Indirect Tax Laws and Practice · Input Tax Credit

Eligibility and Conditions for Taking Input Tax Credit under Section 16

Updated 11 October 2026 · Fact-checked

Section 16 of the CGST Act lets a registered person take credit of input tax on supplies used in business, but only if conditions are met: valid tax invoice, supplier's reporting, receipt of goods or services, tax paid to Government, and return filed. Pay the supplier within 180 days and claim before the time limit.

Understand Eligibility and Conditions for Taking Input Tax Credit

Input tax credit (ITC) lets a registered person set off the GST paid on purchases against the GST payable on sales. This avoids tax on tax. Section 16(1) gives the entitlement: you can take credit of input tax charged on supplies of goods or services or both, used or intended to be used in the course or furtherance of business. The credit goes to your electronic credit ledger.

The entitlement is not automatic. Section 16(2) begins with "notwithstanding anything contained in this section" and says no credit is allowed unless all the listed conditions are met. Think of them as a checklist. If one fails, credit fails.

The conditions are: (a) you hold a tax invoice or debit note issued by a registered supplier, or other prescribed tax paying documents; (aa) the supplier has furnished the invoice details in the statement of outward supplies and these are communicated to you under section 37; (b) you have received the goods or services; (ba) the ITC details communicated to you under section 38 have not been restricted; (c) the tax charged has actually been paid to the Government, in cash or through ITC; and (d) you have furnished the return under section 39.

There are also timing and payment rules. Goods received in lots need the last lot received before credit is taken. If you do not pay the supplier within 180 days from the invoice date, you must pay back the credit with interest. Section 16(4) sets a deadline for taking credit. Section 16(3) denies credit on the tax part of capital goods if you claim depreciation on it under the Income-tax Act.

In exams, questions give a short fact pattern and ask whether credit is allowed, when, or what must be reversed. Test each condition in turn and state the result.

Key rules to remember

Core conditions, Section 16(2): ITC allowed only if: tax invoice/debit note + supplier's details furnished and communicated + goods/services received + ITC not restricted under section 38 + tax paid to Government + return under section 39 filed; All conditions must be met together. Failure of any one denies credit for that supply.
Receipt in lots or instalments: Credit is allowed on receipt of the last lot or instalment; First proviso to section 16(2). Applies where goods against one invoice arrive in lots.
180-day payment rule: If supplier not paid within 180 days from invoice date, ITC availed must be paid back with interest under section 50; Does not apply to supplies on which tax is payable on reverse charge. Under Rule 37 the reversal is proportionate to the amount not paid, made in GSTR-3B for the tax period immediately following the 180 days.
Re-availing after payment: On later payment of value plus tax to the supplier, the ITC reversed can be re-availed; Third proviso to section 16(2) and Rule 37(2). The Section 16(4) time limit does not apply to re-availing credit that was reversed earlier, in accordance with the Act or the Rules (Rule 37(4)).
Time limit, Section 16(4): Last date = 30 November following the end of the financial year of the invoice/debit note, or date of furnishing the annual return, whichever is earlier; Invoice of FY 2026-27 must be claimed by 30 November 2027 at the latest.
Depreciation bar, Section 16(3): If depreciation is claimed on the tax component of capital goods under the Income-tax Act, no ITC on that tax component; The Act text refers to the Income-tax Act, 1961 as written.

How to solve Eligibility and Conditions for Taking Input Tax Credit questions

Use a fixed checklist so that no condition is missed. Write each test and its result in the answer.

1Confirm the claimant is a registered person and the supply is used or intended to be used in the course or furtherance of business (Section 16(1)).
2Check the document: tax invoice or debit note from a registered supplier, or other prescribed document.
3Check that the supplier has furnished the invoice details and they are communicated to the recipient, and that ITC is not restricted.
4Check actual receipt of goods or services, including deemed receipt where delivery is on your direction. For lots, credit only after the last lot.
5Check that tax was actually paid to the Government and that the recipient has filed the return under section 39.
6Test the 180-day payment rule on the invoice date. If breached, compute proportionate reversal and interest. Ignore reverse charge supplies.
7Test the Section 16(4) time limit and the Section 16(3) depreciation bar for capital goods.
8State the conclusion: allowed, allowed later, or denied or reversed, with the amount.

Quickest way: Six-gate check

When to use it: Use in MCQs and short case questions where you must decide quickly whether credit is available.

Gate 1: Is there a valid tax invoice and has the supplier reported it?
Gate 2: Have you received the goods or services (last lot if in instalments)?
Gate 3: Has the tax reached the Government and have you filed your return?
Gate 4: Have you paid the supplier the value plus tax within 180 days from the invoice date (unless reverse charge)?
Gate 5: Is the claim before 30 November following the financial year, or the annual return date, whichever is earlier?
Gate 6: For capital goods, no depreciation claimed on the tax part. If any gate fails, name it and stop.

