Under Section 16 of the CGST Act you can claim input tax credit on GST paid for business purchases if you hold a valid tax invoice, the supplier has reported it in GSTR-1 so it reaches your GSTR-2B, you have received the goods or services, the tax has been paid to the government, and you have filed your return. Claims close on 30 November after the financial year.
Input tax credit (ITC) is what makes GST a tax on value added rather than on every sale. You pay GST when you buy, collect GST when you sell, and pay the government only the difference. But credit is a conditional right, not an automatic one. This guide sets out the conditions in Section 16 of the CGST Act, the time limits, the reversal rules and how credit is used.
What is input tax credit?
ITC is the GST you paid on inputs, input services and capital goods used in the course of your business, which you can set off against the GST you owe on your sales. If a Mumbai bakery pays ₹18,000 GST on an oven and ₹5,000 GST on flour in a month, and charges ₹40,000 GST on its sales, it pays ₹17,000 in cash (₹40,000 − ₹23,000), assuming all the credit is eligible.
Credit comes in three kinds:
- Inputs — goods used in your business (raw materials, stock for resale, packaging).
- Input services — services used in your business (rent, freight, professional fees).
- Capital goods — machinery and equipment capitalised in your books.
What are the conditions to claim ITC under Section 16?
Section 16(2) lists conditions that must all be met:
| Condition | What it means in practice |
|---|---|
| (a) Tax invoice or debit note | You hold a valid invoice or debit note from a registered supplier (or another prescribed document, such as a bill of entry) |
| (aa) Reported by supplier | The supplier has reported the invoice in GSTR-1/IFF and it is communicated to you — i.e. it appears in your GSTR-2B |
| (b) Goods or services received | You (or someone on your direction) have actually received them |
| (ba) Credit not restricted | The ITC communicated to you under Section 38 has not been restricted |
| (c) Tax paid to government | The supplier has actually paid the tax, in cash or through credit |
| (d) Return filed | You have filed your GSTR-3B |
Two provisos matter for daily operations:
- Goods in lots. If goods under one invoice arrive in instalments, credit is available only when the last lot is received.
- 180-day payment rule. If you do not pay the supplier the value plus tax within 180 days from the invoice date (except for reverse-charge supplies), you must pay back an amount equal to the ITC, with interest under Section 50. When you later pay the supplier, you can re-claim the credit.
What is the time limit to claim ITC?
Section 16(4) sets the outer limit: you cannot claim ITC on an invoice or debit note after 30 November following the end of the financial year to which it pertains, or the date you file the annual return, whichever is earlier.
| Invoice date | Deadline to claim (unless annual return filed earlier) |
|---|---|
| April 2025 – March 2026 (FY 2025-26) | 30 November 2026 |
| April 2026 – March 2027 (FY 2026-27) | 30 November 2027 |
Because claims are made through GSTR-3B, in practice this means the GSTR-3B for October (filed in November) is the last regular chance for most monthly filers to pick up missing credit from the previous year.
When must ITC be reversed?
Credit already claimed must be reversed in Table 4(B) of GSTR-3B in several situations:
- Non-payment within 180 days — as above.
- Blocked credits under Section 17(5), such as food, personal-use items, most motor vehicles and works contracts for immovable property. See blocked input tax credit.
- Common credit used for exempt supplies — Section 17(2) limits credit to the portion attributable to taxable (including zero-rated) supplies. Rules 42 and 43 set the method.
- Non-business use — Section 17(1) limits credit to the business portion when goods or services are used partly for personal purposes.
- Credit notes received — when your supplier issues a credit note, your ITC reduces correspondingly.
- Goods lost, stolen, destroyed, written off, or given as gifts or free samples — credit on these is blocked.
Interest under Section 50(3) applies on ITC that is wrongly availed and utilised, at a rate notified by the government (the Act caps it at 24%). Credit that is wrongly availed but never used does not attract this interest.
How is ITC used against tax liability?
Credit sits in your electronic credit ledger and is used in a fixed order:
- IGST credit is used first: against IGST, then against CGST and SGST/UTGST in any order.
- CGST credit is used against CGST, then IGST — never SGST.
- SGST/UTGST credit is used against SGST/UTGST, then IGST — never CGST.
- IGST credit must be exhausted before CGST or SGST credit is used.
Reverse-charge tax, interest and late fee cannot be paid with ITC; they come from the cash ledger.
