GST ITC Guide · FY 2025-26

GST Input Tax Credit on
Capital Goods

When you can claim full ITC on machinery, plant, AC, generators & computers, what Section 17(5) blocks, and how to reverse credit on mixed use or sale within five years.

Updated for FY 2025-26 GST Expert Reviewed Rule 43 · Section 17(5) · 18(6)

Talk to a GST Expert See ITC table

100%Upfront on taxable use

60 moUseful-life reversal

5%/qtrReversal on sale

17(5)Blocked credits

Quick Answer

ITC on a capital good is claimed fully and upfront in the tax period it is received (Section 16) — there is no 5-year spreading. You need a valid tax invoice, the credit reflecting in GSTR-2B, and use for taxable supplies. For mixed taxable + exempt use you claim proportionately under Rule 43 over a 60-month life. Motor cars, works-contract for buildings and personal-use items are blocked under Section 17(5). Sell the asset within five years and you reverse credit at 5% per quarter of use.

Machinery (taxable) 100%

Mixed use Rule 43

Car ≤13 seats Blocked

Useful life 60 months

At a glance

ITC on Capital Goods — Decision Table

Every common capital-goods scenario, whether Input Tax Credit is available, how much, and the governing rule.

Scenario	ITC?	Amount	Rule / Section
Capital good used 100% for taxable supplies	Yes	100%	Section 16
Used 100% for exempt supplies	No	Nil	Section 17(2)
Mixed taxable & exempt use	Partial	Proportionate	Rule 43
Personal / non-business use	No	Nil	Section 17(1)
Plant & machinery, generator, AC (taxable use)	Yes	100%	Section 16
Motor car ≤13 seats (self-use)	No	Blocked	Section 17(5)(a)
Car as taxi / driving school / resale	Yes	100%	17(5)(a) exception
Works contract — factory building	No	Blocked	Section 17(5)(c)/(d)
Capital good sold within 5 years	Reverse	5%/qtr rule	Section 18(6), Rule 40(2)

GST 2.0 (eff. 22 September 2025) rationalised rates into a 5%/18% + 40% structure but did not change the ITC mechanics for capital goods. Confirm on the official GST portal before claiming.

The old 5-year spreading rule is gone

ITC on a capital good is now available in full in the period of receipt — you do not spread it over 60 monthly instalments. The 60-month "useful life" only matters later, when you compute a reversal on mixed use or on sale of the asset.

Section 16

Conditions to Claim ITC on a Capital Good

All four Section 16 conditions must be met before you take credit on machinery, equipment or any capitalised asset:

Tax invoiceValid invoice / debit note held

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Goods receivedAsset physically received

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Tax paidReflecting in GSTR-2B

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Return filedGSTR-3B for the period filed

Valid tax invoice showing supplier & recipient GSTIN, HSN and GST split
The capital good has been physically received
Supplier has paid the tax — credit appears in your GSTR-2B
You have filed your GSTR-3B for that period
The asset is used, or intended, for making taxable supplies
You do not also claim depreciation on the GST component (Sec 16(3))

Depreciation vs ITC — pick one on the tax part

Under Section 16(3), if you capitalise the GST paid on a capital good and claim depreciation on that tax amount under the Income-tax Act, you cannot also claim ITC on it. Book the asset at cost excluding GST and claim the credit instead.

Buying plant or machinery? Get your ITC eligibility checked before you claim.

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Section 18(6) · Rule 40(2)

ITC Reversal When You Sell the Asset

When you sell, transfer or scrap a capital good on which ITC was taken, GST is payable on the disposal. The amount is the higher of: (a) ITC taken minus 5% for every quarter (or part) of use, or (b) GST on the transaction value of the sale. The useful life is taken as 60 months (5 years); after five years there is no reversal.

Worked example — a machine bought for ₹10,00,000 + ₹1,80,000 GST (18%), used for 3 years (12 quarters) and then sold for ₹4,00,000:

(a) ITC reversal — 5%/quarter

ITC originally taken₹1,80,000

Less: 12 qtrs × 5% = 60%−₹1,08,000

Reversal amount₹72,000

(b) GST on sale value @ 18%

Sale value₹4,00,000

GST @ 18%₹72,000

Tax on sale₹72,000

You pay the higher of the two — here both work out to ₹72,000, so ₹72,000 is payable on the sale. If the sale price were higher, (b) would apply; if the asset were older, (a) would shrink.