Common mistakes in Eligibility and Conditions for Taking Input Tax Credit

Claiming credit on the first lot of goods received in instalments.
Students link credit to the invoice date rather than receipt.
Fix: Remember the first proviso: credit is allowed only upon receipt of the last lot or instalment.
Treating the 180 days as permanent loss of credit.
The word reversal sounds final.
Fix: Credit is paid back with interest, but can be re-availed once payment is made to the supplier. The Section 16(4) time limit does not apply to re-availing credit that was reversed earlier, in accordance with the Act or the Rules.
Applying the 180-day rule to reverse charge supplies.
Students apply the rule to every inward supply.
Fix: The proviso excludes supplies on which tax is payable on reverse charge.
Counting the 180 days from the date of payment or receipt.
Confusion with other time limits.
Fix: Count from the date of issue of the invoice by the supplier.
Reversing the full credit when the buyer has paid part of the amount.
Students ignore the proportion wording in Rule 37.
Fix: The reversal is proportionate to the amount not paid to the supplier.
Ignoring the time limit and stating 30 September as the deadline.
Old law memory.
Fix: The Act now states the thirtieth day of November following the end of the financial year, or the annual return date, whichever is earlier.

Worked examples

Example 1

Kaveri Traders, Chennai, bought goods worth ₹2,00,000 plus GST of ₹36,000 on an invoice dated 1 June. The supplier delivered in two lots, 10 June and 25 June. The supplier reported the invoice in its statement of outward supplies, the details were communicated to Kaveri under section 37, and the ITC has not been restricted under section 38. The supplier has paid the tax to the Government. Kaveri files the return under section 39 for June. When can Kaveri take credit of ₹36,000?

Show the solution

Kaveri holds a valid tax invoice, the supplier has reported it and the details are communicated to Kaveri, ITC is not restricted, and the supplier has paid the tax to the Government.
The goods came in two lots against one invoice, so the first proviso to section 16(2) applies.
Credit is allowed only upon receipt of the last lot, which was 25 June. Receipt on 10 June does not unlock the credit.
So credit of ₹36,000 can be taken on or after 25 June, in the June return period, subject to the return under section 39 being filed, the supplier's details being communicated and ITC not being restricted. If the supplier's details were not communicated or ITC were restricted, credit would be denied until that condition is met.

Answer: Kaveri can take the ₹36,000 credit on or after 25 June, in the June return period, not on 10 June, subject to the supplier's details being communicated and ITC not being restricted.

Example 2

Mehta Industries availed ITC of ₹90,000 on an invoice of ₹5,90,000 (value ₹5,00,000 plus GST ₹90,000) dated 1 April. By the end of 180 days it had paid the supplier only ₹2,95,000. The supply is not under reverse charge. What is the ITC to be reversed, and what happens later?

Show the solution

Total invoice amount is ₹5,90,000. Amount not paid is ₹5,90,000 − ₹2,95,000 = ₹2,95,000.
Unpaid proportion = 2,95,000 ÷ 5,90,000 = one half.
Under Rule 37(1), ITC proportionate to the unpaid amount is reversed: ₹90,000 × 1/2 = ₹45,000.
This is paid or reversed with interest under section 50 in GSTR-3B for the tax period immediately following the 180 days.
If Mehta later pays the balance to the supplier, it can re-avail the ₹45,000 under Rule 37(2).

Answer: ₹45,000 of ITC must be reversed with interest. It can be re-availed after Mehta pays the balance to the supplier.

Exam tips

Write the conditions of section 16(2) as a list with clause letters. Examiners award marks per condition.
In case questions, apply each condition to the facts and give a clear conclusion for each.
For the 180-day rule, always state the three points: reverse charge exclusion, interest, and the right to re-avail.
Quote the 30 November deadline correctly and use the earlier of that date or the annual return date.
Check whether the question asks about the Act or the Rules. The reversal mechanics are in Rule 37.

Practice questions from Input Tax Credit

Eligibility and Conditions for Taking Input Tax Credit in other exams

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

Eligibility and Conditions for Taking Input Tax Credit: frequently asked questions

What are the conditions to avail ITC under GST?

Under section 16(2) you need a tax invoice or debit note, the supplier's reporting of it, receipt of goods or services, ITC not restricted under section 38, tax actually paid to the Government, and a return filed under section 39. All must be met.

What is the time limit for claiming ITC?

Credit for an invoice or debit note cannot be taken after 30 November following the end of the financial year to which it pertains, or the date of furnishing the annual return, whichever is earlier.

What is the 180-day rule for payment to the supplier?

If you do not pay the supplier the value and tax within 180 days from the invoice date, you must pay back the ITC with interest. Reverse charge supplies are excluded. You can re-avail the credit once you pay.

Is ITC allowed if depreciation is claimed on the GST part of capital goods?

No. Under section 16(3), if depreciation is claimed on the tax component of capital goods and plant and machinery under the Income-tax Act, ITC on that tax component is not allowed.