What is Input Tax Credit (ITC)?

Last updated: 27 June 2026

Input Tax Credit (ITC) is the mechanism under GST that allows a registered business to reduce the tax it has already paid on its purchases (inputs) from the tax it owes on its sales (output tax), so that GST is effectively paid only on the value added at each stage.

For example: a manufacturer buys raw material paying ₹900 GST and sells the finished product collecting ₹1,500 GST. They pay only ₹600 to the government (₹1,500 minus ₹900 ITC). This chain prevents the cascading effect of "tax on tax."

How to claim ITC

ITC is claimed in Table 4 of GSTR-3B. Since October 2025, the process runs through the Invoice Management System (IMS): you must accept each supplier invoice in IMS, it then flows into your GSTR-2B (auto-generated on the 14th), and that populates Table 4. You cannot claim ITC on an invoice that your supplier has not filed, or that you have rejected in IMS.

Fact box. ITC for a financial year expires on the earlier of 30 November of the following year or the date of filing the annual return — Section 16(4). After this date, the credit is permanently lost; no extension is granted.

Blocked credits — Section 17(5)

Certain purchases do not qualify for ITC regardless of GST paid, including: personal-use motor vehicles (seating ≤ 13), food and beverages, club memberships, health and life insurance (unless mandated by law), works contracts for own-account construction, and goods given as free samples or gifts. Wrongly claimed ITC must be reversed in GSTR-3B with interest at 24% per annum.

Key conditions for valid ITC

• Supplier has filed GSTR-1 and the invoice appears in your GSTR-2B
• You hold a valid tax invoice
• Goods or services have been received
• Tax has actually been paid by the supplier to the government
• The ITC claim is within the Section 16(4) time limit

Frequently asked questions

Can I claim ITC on capital goods? Yes, ITC on capital goods (plant, machinery, equipment) is available in full in the year of purchase, unless the goods are used for exempt supplies, in which case ITC must be apportioned or reversed.

What happens if there is a mismatch between my claim and GSTR-2B? The portal may block GSTR-3B filing if ITC claimed significantly exceeds GSTR-2B. Resolve by correcting the IMS actions or asking your supplier to file/amend their GSTR-1.

Sources: GSTN — gstn.org.in; CBIC — cbic.gov.in

General information, not professional advice. Verify on the official portal for your case. Reviewed by a Chartered Accountant; last updated 27 June 2026.

Related: GSTR-2B · GSTR-3B · Reverse Charge Mechanism (RCM)