Input Tax Credit Under GST: Meaning, Eligibility and Calculation

Content reviewed: 7 October 2026. Examples are illustrative.

Input tax credit, or ITC, is eligible GST on business purchases that you can use to pay GST on your sales and services. It reduces your cash payment, but GST charged on an invoice does not automatically make the purchase eligible for credit.

This guide answers “Can I claim GST credit on this purchase?” Detailed reversals, reclaims and reporting belong to the separate guide, “GSTR-3B Input Tax Credit: How to Claim, Reverse and Reclaim It.”

What is input tax credit, and how is it calculated?

Suppose a registered trader purchases goods in September 2026 for ₹1,00,000 plus ₹18,000 GST and sells them for ₹1,50,000 plus ₹27,000 GST. This example uses an illustrative 18% rate.

The trader collects ₹27,000 GST from the customer. Eligible purchase credit pays ₹18,000 of that liability, leaving ₹9,000 to pay through cash.

The example assumes fully eligible credit, matching tax headings, no opening credit balance and no other adjustments or additional cash-payment restrictions.

Is GST calculated only on your profit?

For an ordinary taxable sale, GST is calculated on the full selling value before GST, not just your profit.

For example, you purchase goods for ₹10,000 plus ₹1,800 GST and sell them for ₹13,000 plus GST, using an illustrative 18% rate.

Charge the customer ₹2,340 GST on the full selling value of ₹13,000. From this ₹2,340 liability, use the eligible purchase credit of ₹1,800 and pay the remaining ₹540 through cash. The ₹3,000 difference between purchase and selling values is your margin; the customer’s GST is calculated on the full ₹13,000 selling value.

How does credit work through the sales chain?

Consider goods passing from a manufacturer to a distributor, then to a retailer and finally to a customer. The example uses an illustrative 5% rate throughout and assumes fully eligible credit, no other purchases or adjustments, and no purchase credit for the manufacturer.

The distributor pays ₹5,000 GST to the manufacturer on its purchase and collects ₹5,250 GST on its sale. It uses the ₹5,000 purchase credit and pays the remaining ₹250 to the Government. The retailer similarly uses ₹5,250 credit against ₹6,000 GST and pays ₹750.

Each dealer collects the full GST shown on its invoice, but pays only the balance after using eligible credit. Together, the dealers pay ₹5,000 + ₹250 + ₹750 = ₹6,000 to the Government. This equals the GST charged to the final customer. Credit prevents the same purchase tax from being paid again at every stage.

For return preparation and payment, see how to file GSTR-3B and pay GST. Before applying, check when your business needs to apply for GST registration.

Which business purchases are eligible for GST credit?

Regular GST-registered businesses can claim eligible GST on purchases used for taxable business activity, provided the document, receipt, reporting and other conditions are met.

Goods purchased for resale: A registered electrical-goods trader buys taxable stock for resale. GST on that stock is available as credit when the conditions are satisfied. Goods bought for the proprietor’s home must be kept out of the business credit claim.

Materials used in manufacturing: A manufacturer buys steel, components and packing materials to make and sell taxable products. GST on these purchases is available as credit. Materials used only to make exempt products must be identified separately because that credit is not available.

Services used in the business: GST on accounting fees, business software and taxable office rent is available where the expense supports taxable business activity and is not restricted. If a subscription is used partly for business and partly personally, the personal portion cannot be claimed.

Business equipment: Computers used by office staff and machines used for taxable production are eligible purchases. An office building and an ordinary company car have separate restrictions; purchasing them in the business’s name does not remove those restrictions.

An expense appearing in your business accounting records is not enough by itself. Its actual use and the GST conditions determine credit availability.

Composition taxpayers cannot claim ITC. A composition supplier issues a bill of supply and cannot charge GST separately; the buyer cannot claim the supplier’s composition tax as purchase credit. Official GST credit guidance

What should you check before claiming an invoice?

For ordinary supplier invoices, confirm the following:

1. The document belongs to your registration: Hold a valid tax invoice or other prescribed credit document with the correct GSTIN and required details.
2. The purchase is for business: Identify its use and exclude personal purchases and purchases used only for exempt supplies.
3. The goods or services have been received: Keep delivery or service-completion evidence. Legally recognized deliveries to another person on your instructions can also count as receipt.
4. The supplier has reported the invoice: Compare it with GSTR-2B and review any credit restriction shown there.
5. The tax-payment condition is met: The supplier’s GST must have been paid to the Government. GSTR-2B reporting alone does not prove payment; investigate supplier defaults brought to your attention.
6. You claim through your return: Eligible credit is claimed through GSTR-3B. An invoice appearing in GSTR-2B does not, by itself, add credit to your ledger.
7. The purchase is eligible and within time: Review blocked-credit restrictions and the claim deadline before including it.

