ITC Reversal Under GST —
Rule 42, 43 & 180 Days
When you must reverse Input Tax Credit, how Rule 42 and Rule 43 work, the 180-day non-payment reversal, Section 17(5) blocked credits and where to report it in GSTR-3B.
You must reverse ITC when inputs are used for exempt or non-business supplies (Rule 42), on capital goods used partly for exempt supplies (Rule 43), when a supplier is not paid within 180 days (Section 16(2)), or when credit was wrongly claimed on Section 17(5) blocked items. Reversals are reported in Table 4(B) of GSTR-3B, and any short reversal carries 18% interest.
When ITC Must Be Reversed
Every common trigger for reversing Input Tax Credit, the governing rule, the action required and whether interest applies.
| Scenario | Rule / Section | Action Required | Interest? |
|---|---|---|---|
| Goods/services used for exempt supplies | Rule 42 | Monthly proportionate reversal + annual true-up | If short at year-end |
| Capital goods used partly for exempt supplies | Rule 43 | 1/60th per month × exempt ratio | If under-reversed |
| Supplier not paid within 180 days | Section 16(2) | Reverse ITC + add to output tax | Yes · 18% p.a. |
| ITC claimed on blocked items | Section 17(5) | Never claimable — reverse if wrongly taken | Yes + penalty |
| Registration cancelled — closing stock | Section 18(4) | Reverse ITC on stock & capital goods | Higher of ITC / 5% per qtr |
| Goods lost, stolen, destroyed, written off | Section 17(5)(h) | Reverse ITC on such goods | Yes if wrongly retained |
These are ITC-reversal rules under the CGST Act/Rules — unchanged by the GST 2.0 rate rationalisation effective 22 September 2025.
Rule 42 vs Rule 43 — Key Differences
Both rules reverse the ITC attributable to exempt or non-business use. The split is by type of credit: Rule 42 handles inputs and input services (a lump-sum monthly reversal), while Rule 43 handles capital goods (spread over 60 months).
| Parameter | Rule 42 | Rule 43 |
|---|---|---|
| Applies to | Inputs & input services | Capital goods |
| Trigger | Used for exempt supplies or non-business use | Used partly for exempt / non-business use |
| Formula | Common ITC × (Exempt turnover ÷ Total turnover) | (ITC ÷ 60) × exempt ratio, each month |
| Periodicity | Monthly (provisional) + annual true-up | Monthly, over 60 months (5 years) |
| Annual reconciliation | By 30 Nov return of following FY | Annual reversal on common capital goods |
| GSTR-3B reporting | Table 4(B)(1) | Table 4(B)(1) |
Rule 42 exempt turnover excludes items listed in the rule (e.g. certain interest income). Confirm the working with your practitioner.
Rule 42 Inputs — worked example
Rule 43 Capital goods — per month
Monthly Rule 42/43 reversals are provisional. A final annual calculation must be done by the return for September — filed on or before 30 November of the following financial year. If your annual reversal exceeds the monthly total, the shortfall is added to output tax with 18% interest; if it is less, the excess can be reclaimed.
Making both taxable and exempt supplies? Get your Rule 42/43 reversal computed correctly.
Talk to a GST Expert →The 180-Day Non-Payment Rule
ITC is conditional on paying your supplier. If you do not pay the invoice value plus tax within 180 days of the invoice date, the credit you claimed must be reversed and added to your output tax liability, with interest. Once you actually pay, you can re-avail the credit.
| Scenario | ITC Treatment | Interest |
|---|---|---|
| Supplier paid within 180 days | ITC retained — no reversal | Nil |
| Supplier NOT paid within 180 days | Reverse ITC + add to output tax | 18% p.a. |
| Payment made after reversal | Re-avail ITC in period of payment | Nil on re-avail |
| Part payment within 180 days | ITC on the paid portion retained; balance reversed | On reversed part |
| Supplies under reverse charge (RCM) | 180-day rule NOT applicable | Nil |
Interest runs on the reversed ITC as per Section 50; RCM and deemed-supply cases are excluded from the 180-day rule.
Blocked Credits Under Section 17(5)
Section 17(5) lists supplies on which ITC is never available — these are not reversals but outright ineligibility. Claiming them can trigger demand notices, interest and penalty, so report them as ineligible from the start.
| Blocked Category | ITC? | Exception (ITC allowed) |
|---|---|---|
| Motor vehicles seating ≤ 13 persons | No | Resale, passenger transport, driving school |
| Food, beverages, health & beauty services | No | If used to make the same outward taxable supply |
| Club, health & fitness memberships | No | None |
| Works contract for immovable property | No | Input service for further works-contract supply |
| Construction of immovable property | No | Plant & machinery is an exception |
| Goods for personal consumption | No | None |
| Goods lost, stolen, destroyed, gifts, free samples | No | None |
A common notice trigger is mixing the two: Rule 42/43 and 180-day reversals go in Table 4(B), while Section 17(5) blocked credits are ineligible ITC reported in Table 4(D)(1). Netting them in the wrong row distorts your available credit and invites a discrepancy notice.
Not sure if a credit is reversible or permanently blocked? Get it reviewed.
Get ITC Advice →Reporting ITC Reversal in GSTR-3B
All ITC is reported in Table 4 of GSTR-3B. Reversals and ineligible credit sit in different sub-heads, and your net usable credit is what remains after both.
| Table 4 Sub-head | What to Report |
|---|---|
| 4(A) — ITC available | Total ITC auto-populated from GSTR-2B |
| 4(B)(1) — Rule 42/43 reversals | Reversal for exempt supplies & capital goods |
| 4(B)(2) — Other reversals | 180-day non-payment, cancellation, voluntary reversals |
| 4(D)(1) — Ineligible ITC | Section 17(5) blocked credits — here, not in 4(B) |
| Net ITC | 4(A) − 4(B) = credit available for utilisation |
Reconcile ITC against GSTR-2B every month before filing to keep reversals accurate and defensible.
- Segregate ITC: taxable / exempt / common
- Compute Rule 42 monthly reversal (D1)
- Spread capital-goods ITC over 60 months (Rule 43)
- Track invoices unpaid beyond 180 days
- Exclude Section 17(5) blocked credits
- Report reversals in 4(B)(1) & 4(B)(2)
- Report blocked credits in 4(D)(1)
- Match ITC with GSTR-2B monthly
- Do the annual Rule 42/43 true-up by 30 Nov
- Pay 18% interest on any short reversal
Want your monthly reversals and GSTR-2B reconciliation handled for you?
Get GST Return Filing →Frequently Asked Questions
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