Taxation · Input Tax Credit

Apportionment of Credit and Reversals under Section 17 of GST

Updated 4 October 2026 · Fact-checked

Section 17 allows ITC only to the extent inputs and services are used for taxable or zero-rated business supplies. Where credit is common, you split it. Rule 42 does this for inputs and input services, Rule 43 for capital goods. You remove exclusive credits first, then reverse the common credit in the ratio of exempt turnover to total turnover.

Understand Apportionment of Credit and Reversals (Section 17)

Input tax credit exists to tax only value added. If you use a purchase to make a taxable supply, you get credit. If you use it for an exempt supply or for personal use, no tax is charged on the output, so the credit must not stay with you.

Section 17(1) says that when goods or services are used partly for business and partly for other purposes, credit is allowed only for the business part. Section 17(2) says that when they are used partly for taxable (including zero-rated) supplies and partly for exempt supplies, credit is allowed only for the taxable part. Exempt supplies include non-taxable supplies. Under the Explanation to Section 17(3), the value of exempt supplies also includes supplies on which the recipient pays tax under reverse charge, transactions in securities, sale of land and, subject to Schedule II para 5(b), sale of building.

In practice credit falls into buckets. Some credit is clearly for taxable supplies: take it in full. Some is clearly for exempt supplies or non-business use: never take it. Some is blocked under Section 17(5). The rest is common credit because you cannot say which output it served. Rules 42 and 43 give the formulas to split common credit.

Rule 42 covers inputs and input services. It uses this notation:

T = total ITC for the month.
T1 = blocked credit under Section 17(5).
T2 = credit used exclusively for non-business purposes.
T3 = credit used exclusively for exempt supplies.
T4 = credit used exclusively for taxable or zero-rated supplies.
C1 = T − (T1 + T2 + T3). This is the credit that is not clearly ineligible.
C2 = C1 − T4. This is the common credit.
D1 = 5% of C2. It applies only when the common credit is used partly for business and partly for non-business purposes.
D2 = (C2 − D1) × E ÷ F. This is the exempt share of the remaining common credit.

Total ineligible credit = T1 + T2 + T3 + D1 + D2. D1 is present only where there is non-business use of common credit.

You compute this every month on a provisional basis. Then you do an annual computation for the whole financial year. It must be done by the due date of the return for September of the following year. If the annual figure shows a shortfall in reversal, you add it to your output tax liability with interest. If it shows an excess reversal, you claim the excess as credit in that return.

Rule 43 covers capital goods. Because a machine lasts for years, credit is spread over a notional life of five years (60 months). Tc is the ITC on the capital goods, and Te = Tc ÷ 60 is the monthly credit amount. Tr = (E ÷ F) × Te is the portion of Te attributable to exempt supplies. Tr is excluded from credit, so you reverse it each month. The monthly Tr uses the ratio worked out under Rule 42 for that tax period. It is then trued up in the annual computation under Rule 42(2) for the financial year.

Capital goods used exclusively for taxable supplies get full credit. Those used exclusively for exempt supplies or non-business use get no credit. Credit attributable to non-business use is also ineligible under Rule 43. But the 5% (D1) deduction belongs to Rule 42 only. Do not apply a 5% share to capital goods under Rule 43.

Under Section 17(4), a banking company or financial institution including an NBFC may either comply with Section 17(2) (that is, Rules 42 and 43) or avail 50% of the eligible ITC each month. This covers inputs, capital goods and input services. The option cannot be withdrawn during the remaining part of the financial year.

Key rules to remember

Section 17(1): ITC allowed only for business use; Credit on goods or services used partly for non-business purposes is limited to the business part.
Section 17(2): ITC allowed only for taxable (including zero-rated) supplies; Credit attributable to exempt supplies is not allowed.
Section 17(3) Explanation: value of exempt supplies: Exempt supplies include RCM supplies, securities, land and (subject to Schedule II para 5(b)) building; These items are counted in E, the value of exempt supplies, for apportionment.
Rule 42: credit not clearly ineligible (C1): C1 = T − (T1 + T2 + T3); T = total ITC for the month. T1 = blocked credit under Section 17(5). T2 = exclusive non-business use. T3 = exclusive exempt supplies.
Rule 42: common credit (C2): C2 = C1 − T4; T4 = credit used exclusively for taxable or zero-rated supplies. T4 is eligible in full.
Rule 42: non-business share of common credit (D1): D1 = 5% × C2; Rule 42 only. Applies when the common credit is used partly for non-business purposes. D1 is ineligible.
Rule 42: exempt share of common credit (D2): D2 = (C2 − D1) × (E ÷ F); E = value of exempt supplies in the tax period. F = total turnover of the registered person in the State in that period. D2 is ineligible.
Rule 42: total eligible and ineligible credit: Eligible ITC = T4 + (C2 − D1 − D2); Ineligible = T1 + T2 + T3 + D1 + D2; Eligible plus ineligible must equal T. D1 is nil if there is no non-business use of common credit.
Rule 42: annual computation: Annual shortfall = added to output tax with interest; annual excess = claimed as credit; Done by the due date of the return for September of the following year.
Rule 43: monthly credit amount on capital goods: Te = Tc ÷ 60; Tc = ITC on the capital goods. Te is the monthly credit amount for the five-year period.
Rule 43: monthly reversal: Tr = (E ÷ F) × Te; Tr is the part of Te attributable to exempt supplies. It is excluded from credit. The monthly Tr uses the Rule 42 ratio for that tax period, and it is trued up in the annual computation under Rule 42(2) for the financial year. Credit attributable to non-business use is also ineligible, but it is not computed with the 5% Rule 42 formula.

