Input Tax Credit (ITC) 

Table of Content

1. What Is Input Tax Credit (ITC) and Why Does It Matter

2. Who Is Eligible to Claim Input Tax Credit

3. Documents Required for Claiming Input Tax Credit (ITC)

4. How to Claim Input Tax Credit - Step-by-Step Process

5. How to Use and Adjust the Input Tax Credit

6. When You Cannot Claim ITC or Need to Reverse It

7. Input Tax Credit Rules for the Insurance and Financial Services Sector

8. Common Mistakes and Compliance Tips While Claiming ITC

9. Do’s and Don’ts checklist

10. Recent Updates and Notifications on Input Tax Credit

11. Summary

12. FAQs on Input Tax Credit

What Is Input Tax Credit (ITC) and Why Does It Matter

Input Tax Credit in GST allows businesses to avoid paying taxes twice on their business inputs. Once they sell their products or services, they can claim back the previously paid tax amount from the government, thereby lowering their tax burden. 

Suppose you are a legal consultant planning to open an office in your locality. For starters, you will need to rent a room, invest in advertising, print consultation cards, and purchase office stationery. For all these, you have spent ₹1 Lakh, including 18% GST (₹18,000). Now, when you start providing legal consultations to clients, you are charging 18% GST on your fees, which is ₹1.5 Lakh, meaning your client is paying ₹27,000 in GST. 

You can claim ₹18,000 previously spent as ITC from the government, since you invested that amount in your business. So, the final net amount you are paying as GST is ₹9000 (₹27,000 - ₹18,000 = ₹9000). 

ITC is significant for businesses because it helps them reduce their overall tax burden. Even when businesses avail of insurance products, they are eligible for Input Tax Credit under GST. Not only that, but reducing effective tax rates increases profitability. 

While ITC applies to both goods and services, the process differs slightly, manufacturers usually claim ITC on raw materials and capital goods. In contrast, service providers claim it as a business expense, such as rent, professional fees, or advertising.

However, under Section 17(5) of the CGST Act 2017, there are “blocked credits” where that ITC is not eligible  to claim, even when the expenses are related to business. For example, ITC cannot be claimed for motor vehicles that are used for personal or employee transportation subject to conditions prescribed under the section.

Who Is Eligible to Claim Input Tax Credit

To understand what is Input Tax Credit, it is essential to understand the specific eligibility criteria, which are:

• According to Section 16(1) and 16(2) of the CGST Act, a GST-registered person can only claim ITC for business-related purposes and not for personal reasons.

• The claimants need to have a valid tax invoice, bill of entry, debit note or other documents as prescribed in rule 36 of CGST Rule 2017. 

• Only those with GST registration can apply for ITC. 

• Suppliers have to complete filing returns (GSTR-1) before the claimant.

• Such details have been updated in GSTR 2B for the recipient to claim ITC

• Goods and services for which ITC is claimed must be purchased in full, or the ITC can be claimed during the last instalment. 

• Supplier payments, including GST, must be completed within 180 days of the invoice issuance date.

• Tax charged on such supply has been actually paid to the government by the supplier.

• If insurance products and financial services are used for business purposes, and the claimant has a valid invoice, they are eligible for ITC, in the cases as specified under the GST Law. 

Note: Certain entities are not eligible to claim ITC, such as composition scheme dealers, suppliers who is wholly engaged in exempt supplies, or those using goods and services used for personal consumption.

Documents Required for Claiming Input Tax Credit (ITC)

Now that you know what is ITC in GST and how it applies to businesses, check out the following documents that are mandatory for claiming ITC: 

• An invoice issued by the supplier  containing all the details related to goods and services purchased. For example, invoices for availing IT services, or marketing services, etc.  

• The invoice needs to be present in the GSTR-2B, which is auto-generated after your supplier completes their GST filing. 

• GSTR-3B is filed by the taxpayer; it is a self-declared summary containing details of sales, the ITC amount claimed, and the net payable tax. 

• The supplier issues a debit note if the payable tax amount differs from the amount on the invoice. 

• A Tax Invoice t issued by the Input Service Distributor (ISD), in case of ITC distributed by ISD

• Once the supplier has paid tax on the supply to the government, the business must claim ITC by 30th November of the financial year, or by the date before filing the annual returns (GSTR-9) form. 

Tip: It is crucial to file ITC in an organised manner. Always keep digital copies of the original invoices and be prepared for audits. As per GST rules, all such records and documents must be retained for a minimum of 6 years from the due date of filing the annual return. If subject matter is for appeal/revision – retention shall be later of 1 year after its final disposal of appeal/revision or 6 year from due date of furnishing Annual return, whichever is later.

