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GST · Input tax creditRule 42 and Rule 43 ITC reversal: calculation examples
If your business makes both taxable and exempt supplies – or uses inputs partly for non-business purposes – you must reverse part of the common ITC under Rules 42 and 43. Here are the formulas in plain language, with monthly and annual examples.
Section 17(1) and (2) of the CGST Act restrict ITC to the part used for business and for taxable supplies (including zero-rated). Where inputs are common, Rule 42 (inputs and input services) and Rule 43 (capital goods) prescribe how much to reverse.
Rule 42 in plain language
- T = total ITC for the month.
- Remove ITC used exclusively for: - non-business purposes (T1), - exempt supplies (T2), - and blocked under 17(5) (T3).
- C1 = T – (T1 + T2 + T3).
- T4 = ITC on inputs used exclusively for taxable (including zero-rated) supplies – credited in full.
- C2 = common credit = C1 – T4.
- D1 (exempt portion) = C2 × E ÷ F, where E = exempt turnover and F = total turnover (of the State registration) for the period.
- D2 (non-business portion) = 5% of C2 (where there is non-business use).
- Reverse D1 + D2; balance C3 = C2 – D1 – D2 is eligible.
Monthly computation is provisional (using that month's turnover, or previous year's if no turnover); final computation is annual.
Worked example: Rule 42
Example: A Delhi trader sells taxable goods and also exempt items (fresh fruits). In October 2026:
| Item | Amount |
|---|---|
| Total ITC (T) | ₹2,00,000 |
| ITC exclusively for taxable goods (T4) | ₹1,20,000 |
| ITC exclusively for exempt goods (T2) | ₹10,000 |
| Blocked credit (T3) | ₹5,000 |
| Common ITC (C2) – rent, electricity, accounting | ₹65,000 |
| Taxable turnover | ₹36,00,000 |
| Exempt turnover (E) | ₹4,00,000 |
| Total turnover (F) | ₹40,00,000 |
- D1 = ₹65,000 × 4,00,000 / 40,00,000 = ₹6,500 (reverse).
- No non-business use here, so D2 = 0.
- Eligible ITC = ₹1,20,000 + (₹65,000 – ₹6,500) = ₹1,78,500.
- T2 (₹10,000) and T3 (₹5,000) are not claimed.
Annual recalculation
At year-end, recompute D1 using annual E and F. If total monthly reversals were less than the annual figure, reverse the difference with interest; if more, reclaim the excess. Rule 42(2) requires this by the due date for furnishing the return for the month of September following the end of the financial year – report the adjustment in that GSTR-3B (or pay any shortfall with interest through DRC-03 if done later).
Rule 43: capital goods
- Capital goods used exclusively for exempt or non-business: no ITC.
- Exclusively for taxable: full ITC.
- Common capital goods: credit goes to the ledger; each month the common credit is treated as spread over 60 months (useful life 5 years). - Tm = total common credit ÷ 60 (monthly). - Te (exempt portion) = Tm × E ÷ F. - Reverse Te each month (plus non-business share where applicable).
Worked example: Rule 43
Example: The trader buys a delivery van (eligible, goods carriage) for ₹12,00,000 + 18% GST (₹2,16,000), used for both taxable and exempt goods.
- Tm = ₹2,16,000 ÷ 60 = ₹3,600 per month.
- With E/F = 10%, Te = ₹360 per month to be reversed.
- Over 60 months, about ₹21,600 is reversed if the ratio stays at 10%.
Special valuation of exempt supplies (Explanations to Rules 42 and 43)
For reversal purposes: - Interest on deposits, loans and advances – excluded from exempt turnover, except for banks/NBFCs. - Securities – 1% of sale value treated as exempt turnover. - Land and completed buildings – value as prescribed. - High sea sales, Schedule III items – specific treatment.
Who commonly needs Rules 42/43
- Traders with exempt products (fresh produce, unbranded cereals, books).
- Real estate developers (taxable under-construction and exempt completed units).
- Hospitals (exempt healthcare plus taxable pharmacy/cafeteria).
- Educational institutions with taxable services.
- Companies with significant non-business use.
Common mistakes
- Ignoring exempt turnover like interest or rent of residential property.
- Not doing the annual recalculation.
- Treating common capital goods' credit fully in the month of purchase.
- Using all-India turnover instead of State-wise GSTIN turnover.
Key takeaway
If you make exempt supplies, reverse common ITC in the ratio of exempt to total turnover every month and true it up annually. Capital goods follow a 60-month spread. Our GST compliance team prepares Rule 42/43 workings for mixed-supply businesses.
Official references
Provisions discussed (summaries in our Law Library):
- CGST Rules, 2017 – Section 42 / 43: Reversal of common credit
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
When do Rules 42 and 43 apply?
When inputs, input services or capital goods are used partly for taxable supplies and partly for exempt supplies or non-business purposes.
What counts as exempt supply for this purpose?
Exempt and nil-rated supplies, non-taxable supplies, and for reversal purposes certain items like interest income from deposits, sale of land and completed buildings (with specified valuation rules), and securities (1% of value).
When is the annual recalculation done?
The final reversal for the year is computed on actual turnover and adjusted by the due date of the September return of the following year (GSTR-3B for September), with interest if reversal was short.
Is 5% of common credit always reversed for non-business use?
Where common credit is used partly for non-business purposes, the law presumes 5% of common credit (D2) as attributable to non-business use under Rule 42.
Is rent from a residential property exempt turnover for reversal?
Yes. Renting residential dwelling for use as residence to unregistered persons is exempt; it counts in exempt turnover for Rule 42.
Does a one-time sale of land need ITC reversal?
Sale of land is treated as exempt supply for reversal purposes with specified valuation; common credit may need reversal in that period.
Is reversal State-wise?
Yes. Rules 42/43 apply per GSTIN using that registration's turnover.
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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