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GST · Input tax creditGST ITC on capital goods: eligibility and reversal examples
GST allows full input tax credit on capital goods in the month of purchase – unlike the old excise rule of 50%. But there are conditions: no depreciation on the GST portion, Rule 43 for common use, and tax on sale of used assets. Here is how it works.
"Capital goods" under GST are goods whose value is capitalised in the books and which are used or intended to be used in the course or furtherance of business. Machinery, computers, furniture, vehicles (where not blocked) and tools fall here.
Key rules
| Rule | Provision |
|---|---|
| Full ITC at once | Section 16 – in the month of receipt and GSTR-2B reflection |
| No depreciation on tax | Section 16(3) – choose ITC or depreciation on GST, not both |
| Blocked items | Section 17(5) – cars, buildings, works contracts etc. |
| Common use (taxable + exempt) | Rule 43 – 60-month spread and monthly reversal |
| Exclusive exempt use | No ITC |
| Change of use to exempt | Reverse ITC for remaining useful life (Rule 43) |
| Sale / removal of used capital goods | Section 18(6), Rule 44(6) |
| Opting into composition / exempt | Reverse ITC on capital goods (reduced by 5% per quarter) |
Sale of used capital goods: Section 18(6)
When used capital goods are sold, tax payable is the higher of:
- ITC taken on the capital goods reduced by 5 percentage points for every quarter (or part) from the date of invoice; or
- Tax on the transaction value of the sale.
For refractory bricks, moulds, dies, jigs and fixtures sold as scrap, tax on transaction value applies.
Worked example 1: sale of machine
Example: Vardhan Enterprises bought a machine on 10 April 2024 for ₹20,00,000 + 18% GST (₹3,60,000) and claimed full ITC. It sells the machine on 15 October 2026 for ₹10,00,000.
- Quarters used: April 2024 to October 2026 = 11 quarters (10 complete + part) → reduction 55%.
- ITC reduced: ₹3,60,000 × (100% – 55%) = ₹1,62,000.
- Tax on transaction value: 18% × ₹10,00,000 = ₹1,80,000.
- Pay the higher: ₹1,80,000 (charged on the invoice to the buyer).
If the sale price were ₹6,00,000, tax on transaction value would be ₹1,08,000. The reduced ITC of ₹1,62,000 is higher, so ₹1,62,000 must be paid – the Section 18(6) floor prevents sale of used assets at low values to recover only a small part of the credit taken.
Worked example 2: depreciation choice
Example: A manufacturer buys a CNC machine for ₹30,00,000 + ₹5,40,000 GST. - Normal route: claim ITC ₹5,40,000; capitalise ₹30,00,000 in books and for income-tax depreciation. - If ITC is not available (e.g. exempt supplies), capitalise ₹35,40,000 and claim depreciation on the full amount. - Claiming both ITC and depreciation on ₹5,40,000 is not allowed.
Common use – Rule 43
Capital goods used for both taxable and exempt supplies: credit is treated as spread over 60 months; the exempt share (by turnover ratio) is reversed each month. See Rule 42/43 reversal.
Capital goods sent for job work
Capital goods (moulds, dies, jigs, tools) can be sent to a job worker without payment of tax under a delivery challan; they must return within 3 years, or the supply is deemed to have occurred on the date of sending.
Transfer on business change
On sale, merger or transfer of business, unutilised ITC (including on capital goods) can be transferred to the transferee through ITC-02, if liabilities are also transferred.
Common mistakes
- Claiming ITC on civil works of factory buildings as "capital goods".
- Claiming depreciation on the full invoice including GST after claiming ITC.
- Not paying tax under 18(6) on disposal of old machines.
- Missing ITC reversal when switching to composition.
Key takeaway
Capital goods ITC is available in full upfront, but not with depreciation on the same tax; common use needs Rule 43, and disposals need the Section 18(6) computation. Our GST and audit teams align fixed asset registers with ITC records.
Official references
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
Is full ITC available on capital goods in the year of purchase?
Yes. GST allows the entire ITC on capital goods at once, provided the Section 16 conditions are met and the item is not blocked.
Can I claim depreciation on the GST portion?
No. If you claim depreciation under the Income-tax Act on the GST component, ITC on that tax is not allowed (Section 16(3)). Normally ITC is claimed and the asset is capitalised net of GST.
What GST applies when I sell used machinery?
Under Section 18(6), you pay the higher of: ITC taken reduced by 5 percentage points per quarter of use, or tax on the transaction value.
Are buildings capital goods for ITC?
No. ITC on construction of buildings and civil structures is blocked under Section 17(5)(c) and (d); plant and machinery (with foundations) is allowed.
Is ITC on a factory shed allowed?
No. Sheds and civil structures are immovable property; ITC is blocked. Machinery foundations are part of plant and machinery and allowed.
Can ITC on capital goods be claimed in instalments?
No. Full ITC is taken at once (subject to Rule 43 for common use).
Is GST payable when capital goods are scrapped?
If written off or destroyed, reverse ITC; if sold as scrap, pay tax under Section 18(6) rules.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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