Worked example: a Nashik furniture workshop
A Nashik furniture workshop (Maharashtra) has the following in October 2026:
| Purchase | GST paid | Eligible? |
|---|---|---|
| Plywood from a Gujarat supplier (IGST) | ₹27,000 | Yes |
| Hardware from a local shop (CGST+SGST) | ₹4,500 + ₹4,500 | Yes |
| Staff lunch from a caterer | ₹900 + ₹900 | No — food is blocked |
| New edge-banding machine (capital goods) | ₹18,000 IGST | Yes |
| Old invoice from March 2026, paid only now after 200 days | ₹3,000 + ₹3,000 | Credit was reversed at 180 days; re-claim now that payment is made |
Eligible ITC: IGST ₹45,000 (₹27,000 + ₹18,000); CGST ₹7,500 (₹4,500 + ₹3,000); SGST ₹7,500.
Sales: intra-state taxable ₹5,00,000 at 18% → CGST ₹45,000 + SGST ₹45,000.
Set-off:
- IGST credit ₹45,000: no IGST liability, so used against CGST ₹45,000 → CGST fully covered. (The portal lets you split IGST credit between CGST and SGST in any proportion; this example puts it all on CGST.)
- CGST credit ₹7,500: no remaining CGST liability, so it stays in the ledger (it cannot be used against SGST).
- SGST credit ₹7,500 against SGST ₹45,000 → SGST cash payable ₹37,500.
A better split: use ₹22,500 IGST credit against CGST and ₹22,500 against SGST. Then CGST payable ₹22,500 − ₹7,500 CGST credit = ₹15,000, and SGST payable ₹22,500 − ₹7,500 SGST credit = ₹15,000. Total cash ₹30,000 and every rupee of credit used, instead of ₹37,500 cash with ₹7,500 of CGST credit left idle in the ledger. Choosing the split carefully matters.
The ₹1,800 GST on staff lunch is not claimed at all.
How does IMS affect ITC?
Since the Invoice Management System went live, you can accept, reject or keep pending each supplier record before GSTR-2B is generated. Accepted and no-action records become ITC available; rejected ones do not reach GSTR-3B. This gives you control but also responsibility: deemed acceptance can pull in invoices you never should have claimed. The mechanics are covered in GSTR-2B reconciliation.
Which documents support an ITC claim?
Section 16(2)(a) requires a tax invoice, debit note or other prescribed tax-paying document. In practice the documents that support credit are:
| Document | Typical use |
|---|---|
| Tax invoice from a registered supplier | Normal domestic purchases |
| Debit note from the supplier | Upward price revision after the invoice |
| Bill of entry | Imports of goods (IGST paid at customs) |
| Self-invoice | Purchases from unregistered persons under reverse charge, where required |
| ISD invoice | Credit distributed by your Input Service Distributor |
A bill of supply, a delivery challan, a proforma invoice or a payment receipt is not a tax-paying document, so no credit can be claimed on it. Keep the invoices in a form you can produce on demand — digital copies are acceptable as long as they are complete and legible.
What details must the invoice carry?
For credit to be safe, the invoice should show your correct GSTIN, the supplier's GSTIN, the invoice number and date, the HSN or SAC code, taxable value, rate and tax amount split by head, and the place of supply. An invoice in the wrong GSTIN or with the wrong tax head (for example CGST+SGST on an inter-state purchase) needs to be corrected by the supplier before you claim. See mandatory fields of a GST invoice for the full list.
How does ITC work for mixed taxable and exempt businesses?
If you make both taxable and exempt supplies — for example a clinic selling taxable products alongside exempt healthcare services — credit on inputs used exclusively for exempt supplies is not available at all, and common credit is split under Section 17(2) and Rules 42 and 43. The usual approach is to work out the exempt share of turnover and reverse that share of common ITC each month, with a final adjustment after the year ends. Getting this right avoids a large reversal at audit time.
Common mistakes
- Claiming from your own purchase register rather than GSTR-2B.
- Missing the 180-day rule on slow-paid suppliers and not reversing.
- Claiming blocked credits such as staff meals, cars or office construction.
- Wrong set-off split that leaves CGST or SGST credit stranded while paying cash on the other head.
- Ignoring the 30 November deadline for previous-year invoices.
- Claiming ITC and depreciation on the same tax amount for capital goods.
- No supplier compliance check — a supplier who does not pay tax puts your credit at risk.
Key takeaways
- ITC needs a valid invoice, presence in GSTR-2B, receipt, tax paid by the supplier and your return filed.
- Pay suppliers within 180 days or reverse the credit with interest.
- Claim by 30 November after the financial year, or the annual return date if earlier.
- Reverse blocked, personal-use and exempt-supply credit in Table 4(B).
- Use IGST credit first, and split it wisely between CGST and SGST.
Accurate supplier GSTINs on purchase entries are the foundation of every ITC claim; the GSTIN validator helps catch typos before they cost you credit. Billing Software by Betterwork can record purchases alongside sales and export GSTR data for your accountant.
This guide is general information, not tax advice. Rules last checked on 20 October 2026; confirm with your tax professional for your situation.