GST Compliance Guide · FY 2025-26

GST Input Tax Credit Rules —
Claim It Right, Keep It Safe

The four Section 16 conditions, GSTR-2B matching, Section 17(5) blocked credits, the 180-day payment rule and the 30 November time limit — everything you need to claim ITC without a demand notice.

Updated for FY 2025-26 GST Expert Reviewed Section 16 & 17(5)

Get an ITC Review See blocked credits

4Section 16 conditions

30 NovITC claim deadline

180 daysPay supplier or reverse

18%Interest on wrong ITC

Quick Answer

Input Tax Credit (ITC) lets a registered business offset the GST paid on purchases against the GST it collects on sales. Under Section 16(2) you can claim ITC only when four conditions are met: (1) a valid tax invoice/debit note, (2) goods or services actually received, (3) the invoice appears in your auto-drafted GSTR-2B (supplier filed & paid), and (4) you have filed your GSTR-3B. Section 17(5) lists blocked credits that can never be claimed, and ITC must be taken by 30 November of the following financial year.

Match against GSTR-2B

Time limit 30 Nov

Pay supplier in 180 days

Wrong-ITC interest 18%

The gateway

Section 16(2) — Four Conditions for ITC

All four conditions must be satisfied together for the same invoice. Fail even one and the ITC is not available for that period.

Valid invoiceTax invoice / debit note under Sec 31

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Goods receivedSupply actually received by you

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In GSTR-2BSupplier filed GSTR-1 & paid tax

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GSTR-3B filedYou claim it in your own return

#	Condition	What it means in practice	Status
1	Valid tax invoice / debit note	Invoice carries GSTIN, HSN/SAC, tax amount & date per Section 31	Must satisfy
2	Goods or services received	Delivery complete; last lot rule applies for goods received in instalments	Must satisfy
3	Tax paid & reflected in GSTR-2B	Supplier filed GSTR-1/3B; invoice auto-populates in your GSTR-2B (Rule 36(4))	Must satisfy
4	Recipient has filed GSTR-3B	ITC is availed only in a period for which you file GSTR-3B	Must satisfy

Fifth statutory condition: pay the supplier within 180 days of the invoice or reverse the ITC (see below). Legal basis: Section 16(2), CGST Act 2017.

ITC time limit — 30 November of the next financial year

Under Section 16(4), ITC for a financial year must be claimed by 30 November of the following FY or the date of filing the annual return (GSTR-9), whichever is earlier. So ITC on FY 2025-26 invoices must be taken by 30 November 2026. Miss it and the credit lapses permanently — it cannot be recovered.

Section 17(5)

Blocked Credits — ITC You Can Never Claim

These credits are blocked by law even when the expense is genuinely for business. Claiming blocked ITC is one of the most common audit triggers, so classify each purchase carefully.

Expense / scenario	ITC	Section	Notes
Motor vehicles (cars, SUVs) — general use	Blocked	17(5)(a)	Allowed only for dealers, passenger transport & driving schools
Trucks, buses, tempos for goods transport	Eligible	17(5)(a) proviso	Vehicles for transport of goods are outside the block
Food, beverages & outdoor catering	Blocked	17(5)(b)(i)	Employee meals/canteen; allowed if obligatory under law or if it is your line of business
Rent-a-cab, health & life insurance for staff	Blocked	17(5)(b)	Allowed where the employer is legally obligated to provide it
Club, health & fitness membership	Blocked	17(5)(b)	No general exception
Works contract for immovable property	Blocked	17(5)(c)	Exception: further supply of works-contract service
Construction of own building / office	Blocked	17(5)(d)	Civil construction, extension or renovation of immovable property
Goods/services for personal consumption	Blocked	17(5)(g)	Anything not used for business — personal use, gifts, free samples
Computers, furniture, ACs for business	Eligible	Section 16	Movable business assets — full ITC available

Legal basis: Section 17(5), CGST Act 2017. GST 2.0 rate rationalisation (22 Sep 2025) did not change the blocked-credit list.

The office renovation trap

ITC on constructing or civil-renovating your own premises is blocked under 17(5)(d), but ITC on movable items inside it — desks, ACs, computers, electrical fixtures — stays eligible under Section 16. The test is whether the spend creates or improves the immovable structure itself.

Not sure if a credit is blocked or eligible? Get it checked before you file.

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Rule 36(4)

GSTR-2B Matching — Claim Only What Reflects

Since ITC is now availed strictly on the auto-drafted GSTR-2B statement, an invoice that your supplier has not reported does not give you credit — no matter how valid your own invoice is. Reconcile every month before filing GSTR-3B.