How to solve Apportionment of Credit and Reversals (Section 17) questions

Use the same sequence for any apportionment question. Do not jump to the ratio before you have separated the exclusive credits.

1List all ITC for the period by use: blocked (T1), exclusive non-business (T2), exclusive exempt (T3), exclusive taxable or zero-rated (T4), and common.
2Check which supplies are exempt for this purpose. Under the Explanation to Section 17(3), include non-taxable supplies, reverse charge supplies, securities and land (and building, subject to Schedule II para 5(b)). Leave out zero-rated supplies, which are treated as taxable. Use E and F as the question gives them.
3Find C1 = T − (T1 + T2 + T3), then common credit C2 = C1 − T4. Do not treat IGST, CGST and SGST differently; add them together unless asked.
4Under Rule 42 only, deduct D1 = 5% of C2 if the question says the common credit is used partly for non-business purposes. Then C2 − D1 is the common credit left for the exempt ratio.
5Work out the ratio E ÷ F using the same tax period. E is exempt turnover, F is total turnover. Then D2 = (C2 − D1) × E ÷ F.
6Compute eligible ITC = T4 + (C2 − D1 − D2). Show ineligible credit too (T1 + T2 + T3 + D1 + D2) and check that eligible plus ineligible equals T.
7For capital goods under Rule 43, take Te = Tc ÷ 60, apply the ratio to get the monthly reversal Tr, and show the amount eligible for that month. Do not apply the 5% D1 deduction here.
8State the answer with a one-line conclusion citing Section 17(2) and Rule 42 or 43. If asked about the year end, note the annual computation by the September return due date, with interest on any shortfall.

Quickest way: Bucket-and-ratio method

When to use it: Use it for numerical MCQs and for the 70-mark written questions where time is short.

MCQ: draw four boxes (T1, T2, T3, T4), subtract them from T, and ignore the rest of the story.
Convert E ÷ F into a simple percentage first, such as 20% or 25%, and multiply once.
Check that eligible plus ineligible equals total ITC. A mismatch means you missed a bucket.
For capital goods, write Tc ÷ 60 and multiply by the ratio. Do not touch the full credit already taken.
Written answers: use a small table with columns for particulars and amount, then a one-line conclusion. Step marks come from showing C1, C2, D1 and D2 separately.
If the question gives no non-business use of common credit, skip D1. If it says zero-rated supplies, treat them as taxable.

Common mistakes in Apportionment of Credit and Reversals (Section 17)

Treating zero-rated supplies as exempt supplies in E.
Both sound like 'no tax on output'.
Fix: Zero-rated supplies are taxable at 0% with ITC allowed. Only exempt and non-taxable supplies (plus the items listed in the Explanation to Section 17(3)) go into E.
Applying E ÷ F to total ITC instead of only common credit.
Students rush to the ratio and skip the exclusive buckets.
Fix: Remove T1, T2, T3 and T4 first to get C2. Apply the ratio only to C2 − D1.
Forgetting the 5% (D1) deduction under Rule 42 when the question says common credit is used partly for non-business purposes.
It is a small number and easy to overlook.
Fix: Check the question for words like personal use or non-business purposes. Compute D1 = 5% × C2 and reduce C2 by D1 before applying the ratio. Do not apply D1 to total ITC, do not apply it when there is no such use, and do not carry it into Rule 43.
Reversing the full ITC on a capital good at once under Rule 43.
Students confuse Rule 43 with blocked credit or full reversal.
Fix: Work out Te = Tc ÷ 60, then reverse only Tr = (E ÷ F) × Te each month for five years.
Using annual turnover for F when the question gives monthly figures.
Mixing tax periods.
Fix: Use E and F of the same tax period as the credit. Then note the annual computation if asked.
Leaving out blocked credit under Section 17(5) from T1 and treating it as common credit.
Section 17(5) is studied separately.
Fix: Remove blocked items first. They are ineligible whatever the use.