TaxClue Insight

The same 60-month clock drives Rule 43 too. If a machine first used only for taxable supplies later starts serving exempt supplies, you reverse the ITC attributable to its remaining useful life — so track the acquisition date and usage of every capitalised asset.

Section 17(5)

Blocked Credits — Common Capital Goods

Section 17(5) blocks ITC on certain capital goods even when they are bought for business. GST 2.0 did not touch this list — these blocks continue in FY 2025-26.

Capital Good	ITC?	Reason
Industrial machinery / manufacturing plant	Yes	Used for taxable production — Section 16
Air conditioner / generator / UPS (business premises)	Yes	Not blocked; supports taxable supply
Computers, laptops, servers	Yes	Business use — eligible
Goods vehicles / trucks	Yes	Transport of goods — not blocked
CCTV & security equipment	Yes	Business-premises security
Motor car / SUV ≤13 seats (self-use)	No	Section 17(5)(a) — regardless of business use
Works contract — factory / office building	No	Section 17(5)(c)/(d) — immovable property
Aircraft / vessel for personal use	No	Section 17(5)(aa)/(ab)

Cars used as taxis, for driving instruction, or for onward supply escape the block — full ITC then applies.

ITC generally allowed on

Plant, machinery & manufacturing equipment
Office AC, generator, UPS, servers
Goods carriers & delivery trucks
Furniture, fixtures & CCTV for business use

ITC generally blocked on

Cars/SUVs (≤13 seats) for own use
Civil construction of a building
Assets for personal / non-business use
Membership, club & employee-benefit items

Not sure if an asset is blocked under 17(5)? Get it confirmed before you file.

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Stay compliant

Capital-Goods ITC Compliance Checklist

Getting capital-goods ITC right is as much record-keeping as it is law. Keep this covered each year:

Maintain a fixed-asset register with invoice date & GST
Match every credit against GSTR-2B before claiming
Book assets net of GST where ITC is taken (no double benefit)
Track taxable vs exempt use for Rule 43 assets
Compute reversal on any sale within 60 months
Report reversals in GSTR-3B and reconcile in GSTR-9
Flag Section 17(5) blocked purchases at entry
Pay attention to the 180-day supplier-payment rule

180-day payment rule applies here too

If you do not pay the supplier (value + GST) within 180 days of the invoice, ITC already taken on the capital good must be reversed with interest, and re-claimed only when you pay. This bites on large capital purchases bought on credit.

Government sourcesRates & notifications: gst.gov.in · CBIC GST: cbic-gst.gov.in · Claim conditions: Section 16, CGST Act 2017 · Mixed-use reversal: Rule 43, CGST Rules · Sale reversal: Section 18(6) & Rule 40(2)/44(6) · Blocked credits: Section 17(5), CGST Act 2017

Frequently Asked Questions

Claiming ITC

When is ITC on capital goods available under GST?

ITC on a capital good is available in the same tax period in which the asset is received and the credit reflects in your GSTR-2B. You must hold a valid tax invoice, have received the goods, the supplier must have paid the tax, and the asset must be used (or intended) for taxable supplies. There is no requirement to spread the credit over multiple years — full ITC is available upfront under Section 16.

Is ITC on capital goods claimed fully or spread over 5 years?

Fully and upfront. The old idea of spreading capital-goods ITC over 60 monthly instalments no longer applies — you claim 100% of the eligible GST in the tax period of receipt, subject to Section 16 conditions. The 60-month (5-year) useful life is used only later to compute a reversal on mixed use or on sale of the asset.

What are the conditions to claim ITC on capital goods?

Four Section 16 conditions must all be satisfied: (1) you hold a valid tax invoice or debit note; (2) you have received the capital good; (3) the supplier has paid the tax to the government (credit appears in GSTR-2B); and (4) you have filed your GSTR-3B for the period. The asset must be used for taxable supplies, and you must not also claim income-tax depreciation on the GST component.

Can I claim both ITC and depreciation on a capital good?

Not on the GST portion. Under Section 16(3), if you capitalise the GST paid and claim depreciation on that tax amount under the Income-tax Act, you cannot also claim ITC on it. Choose one: either book the asset at cost excluding GST and claim the credit, or capitalise the GST and take depreciation on it.

