Input tax credit
What Input tax credit means, how it works, a worked example, the mistakes we see and the questions founders ask.
DefinitionInput tax credit (ITC) is the GST a registered business paid on its purchases that it can set off against the GST it collects on sales, so tax is paid only on the value added.
GST is designed as a chain: each business pays tax on the value it adds and passes credit down the line. If you buy a laptop for ₹1 lakh plus ₹18,000 GST and bill a client ₹5 lakh plus ₹90,000 GST, you deposit ₹72,000 and keep the ₹18,000 as credit. Credit is available only if you hold a valid tax invoice, the supplier has filed GSTR-1 so it shows in your GSTR-2B, you have received the goods or service, and the supplier has paid the tax. Some items are blocked, such as cars, food and personal expenses, and composition dealers get no credit at all. You meet ITC in every GSTR-3B. What it means for you: pay suppliers within 180 days and chase those who file late, because unmatched credit is reversed with interest.
How Input tax credit works
Input tax credit is the mechanism that makes GST a tax on value added: the tax you paid on inputs is set off against the tax you collect on outputs, and only the difference is paid in cash. Section 16 sets four conditions: a valid tax invoice, receipt of the goods or services, the supplier having reported the invoice so it appears in your GSTR-2B and paid the tax, and your own GSTR-3B filed. A fifth condition applies to timing: the invoice must be paid within 180 days or the credit is reversed with interest until it is paid.
Section 17(5) blocks credit on a list of expenses whatever the business: motor vehicles for personal use, food and beverages, club memberships, health insurance and life insurance (unless mandatory for employees), construction of immovable property, and goods given free. Credit on inputs used partly for exempt supplies or personal use is apportioned under Rules 42 and 43.
The outer limit is 30 November of the year after the invoice, or the date of the annual return if earlier; credit not claimed by then is lost. Credit is claimed in GSTR-3B against the 2B figure, and a reversal is reported in the same return when a condition fails.
A Chennai furniture maker buys ₹10 lakh of timber in May and pays ₹1.8 lakh GST. The supplier files GSTR-1 on 11 June, the invoice appears in the maker's June 2B, and the maker claims ₹1.8 lakh in the June GSTR-3B against ₹4 lakh of output tax, paying ₹2.2 lakh in cash. Had the maker not paid the supplier by November, 180 days on, the credit would have had to be reversed with interest until payment.
Mistakes we see with Input tax credit
- Claiming credit on an invoice that is not yet in GSTR-2B because the supplier filed late; the claim is reversed with 18% interest.
- Leaving supplier invoices unpaid past 180 days and forgetting the reversal, which the auditor finds at year end.
- Taking credit on the office cab, staff lunches and a director's health insurance, all blocked under Section 17(5).
Last updated 19 October 2026. Checked against the MCA, GST, Income-tax and Trade Marks rules in force for October 2026.
Where you will meet this term
Questions founders ask about Input tax credit
What are the conditions to claim input tax credit?
A tax invoice or debit note, receipt of the goods or services, the invoice appearing in your GSTR-2B with the supplier having paid the tax, filing of your GSTR-3B, and payment to the supplier within 180 days. Blocked credits under Section 17(5) are excluded.
What is the last date to claim ITC for a year?
30 November of the following financial year, or the date of filing the annual return for that year if earlier. Credit for invoices of 2025-26 must be claimed by 30 November 2026.
Can I claim ITC on a car bought for the business?
Not for a passenger vehicle with up to 13 seats unless the business is transporting passengers, driving training or selling vehicles. Goods vehicles, and cars for those specified uses, are eligible.