What is Input Tax Credit?
ITC is the GST you paid on business purchases, which you can deduct from GST you owe on sales. Only the tax on the value you added is actually paid to the government.
Output tax: ₹2,700; Less ITC: ₹1,800; Net cash payable: ₹900
Four Conditions to Claim ITC (Section 16)
- You have a valid tax invoice or debit note from a registered supplier
- You have received the goods or services
- Supplier has paid tax to government (verified via GSTR-2B)
- You have filed your GSTR-3B
Plus: if you don't pay the supplier within 180 days of invoice date, you must reverse the ITC — re-claim once paid.
Time Limit
ITC for invoices issued in a financial year can be claimed up to 30 November of the following FY, or the date of filing the annual return for that FY, whichever is earlier.
Blocked Credits — Section 17(5)
| Category | What's blocked | Exception |
|---|---|---|
| Motor vehicles (≤13 seats) | Cars, bikes for passenger use | If onward supply of vehicle, transportation, driving school |
| Food & beverages | Outdoor catering, club membership, health services | If statutorily obligated or onward supply |
| Insurance & repairs | Of blocked motor vehicles | Same as motor vehicles |
| Travel benefits to employees | LTA, home travel concession | — |
| Construction | Works contract for immovable property | Allowed for plant & machinery or further supply |
| Personal use, lost, stolen, gifted | — | — |
| Composition supplier purchases | — | — |
When ITC Must Be Reversed
- Non-payment within 180 days — proportionate reversal, re-claim on payment
- Goods used for exempt supply — proportionate via Rule 42/43
- Goods used for non-business — proportionate
- Loss/theft/destruction of inputs — full reversal
- Capital goods sold — reverse ITC equal to lower of (ITC less 5% per quarter from invoice) or (tax on transaction value)
Rule 42 — Common Credit on Exempt Supplies
If you supply both taxable and exempt goods, common ITC must be apportioned:
- T = Total ITC for the month
- T1 = ITC exclusively for exempt (fully reversed)
- T2 = ITC exclusively for non-business (fully reversed)
- T3 = ITC ineligible per Section 17(5) (fully reversed)
- C2 = Common ITC = T − T1 − T2 − T3
- D1 = Reversal = C2 × (Exempt turnover / Total turnover)
How to Maximise Legitimate ITC
- Insist on tax invoices with your GSTIN — not cash memos
- Verify supplier GSTIN status before purchase
- Reconcile GSTR-2B every month
- Pay suppliers within 180 days — track aging
- Keep personal and business purchases separate
- Document use ratio for shared inputs (Rule 42)
iAccounting flags blocked credits automatically based on the ledger you post to — never accidentally claim ITC on motor insurance or personal expenses. 180-day payment aging tracked supplier-wise with 15-day warning.
See ITC tracking →Continue Learning
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