(2) under the option in section 17(4).
- Clause (a): no credit on non-business inputs and input services, or on the supplies in section 17(5).
- Clause (b): credit on inputs and input services in the second proviso to section 17(4), not covered by clause (a).
- Clause (c): fifty per cent. of the remaining input tax is admissible; the balance is reversed in FORM GSTR-3B.
- Clause (d) is omitted.
Read next
- Rule 40 of the CGST Rules, 2017: manner of claiming credit in special circumstances
- Rules 41 and 41A of the CGST Rules, 2017: transfer of credit
- The fifty per cent. option for banks and NBFCs: section 17(4)
- Rule 36: which documents support a credit claim
Disclaimer: Based on the Central Goods and Services Tax Rules, 2017 and the GST Acts as amended up to 31 October 2025 in the compilation consulted, read with the Finance Act, 2026 where this article says so, as consulted on 2 October 2026. Notifications, circulars and amendments issued after that date, the forms on the common portal and the way the tax authorities apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.