Download GSTR-2BAuto-drafted on the 14th each month

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Match to purchasesInvoice-by-invoice reconciliation

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Chase mismatchesAsk supplier to file / amend GSTR-1

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Claim in GSTR-3BOnly the matched, eligible ITC

GSTR-2B mismatch = demand-notice risk

Claiming ITC that is not in your GSTR-2B invites a demand under Section 73/74 with 18% interest and penalty. If a supplier has not filed, hold the credit until the invoice appears; mismatches uncorrected by 30 November of the next FY are lost forever.

180-day rule

Pay Your Supplier Within 180 Days

If you do not pay the supplier the invoice value plus tax within 180 days of the invoice date, the ITC already claimed must be added back to your output liability with 18% interest. You can re-claim it in the month you finally make the payment — the credit is only deferred, not lost.

ITC claimed on a ₹1,00,000 purchase

Taxable value₹1,00,000

GST @ 18%₹18,000

ITC availed₹18,000

Credit taken₹18,000

Supplier unpaid past 180 days

ITC to reverse₹18,000

Interest @ 18% p.a.Added

Re-claim when paidAllowed

Net impactReverse + 18%

Rules 42, 43 & 86B

Proportionate Reversal & the 1% Cash Rule

If you make both taxable and exempt supplies you cannot keep full ITC. Rule 42 reverses common ITC on inputs/services in the ratio of exempt turnover to total turnover; Rule 43 does the same for capital goods, spread over 60 months.

Rule 42 — inputs & services

Applies to inputs and input services
Reversal = common ITC × (exempt ÷ total turnover)
Computed provisionally every month
Finalised in the annual return
Interest at 18% on any short reversal

Rule 43 — capital goods

Applies to plant, machinery & equipment
Credit life spread over 60 months (5 years)
Monthly proportionate reversal
Based on exempt-supply ratio
Reported through GSTR-3B

Rule 86B — the 1% cash-payment rule

A business with monthly taxable turnover above ₹50 lakh must discharge at least 1% of its output tax in cash rather than fully through ITC. Exemptions apply if promoters paid over ₹1 lakh income tax in either of the last two years, received a large GST refund, or are a government body — a rule aimed at curbing fake-ITC chains.

Stay safe

Monthly ITC Compliance Checklist

Download GSTR-2B on the 14th
Reconcile 2B against purchase register
Hold ITC for invoices not in 2B
Segregate blocked credits (17(5))
Reverse Rule 42/43 proportionate ITC
Track 180-day supplier payments
Confirm invoices carry valid GSTIN & HSN
Claim only matched, eligible ITC in GSTR-3B
Ensure Rule 86B 1% cash where it applies
Claim FY 2025-26 ITC before 30 Nov 2026
Document reasons for any reversal
Keep tax invoices for audit

Facing an ITC mismatch, reversal or Section 17(5) query? Get a CA review.

Get an ITC Review →

Government sourcesITC conditions & blocked credits: gst.gov.in · CBIC GST: cbic-gst.gov.in · Statutory basis: Sections 16 & 17(5), CGST Act 2017 · Reversal & matching: Rules 36(4), 42, 43 & 86B, CGST Rules 2017

Frequently Asked Questions

Basics & Conditions

What is Input Tax Credit (ITC) under GST?

ITC is the credit a registered business gets for the GST it pays on business purchases (inputs, input services and capital goods), which it can set off against the GST it collects on its sales. It removes the cascading of tax, so GST is effectively paid only on the value added at each stage. Only registered persons using goods/services for business can claim it.

What are the four conditions to claim ITC under Section 16?

Under Section 16(2): (1) you hold a valid tax invoice or debit note, (2) you have actually received the goods or services, (3) the tax has reached the government and the invoice appears in your GSTR-2B, and (4) you have filed your GSTR-3B return. A fifth condition requires you to pay the supplier within 180 days or reverse the credit. All conditions must be satisfied for the same invoice.

What is the time limit to claim ITC?

Under Section 16(4), ITC for a financial year must be claimed by 30 November of the following financial year, or the date of filing the annual return (GSTR-9), whichever is earlier. For FY 2025-26 invoices, the deadline is 30 November 2026. ITC not claimed by then lapses permanently and cannot be recovered.

Can a composition dealer claim ITC?

No. A taxpayer registered under the composition scheme pays tax at a flat rate on turnover and cannot claim any Input Tax Credit, nor can the buyer claim ITC on purchases from a composition dealer. If you need ITC, you must be a regular registered taxpayer rather than a composition dealer.