If goods under one invoice arrive in several lots, credit ordinarily becomes available when the last lot is received. An advance payment or purchase order alone does not establish receipt. These conditions come from Section 16 of the CGST Act.

Are the documents different for imports and reverse-charge purchases?

Yes. The document supporting credit depends on the type of purchase.

Imported goods: The overseas supplier’s invoice shows what you purchased, but the bill of entry records the import and IGST paid through customs. Use the bill of entry to verify your GSTIN and eligible import IGST. Basic customs duty is not GST credit. Import details may appear in GSTR-2B, but the overseas supplier does not report a domestic GST invoice like an Indian supplier.

Reverse-charge purchases: Here, your business pays the applicable GST directly to the Government instead of the supplier collecting it. Keep the supplier’s invoice, or issue a self-invoice where the law requires one, and retain the tax-payment evidence. Pay reverse-charge GST through cash before claiming related eligible credit.

Some reverse-charge purchases, such as certain services received from unregistered suppliers or overseas suppliers, will not appear as ordinary supplier invoices in GSTR-2B. Review your purchase documents and the GST you paid; an absent ordinary invoice entry in GSTR-2B does not, by itself, settle credit eligibility. GST rules on credit documents

Before preparing invoices or returns, check which details to include on a GST invoice.

Which purchases have blocked credit, conditional credit or normal credit?

The following three groups help explain credit availability. Every claim must meet the basic requirements explained above, including business use, valid documents and the claim deadline. The second group involves an additional permitted use or legal exception.

1. Purchases on which credit is blocked

For the uses described below, credit is not available:

Putting these expenses in your business accounting records, or finding an invoice in GSTR-2B, does not remove the restriction. Some expense categories have permitted exceptions, explained next. Blocked-credit provisions in Section 17

2. Purchases on which credit is available for permitted uses

Passenger vehicles: Credit is available on vehicles bought for taxable resale, taxable passenger transport or taxable driving lessons. A business buying a small car for its own management visits has a different result. The simplified vehicle table below explains the seating rule.

Catering and similar services supplied onward: A caterer purchasing catering services to complete a taxable catering order can claim credit where the applicable rate permits it. The same principle covers listed restricted goods or services used to provide taxable supplies of the same category, or as part of a qualifying taxable package. Merely purchasing refreshments for your own staff does not meet this test.

Employee benefits required by law: Where an applicable law requires an employer to provide a qualifying facility, such as a factory canteen, credit is available under the employer-obligation exception. Keep evidence of the legal requirement and the expense. A voluntary company policy alone does not establish this exception.

This is the final proviso to Section 17(5)(b), following sub-clause (iii). Circular 172/04/2022-GST, dated 6 July 2022, clarification 3, confirms that it applies to the whole of clause (b), including the listed food, insurance, membership and vacation-benefit categories. It does not remove unrelated restrictions. CBIC’s employee-benefit clarification

Hiring vehicles, vessels and aircraft: Ordinary management use can have blocked credit. The law allows specified taxable activities, such as passenger transport or qualifying training; vessels and aircraft used to transport goods also have a permitted-use exception. Certain related insurance and repair expenses have exceptions linked to permitted use, vehicle manufacture or insurance activity.

Construction services used by a contractor: A subcontractor’s works-contract service used to execute a customer’s taxable works contract has different treatment from constructing your own office. The construction section below explains this distinction.

Gifts and promotional offers: Genuine free gifts and samples generally have blocked credit. Certain transactions treated as taxable supplies under GST law have different treatment. Two products sold together for one price are not automatically free samples because the advertisement says “buy one, get one.” Establish what was actually supplied and whether it was taxable. CBIC’s promotional-scheme clarification

Non-resident taxable persons: Domestic purchases under this special registration have blocked credit, while goods imported by that person are excepted. Current statutory exceptions

3. Purchases on which credit is available under normal ITC rules

These ordinary business purchases do not need the special exceptions discussed above:

• Goods purchased for taxable resale.
• Raw materials, components and packing materials used for taxable production.
• Accounting services, business software and taxable office rent supporting taxable business activity.
• Computers, eligible production machinery and goods vehicles used for taxable business activity.
• Eligible employee travel to attend customer meetings, as distinct from employer-funded holidays.