How to Claim Input Tax Credit - Step-by-Step Process

Input Tax Credit (ITC) allows you to improve your business cash flow and profitability. You can claim the Input Tax Credit by following these steps: 

Step 1: Supplier file his monthly GST return (GSTR 1) by showing the details of invoice wise supply made to us. 

Step 2: We check such transaction appearing in GSTR-2B whether it is correct or not. Since GSTR-2B is generated based on the information provided by suppliers in GSTR 2B, it is best to verify. 

Step 3: Rectify if you find any discrepancies between the input tax credit to be claim and Form GSTR-2B by communicating discrepancies to supplier and tell them to rectify the details in month’s GST returns (GSTR - 1). I

Step 4: We file the monthly GSTR return by filing GSTR 3B and notify your input tax credit details along with output tax liability. 

Step 5: Pay the GST liability after reducing the claimed ITC if any, 

For example, if your total GST liability for the month is ₹50,000 and you have eligible ITC worth ₹30,000, you only need to pay ₹20,000 in cash after adjusting the credit.

How to Use and Adjust the Input Tax Credit

The Government of India has introduced Sections 49A, 49B, and Rule 88A to ensure systematic utilisation of ITC across the CGST, IGST, and SGST categories. Therefore, for businesses, besides knowing what is input tax credit is in GST, it is also of utmost importance to understand the ITC utilisation rules, such as: 

Under the new rule, before utilising ITC on CGST and SGST, companies must utilise the entire available IGST in their electronic credit ledger. 

Let us go through an example to understand it better:

Suppose your business has an IGST credit of ₹20,000, CGST credit of ₹10,000, and SGST credit of ₹10,000. Your total GST liability is ₹15,000 IGST, ₹12,000 CGST, and ₹12,000 SGST.

• First, use ₹15,000 from the IGST ITC to clear the IGST liability.

• The remaining ₹5,000 IGST ITC can be adjusted against CGST/SGSTliability (you can adjusted such IGST ITC in any ratio against CGST and SGST Liability)(Assuming Rs 2,500 use against CGST Liability and Rs 2,500 use against SGST liability.

• The balance CGST liability  is now ₹9,500 (₹12,000 – ₹2,500), which can be paid using CGST ITC.

• Finally The balance SGST liability is now ₹9,500 (₹12,000 - ₹2,500) which can be paid using SGST ITC.

This example shows how ITC helps businesses optimise tax payments efficiently while complying with GST utilisation rules.

When You Cannot Claim ITC or Need to Reverse It

There are certain conditions under which, even though the basic ITC eligibility criteria are met, the claims must be reversed. ITC reversal means that the input credits utilised earlier would be considered under output tax liability, and therefore, the input credit claimed earlier will be nullified. 

Those conditions are: 

• Under section 37 of the CGST Rule, if the recipient of goods and services fails to pay the supplier fully or partially for a specific item, the recipient has to reverse the ITC claim within 180 days of the invoice issuance.  

• The ITC claim needs to be reversed if inputs are used in lost or stolen goods. 

• If the supplier does not pay tax through GSTR-3B on time (by 30th September of the following year), the recipient must reverse their claim before 30th November of the following financial year. 

• If the claim contains blocked credits, such as motor vehicles, personal usage and so on, under Section 17(5). 

• As per Rules 42 and 43 of CGST Rules, 2017, ITC on capital goods or common inputs used for both taxable and exempt supplies must be reversed proportionately.

Rule 42/43 Reversal Formula:

ITC to be reversed = (Exempt Turnover ÷ Total Turnover) × Common ITC

Example:
If your total turnover is ₹10,00,000 and ₹2,00,000 relates to exempt supplies, and your common ITC is ₹50,000 -

ITC to be reversed = (2,00,000 ÷ 10,00,000) × 50,000 = ₹10,000

So, ₹10,000 must be added back to your output tax liability for that period.

Input Tax Credit Rules for the Insurance and Financial Services Sector

ITC for Insurance Sector

As per the 56th GST Council Meeting of 22nd September 2025, individual life and health insurance policies including term, ULIP, endowment plan etc are tax-exempt, meaning 0% GST is now levied on such services. 

The Government of India has taken this initiative to make insurance plans affordable and accessible to a larger population. However, general insurance policies are still under 18% GST with no available input tax credit for personal users.

ITC for the Financial Service Sector 

In contrast, there have been no changes in the financial service sector, such as traditional banking operations, credit and loan facilities, investment services, and so on. These services remain taxable at 18% GST. However, banks and financial institutions have the authority to claim 50% ITC on taxable supplies, including capital goods subject to conditions prescribed as per Section 17(4)read with rule 38. 

For example:

Suppose a financial institution incurs ₹1 lakh in input services with ₹18,000 GST. Under Rule 38, it can claim 50% of the GST (₹9,000) as ITC and must reverse the remaining ₹9,000. This proportionate reversal ensures compliance where both taxable and exempt supplies are involved.