Mixed & Exempt Use

How is ITC calculated when a capital good is used for both taxable and exempt supplies?

Under Rule 43. The common credit on the capital good is spread notionally over 60 months of useful life, and the portion attributable to exempt supplies each tax period is reversed based on the ratio of exempt turnover to total turnover. Only the taxable-supply portion of the credit is retained.

What happens to ITC if a capital good is later used for exempt supplies?

If an asset first used only for taxable supplies later starts serving exempt supplies, the ITC attributable to its remaining useful life (out of 60 months) is brought into the Rule 43 common-credit pool and reversed proportionately going forward. You track the acquisition date to work out the remaining life.

Is ITC available on capital goods used partly for personal use?

Only the business portion is allowed. ITC attributable to personal or non-business use of a capital good must be reversed under Section 17(1). If an asset is used entirely for personal purposes, no ITC is available at all.

Reversal on Sale

Do I have to reverse ITC when I sell a capital good?

Yes. On sale of a capital good on which ITC was claimed, you pay the higher of: (a) ITC taken reduced by 5% for every quarter (or part) of use, or (b) GST on the transaction value of the sale. This is under Section 18(6) read with Rule 40(2)/44(6), using a 60-month useful life. After five years of use, there is no reversal obligation.

How is the 5% per quarter reversal calculated?

Take the original ITC and reduce it by 5% for every quarter, or part of a quarter, from the invoice date to the date of sale. Example: ITC of ₹1,80,000 on a machine sold after 12 quarters (3 years) is reduced by 60% (12 × 5%), leaving ₹72,000 as the reversal under limb (a). You then compare this with the GST on the sale value and pay whichever is higher.

Is ITC reversal needed if I sell a machine after 5 years?

No reversal under the 5%-per-quarter mechanism, because 60 months (20 quarters × 5%) exhausts the credit. However, you still pay GST on the transaction value of the sale as a normal taxable supply — limb (b) of Section 18(6) continues to apply on the sale price.

Blocked Credits

Which capital goods are blocked from ITC under Section 17(5)?

Section 17(5) blocks ITC on motor cars and other vehicles with seating capacity up to 13 persons for own use (unless used as taxis, for driving instruction or for further supply), aircraft and vessels for personal use, works-contract services for construction of an immovable property other than plant and machinery, and any goods used for personal consumption. These blocks apply even when the purchase is for business.

Can a business claim ITC on an air conditioner or generator?

Yes. Air conditioners, generators, UPS systems and similar equipment installed at a place of business (factory, office or shop) are eligible for ITC, provided the business makes taxable supplies. They are not in the Section 17(5) blocked list. ITC gets complicated only if the item serves a building used for personal purposes.

Is ITC available on factory or office building construction?

No. ITC on works-contract services and materials used for constructing an immovable property — including a factory or office building — is blocked under Section 17(5)(c)/(d), except for plant and machinery. Cement, steel and bricks capitalised into the building do not qualify, but plant and machinery embedded in the building (such as a cold-storage chamber or process chimney) remains eligible.

Can I claim ITC on a car bought for my business?

Generally no. A motor car or SUV with seating capacity up to 13 persons is blocked under Section 17(5)(a), even if used for business travel. The exceptions are cars used for passenger transport (taxi), for imparting driving training, or for further supply (a dealer's stock) — in those cases full ITC is allowed. Goods carriers and trucks are not blocked.

GST 2.0 & General

Did GST 2.0 change ITC rules on capital goods?

No. The GST 2.0 rationalisation effective 22 September 2025 restructured goods and services rates into a two-slab system (5%/18% plus a 40% demerit rate). It did not change the mechanics of claiming or reversing ITC on capital goods — Section 16 conditions, Rule 43 mixed-use reversal, Section 18(6) sale reversal and the Section 17(5) blocked list all continue as before.

Does the 180-day payment rule apply to capital goods?

Yes. If you do not pay the supplier the invoice value plus GST within 180 days of the invoice date, ITC already claimed on the capital good must be reversed along with interest, and can be re-claimed only after you make the payment. This is easy to miss on large capital purchases bought on extended credit.

Done-for-you

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