Goods and Services Tax (GST) and Corporate Tax Planning · Input Tax Credit and Computation of GST Liability

Eligibility and Conditions for Taking Input Tax Credit

Updated 11 October 2026 · Fact-checked

Section 16 CGST Act lets a registered person take credit of input tax on supplies used or intended to be used in the course or furtherance of business. Credit is allowed only if the conditions in section 16(2) are met, and it must be claimed within the time limit in section 16(4).

Understand Eligibility and Conditions for Taking Input Tax Credit

Input tax credit (ITC) is the tax you paid on purchases, which you set off against the tax you owe on sales. It stops tax from piling up at every stage of the supply chain. Section 16 is the gateway: it says who can take the credit and on what conditions.

The basic right is in section 16(1). Every registered person can take credit of input tax charged on goods or services supplied to him, if they are used or intended to be used in the course or furtherance of business. The credit goes to his electronic credit ledger. Both parts matter: you must be registered, and the purchase must be for business.

The right is then limited by section 16(2), which opens with 'notwithstanding'. So even a business purchase gives no credit unless every condition is met. 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 have been communicated to you under section 37; (b) you have received the goods or services; (ba) the credit communicated to you under section 38 has 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.

The law adds more rules. If goods come in lots or instalments, you take credit only on receipt of the last lot. If you do not pay the supplier the value plus tax within 180 days from the invoice date, you must pay back the ITC availed, with interest under section 50. This does not apply to supplies on which tax is payable under reverse charge. You can take the credit again once you pay the supplier. Under section 16(3), if you claim depreciation on the tax component of the cost of capital goods or plant and machinery under the Income-tax Act, 1961, no ITC is allowed on that tax component.

There is also a time limit. Under section 16(4), you cannot take ITC on an invoice or debit note after the 30th November following the end of the financial year to which it pertains, or the date of furnishing the annual return, whichever is earlier. Sections 16(5) and 16(6) give relief for specific past years and for revoked cancellations.

Key rules to remember

Basic entitlement: Registered person + business use (used or intended to be used in course or furtherance of business) = eligible to take ITC, subject to conditions; Section 16(1). Credit goes to the electronic credit ledger.
Conditions in section 16(2): Document (a) + supplier's GSTR-1 details communicated (aa) + receipt (b) + credit not restricted (ba) + tax paid to Government (c) + return filed (d); All must be met together. Missing one means no credit for that supply.
Deemed receipt: Goods delivered to a third party on the registered person's direction, or services provided to any person on his direction and account = received by him; Covers bill-to-ship-to cases. Explanation to section 16(2)(b).
Instalment supplies: Goods received in lots or instalments: credit on receipt of the last lot; First proviso to section 16(2).
180-day payment rule: Supplier not paid within 180 days from invoice date: pay back ITC availed, with interest under section 50; Not applicable to reverse charge supplies. Credit can be taken again on payment to the supplier.
Time limit: Last date = earlier of (30 November following the end of the financial year of the invoice) and (date of furnishing the annual return); Section 16(4).
Depreciation bar: Depreciation claimed on the tax component of capital goods cost under the Income-tax Act, 1961 = no ITC on that tax component; Section 16(3).

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

Use this order for any case question on whether ITC is allowed.

1Check the claimant is a registered person and the purchase is used or intended to be used in the course or furtherance of business.
2Check the document: a tax invoice or debit note from a registered supplier, or other prescribed document.
3Check the supplier has reported the invoice in outward supplies and the details reached the recipient, and the credit is not restricted.
4Check receipt of goods or services, including deemed receipt and the last lot rule for instalments.
5Check the tax has actually been paid to the Government and the recipient has furnished the section 39 return.
6Check the 180-day payment rule and the depreciation bar in section 16(3).
7Check the time limit under section 16(4), applying the earlier of the two dates.
8Conclude: state the amount allowed or denied, with the section for each point.

Quickest way: Checklist of section 16(2) plus the clock

When to use it: Use for short-answer or case questions where you must say quickly whether credit is allowed.

Tick the five tests: document, supplier's reporting, receipt, tax paid, return filed.
Look for the trap in the facts: last lot pending, no payment to the supplier for over 180 days, depreciation claimed, or a late claim.
Work out the deadline: 30 November after the financial year, or annual return date if earlier.
Write the conclusion in one line with the section number.