Overall, these rules help maintain compliance and transparency for insurers and financial entities while aligning with the latest 2025 updates.

Common Mistakes and Compliance Tips While Claiming ITC

Input Tax Credit (ITC) is a significant element that combines regulatory awareness, technology integration, and diligent record storage. Mistakes while claiming ITC can lead to delay, such as: 

1. Documentation Error

Error while documenting ITC is one of the most common mistakes. The reason behind this mistake could be the inability to keep accurate records of financial transactions, invoices and receipts. Without supporting documents, validating ITC claims becomes challenging.  

2. Mismatch in the GSTR-2B

Since GSTR-2B determines the Input Tax Credit eligibility of the taxpayer, mismatched information in GSTR-2B could lead to penalties. 

Initially, the GST system flags the mismatch by notifying the taxpayer via Form DRC 01C, allowing the taxpayer to accept the error and reverse the excessive ITC claim within 7 days. Inability to do so could result in a blocked GSTR-1 filing, which could disrupt their business.    

3. Late Filing

ITC of a particular financial year needs to be claimed as per Section 16(4) of CGST Act,2016, which is before the 30th day of November following the end of relevant financial year or furnishing of the relevant Annual Return whichever is earlier. 

4. Supplier Non-Compliance

Under section 16 (2) of the CGST Act, businesses can claim ITC only when the supplier has collected the tax and paid it to the government either in the form of cash or through utilising admissible ITC. If the supplier has not filed GSTR-1 on time, the businesses will be unable to claim ITC.  

Do’s and Don’ts checklist

Recent Updates and Notifications on Input Tax Credit

As per the recent updates and notifications on the Input Tax Credit:

• As of the Budget 2025 update, the claimant has to reverse the corresponding ITC if a supplier issues a credit note to reduce their tax liability (Section 126 of the Finance Act 2025). 

• As per Section 127 of the Finance Act, 2025, GSTR-2B will no longer be fully auto-generated; businesses can now validate and reconcile ITC and invoices using the Invoice Management System (IMS).  

• GST on Individual life and health insurance policies has been reduced to 0%, whereas the general insurance remains under 18% GST. 

Summary

ITC refers to the tax amount you pay at the time of purchasing goods for your business. You can later claim this amount to reduce the tax you owe on your sales. To be eligible for Input Tax Credit, in addition to having a GST registration, your invoices must match those shared by your supplier in GSTR-1, GSTR-2B, and GSTR-3B. If there are any mismatches, your ITC eligibility will be cancelled. Therefore, you have to check all the latest rules published by the government in 2025 regarding ITC to be eligible for this benefit. 

FAQs on Input Tax Credit

Q. How to claim GST input tax credit?

If you are a registered person seeking ITC claims under GST, it is vital to keep in mind the steps given below:

• Use the GSTR-2B to verify the input tax credit details. GSTR-2B is an auto-generated statement that reflects the returns filed by the suppliers.

• Match the invoice-wise ITC as  books of accounts & that reflected in GSTR-2B 

• Declare the output tax liability and input tax credit details matched in the previous step while filing the monthly return in form GSTR-3B.

• Follow up with your suppliers for mis-matched ITC, if any.

• Reconcile  such differences & claim the same in the next month’s return 

• Ensure that if any excess input tax credit is claimed it shall be reversed with the interest as applicable.

Q. What are the rules or eligibility criteria for ITC claims?

As per the input credit mechanism, one needs to fulfil several conditions. These are:

• Ensure you are a registered taxpayer.

• The registered person must have a valid tax invoice or a specified tax-paying document.

• The registered person should have received the goods or services they paid for.

• The seller should have paid the tax amount to the government.

• The necessary return should be filed.

• The final lot of inputs should have been received for lot-based goods.

• The supplier should be paid within 180 days from the date of invoice.

Q. Can ITC be claimed after 2 years?

The input tax credit can be claimed for debit notes and tax invoices less than a year old. The timelines for the same will be earlier of:

• Due date to file the annual return for the financial year.

• November 30 of the succeeding financial year.

Q. How do I claim my ITC balance?

ITC can be claimed by meeting the required eligibility criteria, maintaining tax invoices and debit notes records, filing the necessary tax returns, and being GST compliant.

Q. What is ITC under income tax?

ITC or Input Tax Credit is the tax amount you pay while purchasing goods for your business, which can be claimed to reduce your output tax liability. It applies to GST. 

Suppose you pay ₹500 with 18% GST (₹90) to purchase raw materials, and after making the goods, you sell those at ₹1000, collecting ₹180 (18% GST). While filing GST, you can claim ₹90 as your Input Tax Credit. 

Q. On what goods and services can ITC be claimed?

ITC can be claimed on all purchases related to businesses that make taxable supplies, such as raw materials, capital goods, and overhead expenses.