Input Tax Credit (ITC): Complete Guide 2026
Input Tax Credit is the backbone of GST. It allows businesses to reduce their tax liability by claiming credit for taxes paid on purchases. Understanding ITC rules is crucial for maximizing benefits and staying compliant.
What is Input Tax Credit?
Input Tax Credit (ITC) is the tax you paid on purchases (inputs) that can be set off against the tax you collect on sales (output).
📊 Simple Example
Purchase: You buy raw materials for ₹10,000 + ₹1,800 GST (18%)
Sale: You sell finished goods for ₹20,000 + ₹3,600 GST (18%)
Tax Payable: ₹3,600 (Output) - ₹1,800 (ITC) = ₹1,800 only
Without ITC, you'd pay full ₹3,600!
Eligibility Conditions for ITC
You can claim ITC only if ALL these conditions are met:
- Registered under GST: Only registered taxpayers can claim ITC
- Tax invoice/debit note: You must have a valid tax invoice
- Goods/services received: Must have actually received the goods/services
- Tax paid to government: Supplier must have paid the tax (appears in GSTR-2B)
- Returns filed: You must file GSTR-3B to claim ITC
- Used for business: Goods/services must be for business purposes only
❌ No ITC if ANY Condition Fails
Missing even one condition? No ITC! For example: supplier didn't file GSTR-1 = their sale won't appear in your GSTR-2B = you can't claim ITC.
Section 17(5): Blocked ITC Items
Even if all conditions are met, ITC is BLOCKED on these items:
| # | Blocked Item | Exceptions (ITC Allowed) |
|---|---|---|
| 1 | Motor vehicles & conveyances | Used for: transport, imparting training, taxable supply of such vehicles |
| 2 | Food, beverages, outdoor catering, beauty treatment | When outward supply is of same items (e.g., restaurant business) |
| 3 | Club, health, fitness center membership | If outward supply is same service (e.g., gym running business) |
| 4 | Travel, rent-a-cab, life/health insurance | If transport/insurance service is your business |
| 5 | Works contract for immovable property (except plant & machinery) | Plant & machinery ITC allowed |
| 6 | Goods/services for personal use | None - always blocked |
Calculate Your Eligible ITC
Use our ITC Calculator to identify blocked items and calculate available credit.
Calculate ITC →Time Limit for Claiming ITC
ITC must be claimed by the earlier of:
- Due date of filing GSTR-3B for September of next financial year, OR
- Date of filing annual return for that year
⏰ Example
Invoice dated April 2025 → Claim ITC by September 2026 (before filing September 2026 GSTR-3B)
Miss this deadline? ITC lapses - you can never claim it!
ITC Matching & GSTR-2B
From 2021 onwards, ITC claim is linked to GSTR-2B:
What is GSTR-2B?
- Auto-generated statement of all your purchases
- Generated on 14th of next month
- Shows ITC available based on suppliers' GSTR-1 filings
- Available on GST portal under Returns → GSTR-2B
Claiming ITC Process
- Download GSTR-2B (available from 14th)
- Match with your purchase records
- Claim only MATCHED invoices in GSTR-3B Table 4
- If supplier hasn't filed → Invoice won't appear → Can't claim now
- Follow up with supplier or claim in next month when they file
✓ Reconciliation is Key
Always reconcile GSTR-2B with your books before filing GSTR-3B. Claiming ITC without GSTR-2B match will trigger notices.
ITC Reversal
Sometimes you must REVERSE (give back) ITC already claimed:
Common Reversal Scenarios
- Non-payment to supplier: If you don't pay supplier within 180 days, reverse ITC + 18% interest
- Personal use: Goods/services used for personal purposes
- Exempted supplies: Goods used for making exempted/nil-rated supplies
- Credit note from supplier: Reduce ITC proportionately
- Blocked credit discovered later: Reverse if claimed by mistake
How to Reverse ITC
Report in GSTR-3B Table 4(B) - ITC Reversed. Pay the amount in cash.
ITC on Capital Goods
For capital goods (machinery, equipment):
- Full ITC available in the month of receipt
- No need to depreciate over years (unlike old tax regime)
- Must reverse if sold within 5 years before full use
Common ITC Mistakes to Avoid
- Claiming without invoice: Self-billing or estimation not allowed
- Supplier didn't pay tax: Check GSTR-2B - only claim if invoice appears
- Wrong head (IGST/CGST/SGST): Must match exactly with invoice
- Personal use items: Car bought for MD's use = No ITC
- Missing time limit: Old invoices not claimed within deadline = ITC lost forever
- Not reversing when required: Claiming on exempted supplies without reversal
ITC Utilization Sequence
When paying tax, ITC can be used in this order:
| ITC Type | Can Be Used For | Sequence |
|---|---|---|
| IGST credit | IGST → CGST → SGST | First |
| CGST credit | CGST → IGST only | Second |
| SGST credit | SGST → IGST only | Third |
💡 Pro Tip
IGST credit is most flexible - use it for any tax head. CGST and SGST cannot be used for each other.
Frequently Asked Questions
Can I claim ITC if I'm under composition scheme?
No. Composition taxpayers CANNOT claim any ITC. This is one of the main restrictions of the scheme.
What if supplier cancels their GST registration?
You can still claim ITC if the invoice was valid when issued and appears in GSTR-2B before cancellation.
Can I claim ITC on expenses incurred before GST registration?
Yes, for inputs held in stock and capital goods, if claimed within one year of registration.
How to claim ITC on import of goods?
Claim using IGST paid in Bill of Entry. Report in GSTR-3B Table 4(A)(1) - Import of goods.