Rules 42 and 43: common credit reversal
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Updated 03 Oct 2026
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AI summary
Working out the ITC to reverse when inputs serve both taxable and exempt supplies.
3 sections 5 steps
Rule 42 — inputs and input services
- Credit used only for exempt or non-business → reverse fully (T1, T2).
- Blocked credit → reverse (T3).
- Credit used only for taxable supplies → keep.
- Common credit (C2) is split:
- D1 (exempt share) = C2 × Exempt turnover ÷ Total turnover
- D2 (non-business share) = 5% of C2
- Reverse D1 + D2 every month; recalculate for the whole year and adjust by the September return of the next year.
Example: common credit ₹50,000; exempt turnover ₹20 lakh of total ₹1 crore → D1 = ₹10,000; D2 = ₹2,500 → reverse ₹12,500.
Rule 43 — capital goods
- Common capital goods have a useful life of 5 years (60 months).
- Monthly common credit (Tm) = Credit ÷ 60.
- Monthly reversal (Te) = Tm × Exempt turnover ÷ Total turnover.
- Recalculate at year end.
Reporting
GSTR-3B Table 4B(1). Keep the working in your files for audit.
Sources
PreviousITC reversal: when and how Next in Input Tax Credit Rules 37 and 37A: non-payment and supplier non-filing
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