Worked examples

Example 1

A registered person makes taxable and exempt supplies. In a month, total ITC is ₹5,00,000, of which ₹40,000 relates exclusively to exempt supplies, ₹20,000 is blocked under Section 17(5), and ₹2,00,000 relates exclusively to taxable supplies. The rest is common credit, which is also used partly for non-business purposes. Exempt supplies are ₹20,00,000 and total turnover is ₹1,00,00,000. Find eligible ITC for the month under Rule 42.

Show the solution

T = ₹5,00,000. T1 (blocked) = ₹20,000. T2 (non-business) = nil. T3 (exempt) = ₹40,000. T4 (taxable) = ₹2,00,000.
C1 = 5,00,000 − (20,000 + 0 + 40,000) = ₹4,40,000.
C2 = C1 − T4 = 4,40,000 − 2,00,000 = ₹2,40,000.
D1 = 5% × 2,40,000 = ₹12,000. C2 − D1 = ₹2,28,000.
Ratio E ÷ F = 20,00,000 ÷ 1,00,00,000 = 20%.
D2 = 20% × 2,28,000 = ₹45,600.
Eligible common credit = 2,28,000 − 45,600 = ₹1,82,400.
Eligible ITC = T4 + eligible common = 2,00,000 + 1,82,400 = ₹3,82,400.
Check: ineligible = T1 + T2 + T3 + D1 + D2 = 20,000 + 0 + 40,000 + 12,000 + 45,600 = ₹1,17,600. 3,82,400 + 1,17,600 = ₹5,00,000.

Answer: Eligible ITC for the month is ₹3,82,400. Ineligible ITC to be reversed or not claimed is ₹1,17,600.

Example 2

A trader buys a machine for ₹10,00,000 plus 18% GST. It is used for both taxable and exempt supplies. In the first month exempt supplies are ₹12,50,000 and total turnover is ₹50,00,000. In the second month the ratio is 10%. Find the ITC reversal for each month under Rule 43.

Show the solution

GST on machine = 18% × 10,00,000 = ₹1,80,000. So Tc = ₹1,80,000, and full credit is taken in the books.
Te = 1,80,000 ÷ 60 = ₹3,000 per month.
Month 1 ratio = 12,50,000 ÷ 50,00,000 = 25%.
Month 1 reversal = 25% × 3,000 = ₹750. Eligible credit for the month = 3,000 − 750 = ₹2,250.
Month 2 ratio = 10%. Reversal = 10% × 3,000 = ₹300. Eligible = ₹2,700.

Answer: Reversal is ₹750 in month 1 and ₹300 in month 2. The same method continues each month for the five-year (60-month) period.

Exam tips

Always start with a bucket list. Examiners give marks for identifying T1 to T4 even if the final number is wrong.
Read the question for the words 'exclusively', 'common' and 'personal use'. They decide which bucket an amount falls in.
Check carefully what is included in exempt turnover: under the Explanation to Section 17(3), reverse charge supplies, securities and land count as exempt supplies.
In MCQs, test each option by adding eligible and ineligible credit back to the total. Wrong options often fail this check.
For theory questions, give provision, facts and conclusion: cite Section 17(1) or 17(2), apply to facts, then state the eligible credit.

Practice questions from Input Tax Credit

Apportionment of Credit and Reversals (Section 17) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Apportionment of Credit and Reversals (Section 17): frequently asked questions

What is the difference between Rule 42 and Rule 43?

Rule 42 applies to inputs and input services that are used for both taxable and exempt supplies. Rule 43 applies to capital goods, where credit is spread over five years (Te = Tc ÷ 60 each month). Under Rule 42 the exempt ratio applies to common credit after the 5% D1 deduction where relevant. Under Rule 43 the ratio applies to Te to get Tr, and the 5% D1 deduction is not used.

Is ITC on personal use allowed under GST?

No. Section 17(1) allows credit only to the extent goods or services are used for business. Credit used exclusively for non-business purposes is ineligible. Where common credit of inputs and input services is used partly for non-business purposes, Rule 42 treats 5% of the common credit (C2) as D1 and makes it ineligible.

Are zero-rated supplies counted as exempt supplies when reversing ITC?

No. Section 17(2) allows credit for taxable supplies including zero-rated supplies. So zero-rated turnover stays out of E but is part of F, the total turnover.

What happens at the end of the year under Rule 42?

You do the annual computation for the whole financial year by the due date of the return for September of the following year. If the annual reversal is higher than what you reversed monthly, you add the shortfall to your output tax liability with interest. If it is lower, you claim the excess as credit in that return.