For example, a trader purchasing stock for taxable resale establishes the invoice, receipt and reporting conditions. The trader does not need to prove an employee-benefit obligation or a passenger-vehicle exception to claim that stock’s eligible GST.

“Normal credit” still requires the basic eligibility checks. Personal use, exempt activity and a tax-rate arrangement denying ITC can change the result.

Is GST credit available on vehicles?

The seating count includes the driver. A vehicle with 13 passenger seats plus one driver seat has 14 total seats and is eligible for taxable business use. The basic credit checks still apply. Check the approved seating capacity in the vehicle records.

For a vehicle-rental business, credit also depends on the rental service and its tax-rate conditions. Renting vehicles as your main business does not automatically allow credit under every arrangement. Current vehicle-credit provisions

Is GST credit available on construction expenses?

Constructing your own office or warehouse: GST on building materials and construction services is blocked for construction of your own immovable property. Using the building for business does not make that credit available.

Installing eligible production machinery: Credit is available on qualifying plant and machinery and its qualifying installation or foundation costs. Land, buildings and civil structures do not become eligible merely because they are located in a factory.

A contractor using a subcontractor: A contractor executing a taxable customer works contract can claim eligible GST on a subcontractor’s works-contract service used to complete that contract. A contract taxed under a scheme that denies ITC must follow that scheme’s restriction. This differs from constructing the contractor’s own office.

Repairs and maintenance: Routine eligible repairs are different from construction or renovation costs added to the building’s asset value. For example, ordinary maintenance may be eligible, while a capitalized building extension is subject to the construction restriction. Review what was done and how the expense was recorded. Construction-credit provisions

Can you claim GST on business equipment and also claim depreciation?

You cannot claim both ITC and income-tax depreciation on the same GST component.

For example, a production machine costs ₹1,00,000 plus ₹18,000 GST. If the ₹18,000 is eligible and claimed as ITC, exclude that GST from the amount on which you claim depreciation. If you claim depreciation on the GST component, ITC on that component is not allowed. Section 16(3): depreciation and ITC

What is the last date to claim ITC?

For ordinary invoices and debit notes, the general deadline is 30 November following the relevant financial year, or filing the relevant annual return, whichever happens earlier.

An invoice dated 15 March 2026 belongs to financial year 2025–26. Its general claim deadline is 30 November 2026. If the relevant annual return is filed on 25 November 2026, claim the credit before filing that annual return.

The claim must be made through a return filed within this window. Filing November 2026 GSTR-3B in December does not extend the deadline.

A debit note’s financial year is considered separately from the original invoice’s year. A debit note issued in September 2026 generally has a 30 November 2027 deadline, or earlier annual-return filing, even if the original invoice belongs to a previous financial year. Current invoice and debit-note deadline

Relief for specified previous financial years and restored registrations has separate conditions. It is not a general extension for every missed invoice. CBIC’s clarification on this relief

What if your business has taxable and exempt supplies?

Keep purchases used for taxable supplies separate from those used for exempt supplies. You can maintain two purchase registers, or clearly labelled groups in your accounting software or Excel workbook, together with a separate list of common purchases and expenses.

Purchases used only for taxable supplies: Claim eligible credit after satisfying the normal conditions. For example, packing materials used only for taxable products belong in this group.

Purchases used only for exempt supplies: Do not claim their GST as ITC. Materials used only to make exempt products should be identified here.

Purchases shared by both activities: Office rent, accounting fees or other shared expenses may support both taxable and exempt supplies. After excluding blocked and personal credit, apportion eligible common credit using the applicable exempt-supply and total-turnover calculation. The portion relating to exempt supplies cannot be retained.

If all otherwise eligible inputs and services genuinely support both activities, the eligible common pool is apportioned. Do not apply a turnover percentage to every purchase merely because the accounting records have not separated their use; identify directly attributable purchases first.

Common credit on capital goods follows separate rules. Exports and qualifying SEZ supplies are zero-rated and should not be grouped with ordinary exempt domestic supplies. Rules for separating and apportioning credit

The separate GSTR-3B Input Tax Credit guide explains the numerical reversal calculation, later reclaims, purchase-return adjustments and payment using credit. This article establishes whether the purchase is eligible before those adjustments are made.

Our GST return filing services in Chennai can help review purchase documents and identify eligible credit before filing your return.

For credit corrections and reclaims, see how to reverse and reclaim ITC in GSTR-3B.