Common mistakes in Eligibility and Conditions for Taking Input Tax Credit

Taking credit on a lot-wise basis when goods arrive in instalments.
Students assume credit follows each delivery.
Fix: The first proviso allows credit only on receipt of the last lot or instalment.
Applying the 180-day rule to reverse charge supplies.
The rule is remembered without its exception.
Fix: The rule excludes supplies on which tax is payable on reverse charge.
Saying the credit is lost forever when the supplier is not paid in 180 days.
The word 'paid back' is read as a permanent denial.
Fix: The recipient pays back the ITC with interest under section 50 and can avail it again on paying the supplier.
Allowing ITC on the tax component of capital goods where depreciation has been claimed on it.
Students ignore section 16(3).
Fix: Depreciation on the tax component under the Income-tax Act, 1961 means no ITC on that component.
Taking the time limit as always 30 November.
The 'whichever is earlier' part is dropped.
Fix: The limit is the earlier of 30 November following the financial year and the date of furnishing the annual return.
Treating possession of the invoice as enough.
Condition (a) is remembered and the rest are forgotten.
Fix: Every condition in section 16(2), including supplier reporting, receipt, tax payment and return filing, must be met.

Worked examples

Example 1

Rohan Traders, Pune, a registered person, buys goods from Mehta Industries (registered) under a tax invoice dated 10 January 2027. Mehta delivers the goods in three lots; the third lot arrives on 5 March 2027. Rohan wants to take ITC on the full invoice in his January return. Advise.

Show the solution

Rohan is registered and the goods are for business, so section 16(1) is satisfied.
He holds a tax invoice from a registered supplier, which meets section 16(2)(a).
Goods are received in lots. The first proviso allows credit only on receipt of the last lot or instalment.
The last lot arrives on 5 March 2027, so credit cannot be taken in the January return.
Other conditions must also be met: supplier reporting, tax paid and return filed.

Answer: Rohan cannot take credit in the January return. He may take ITC on the whole invoice only after receiving the last lot on 5 March 2027, if the other section 16(2) conditions are satisfied.

Example 2

Sharma Ltd has an invoice for the financial year 2026-27 for services received. It did not claim ITC in the year. State the last date for claiming, and what happens if the annual return for 2026-27 is furnished on 20 October 2027.

Show the solution

Section 16(4) bars credit after the 30th November following the end of the financial year, or furnishing of the annual return, whichever is earlier.
The financial year 2026-27 ends on 31 March 2027, so the 30 November date is 30 November 2027.
The annual return is furnished on 20 October 2027, which is earlier than 30 November 2027.
The earlier date applies, so the limit is 20 October 2027.

Answer: The last date is 20 October 2027, the date of furnishing the annual return, as it is earlier than 30 November 2027. Credit claimed after that date is barred by section 16(4).

Exam tips

Write the section 16(2) conditions as a numbered list with clause letters, then apply each to the facts.
Underline trap words in the facts: 'last lot', 'not paid', 'depreciation', 'annual return'.
In case questions, follow provision, analysis, conclusion, and name the exact sub-section.
Always state the 'whichever is earlier' logic when the question involves the time limit.
Mention that reverse charge supplies are outside the 180-day rule when payment to the supplier is in the facts.

Practice questions from Input Tax Credit and Computation of GST Liability

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 claim ITC under GST?

Under section 16(2), you need a tax invoice or debit note, the supplier's details furnished and communicated to you, receipt of the goods or services, credit not restricted, tax actually paid to the Government, and a section 39 return furnished. You must also be registered and use the supply for business.

What is the time limit to claim ITC under section 16(4)?

You cannot take ITC after the 30th November following the end of the financial year to which the invoice or debit note pertains, or the furnishing of the annual return, whichever is earlier.

What happens if I do not pay my supplier within 180 days?

You must pay back an amount equal to the ITC availed, with interest under section 50. This does not apply to reverse charge supplies. You can take the credit again when you pay the supplier.

Can I claim ITC if I claimed depreciation on the GST amount?

No. If depreciation is claimed on the tax component of the cost of capital goods or plant and machinery under the Income-tax Act, 1961, ITC on that component is not allowed.