GSTR-2B & Matching

What is GSTR-2B and why does it matter for ITC?

GSTR-2B is a static, auto-drafted ITC statement generated on the 14th of each month from your suppliers' GSTR-1 filings. Under Rule 36(4), you can claim ITC only for invoices that reflect in your GSTR-2B. It is the single reference for how much credit you are entitled to, so monthly GSTR-2B reconciliation is essential before filing GSTR-3B.

What if my GSTR-2B shows less ITC than my supplier invoiced?

A shortfall usually means the supplier has not filed GSTR-1 or made an error. Do not claim the missing ITC in GSTR-3B until it appears in GSTR-2B, since claiming un-reflected credit risks a demand under Section 73/74. Ask the supplier to file or amend their GSTR-1, and if they remain non-compliant, recover the tax amount from them. Uncorrected mismatches lapse after 30 November of the next year.

Can I claim ITC that is not showing in GSTR-2B?

No, not safely. The law ties ITC to reflection in GSTR-2B, so claiming credit that is not in your 2B commonly triggers an ITC-mismatch demand notice with 18% interest and penalty. Wait until the supplier files and the invoice appears, then claim it in that month's GSTR-3B (subject to the 30 November time limit).

Blocked Credits (17(5))

Can I claim ITC on a car bought for business?

Generally no. Motor vehicles for passenger use (cars, SUVs) are blocked under Section 17(5)(a), along with their insurance, servicing and repairs. ITC is allowed only if you are a motor-vehicle dealer, use the vehicle to transport passengers (taxi/tour operator), or run a driving school. Trucks, buses and tempos used to transport goods are eligible.

Can I claim ITC on office construction or renovation?

ITC on constructing or civil-renovating your own immovable property is blocked under Section 17(5)(c)/(d), even if used for business. However, ITC on movable assets placed inside — furniture, ACs, computers, electrical fittings — remains eligible under Section 16. The test is whether the expenditure creates or improves the immovable structure itself.

Is ITC allowed on food, catering or employee canteen?

No. Food and beverages, outdoor catering and club membership are blocked under Section 17(5)(b), including employee meals and canteen bills. Exceptions: where providing food/catering is your own line of business, or where the employer is legally obligated to provide the service (for example a canteen mandated under the Factories Act), a portion may be eligible — confirm with a CA.

Can I claim ITC on staff insurance and rent-a-cab?

These are blocked under Section 17(5)(b) as a default. ITC on life or health insurance and rent-a-cab for employees becomes available only where an employer is obligated to provide it under a law in force, or where you supply such services yourself. Group insurance taken purely as a benefit is generally not eligible.

Reversal & Reversals

What is the 180-day rule for ITC?

If you do not pay the supplier the invoice value plus GST within 180 days of the invoice date, the ITC you claimed must be added back to your output tax liability with 18% interest. Once you make the payment, you can re-claim the ITC in that month's GSTR-3B, so the credit is deferred rather than permanently lost.

What is Rule 42 and Rule 43 ITC reversal?

When you make both taxable and exempt supplies, you must reverse ITC proportionately. Rule 42 covers inputs and input services — reverse = common ITC × (exempt turnover ÷ total turnover), computed monthly and finalised in the annual return. Rule 43 covers capital goods, with the credit spread over 60 months and reversed proportionately each month. Short reversal attracts 18% interest.

What interest applies if I reverse wrongly claimed ITC?

Interest at 18% per annum under Section 50 applies from the date of wrongful availment (or utilisation, in the current framework) to the date of reversal. Where ITC was availed but never utilised to pay output tax, some rulings suggest interest may not apply — but the department often still demands it, so take advice before reversing large amounts.

What is Rule 86B (the 1% cash rule)?

Rule 86B requires a business whose monthly taxable turnover exceeds ₹50 lakh to pay at least 1% of its output tax liability in cash rather than settling it entirely through ITC. Exemptions apply where the promoters paid over ₹1 lakh income tax in either of the last two years, received a GST refund above ₹1 lakh, or are a government/PSU/local authority. It targets fake-ITC chains.

Reform

Did GST 2.0 change the ITC rules?

No. The GST 2.0 rationalisation effective 22 September 2025 restructured tax rates into a two-slab 5%/18% system (with a 40% demerit rate) but did not change the ITC mechanism. Section 16 conditions, Section 17(5) blocked credits, GSTR-2B matching, the 180-day rule and the reversal rules all continue exactly as before.

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Related TaxClue Services

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