Input Tax Credit (ITC) is the backbone of India’s GST system, ensuring you only pay tax on the value addition your business creates. However, claiming ITC isn’t automatic—it requires strict compliance with eligibility rules, documentation, and timelines under Section 16 of the CGST Act and related rules.
This guide explains who can claim ITC, the conditions to claim, blocked credits, the 180-day payment rule, time limits, Rule 42 apportionment, and practical tips to help your business avoid cash flow disruptions and compliance penalties.
Who Can Claim ITC?
Only GST-registered persons can claim ITC. Personal use or purely exempt supply dealers cannot claim ITC under GST law.
Additionally:
- The goods or services purchased must be used in the course or furtherance of business.
- Voluntary registration alone doesn’t permit ITC for exempt supply dealers.
Mandatory Documents Required to Claim ITC
To claim ITC, you must have valid documentation, such as:
- A tax invoice or debit note issued by a registered supplier.
- A bill of entry for imported goods.
- Documents from an Input Service Distributor (ISD) if applicable.
Core Conditions Under Section 16 of CGST Act
To legally claim ITC, ensure:
✅ Invoice or debit note issued by a registered supplier is available.
✅ Goods/services are received, including the last lot if delivered in parts.
✅ Tax has been paid by the supplier to the government (via cash or ITC).
✅ You have filed your GSTR-3B return for the relevant tax period.
Additionally:
- The supplier must upload invoice details in GSTR-1, ensuring it reflects in your GSTR-2B (as per Rule 36 conditions).
- Missing reflection in GSTR-2B can lead to disallowed ITC during audits.
Time Limits and Reversals in ITC Claims
- ITC must be availed by 30 November of the subsequent financial year or before filing the GSTR-9 (Annual Return), whichever is earlier.
- If you fail to claim within this period, the ITC lapses permanently.
Blocked Credits Under GST:
ITC cannot be claimed for:
- Motor vehicles (except when used for transport or declared business use).
- Goods/services for personal use.
- Food and beverages (unless used for onward taxable supply).
- Club memberships, health and fitness services.
- Travel benefits for employees (for personal purposes).
180-Day Payment Rule:
If payment to the supplier is not made within 180 days from the invoice date:
- ITC claimed must be reversed with interest and added to your output tax liability.
- ITC can be reclaimed once payment is made to the supplier.
Special Provisions Impacting ITC
1️⃣ Capital Goods:
ITC is allowed on capital goods, but under Rule 42:
- Credit is reduced by 5% per quarter if used for exempt and taxable supplies.
- Apportionment may be required if the goods are partly used for exempt supplies.
2️⃣ Retrospective Claims (Transition Relief):
Under Section 16(5) and 16(6):
- Certain retrospective ITC claims are allowed for FYs 2017–18 to 2020–21.
- ITC can be claimed on invoices during cancelled–revoked registration cases under specific conditions.
3️⃣ Rule 42 Apportionment:
If inputs are used for both taxable and exempt supplies, ITC must be:
- Apportioned proportionately based on taxable turnover.
- The ineligible portion reversed in GSTR-3B.
Quick Summary Table
| Condition | Requirement |
|---|---|
| Registered taxpayer | GST registration mandatory |
| Valid documents | Invoice, debit note, bill of entry, ISD credit note |
| Receipt of goods/services | Yes (including last installment if partial supply) |
| Tax paid by supplier | Yes (cash or ITC utilization) |
| Return filed | GSTR-3B filed for the relevant period |
| Invoicing compliance | Supplier files GSTR-1, reflected in GSTR-2B |
| Time limit | Avail by 30 Nov of next FY or before GSTR-9 |
| Blocked credits | Motor vehicles (mostly), personal use, exempt items |
| 180-day rule | Reverse ITC if unpaid; reclaim after payment |
| Mixed supplies | Apportion per Rule 42, reverse exempt portion |
| Capital goods | ITC allowed with quarterly reductions if applicable |
| Retrospective claims | Allowed under specific provisions for past FYs |
Practical Tips for Businesses
✅ Reconcile GSTR-2B regularly: Identify missing invoices early to coordinate with suppliers for timely uploads.
✅ Monitor the 180-day rule: Automate tracking to avoid interest and reversed ITC surprises.
✅ Apply Rule 42 accurately: Maintain clear turnover records if you deal with both taxable and exempt supplies.
✅ Use software tools: Platforms like Tally, Zoho Books, and ClearTax can automate ITC tracking, reversal, and reporting.
✅ Maintain documentation rigorously: Retain invoices, goods receipt records, and payment proofs for audits.
FAQs on ITC Under GST
1️⃣ Can ITC be claimed on capital goods in full immediately?
Yes, unless the goods are used for exempt supplies, in which case Rule 42 applies for proportional reversal.
2️⃣ Is ITC allowed if the supplier hasn’t filed GSTR-1?
No, ITC will not reflect in your GSTR-2B until the supplier files GSTR-1, making your claim ineligible until then.
3️⃣ What happens if I miss the 30 November deadline for claiming ITC?
The ITC will lapse permanently, increasing your effective tax cost.
4️⃣ Can I claim ITC for goods/services used for personal purposes?
No, GST law blocks credits for personal use.
5️⃣ Is ITC applicable for GST paid under reverse charge?
Yes, but only after the tax under reverse charge is paid to the government.
Key Takeaways
- Claiming ITC correctly is essential for cash flow and compliance under GST.
- Ensure documentation, supplier compliance, and payment timelines are strictly followed.
- Automate reconciliation processes to prevent missing ITC opportunities.
- Monitor blocked credits and Rule 42 adjustments for businesses with mixed supplies.
By following these structured practices, your business can leverage Input Tax Credit to minimise cascading tax burdens, improve working capital, and remain compliant under GST.
