Two days before the GSTR-3B deadline, your accountant flags a problem: GSTR-2B shows Rs 3.1 lakh of credit, but your purchase register says Rs 4.2 lakh. Input tax credit under GST is the tax you paid on business purchases, which you can set off against the GST you collect on sales, provided you hold a valid invoice, your supplier has filed and paid, and the credit shows in your GSTR-2B.

That Rs 1.1 lakh gap (illustrative figures) is a cash flow problem hiding inside a compliance problem. Claim too little and you overpay tax in cash. Claim too much and you face a notice, plus interest at 24% a year on credit wrongly claimed and used. Most mismatches trace back to a late supplier, a blocked category under Section 17(5) or a missed condition under Section 16 of the CGST Act, 2017. This guide explains who is eligible, which credits are blocked, when reversal is mandatory and which mistakes draw notices, so you can reconcile with confidence and know when a chartered accountant's review is worth it before the 30 November 2026 cut-off for FY 2025-26 claims.

What Is Input Tax Credit Under GST and Who Can Claim It?

Any registered person who uses goods or services in the course or furtherance of business can claim ITC under Section 16 of the CGST Act. Composition scheme taxpayers cannot, and neither can anyone buying for personal use. Think of ITC as a running balance in your electronic credit ledger that reduces your cash tax payment.

Section 16(2) sets the conditions, and every one must hold together. You need a tax invoice, debit note or another prescribed document. The supplier's details must reflect in your GSTR-2B. You must have received the goods or services. The supplier must have paid the tax to the government. And you must have filed your own GSTR-3B.

The GSTR-2B condition is where most claims break. The portal generates it around the 14th of the following month, and it is the statement the department treats as proof of eligible credit. Claiming ITC because the invoice is sitting in your drawer, while it is missing from GSTR-2B, is the quickest route to a notice.

At Chandwani & Company, a chartered accountant firm in Bhopal, we begin every ITC review with this match before touching anything else. Credit that isn't in GSTR-2B gets parked, not claimed. It feels conservative, but it avoids interest and penalty arguments later.

How Do You Claim Input Tax Credit Step by Step?

Claiming credit comes down to one monthly routine: reconcile first, then report, then file. This is the sequence that works for most small and mid-sized businesses:

1. Open the GST portal, go to Services > Returns > Returns Dashboard, pick the period and download GSTR-2B.
2. Match it with your purchase register on supplier GSTIN, invoice number, date and tax amount.
3. Chase suppliers for missing invoices. Don't claim those until they show up.
4. Report eligible ITC in Table 4(A) of GSTR-3B, and any reversal or ineligible credit in Tables 4(B) and 4(D).
5. File by the due date and keep your reconciliation sheet for audit.

Here's a trade-off beginners miss. A supplier who files GSTR-1 late costs you working capital for a month, not the credit itself, because you can claim it in a later return. So don't claim early to rescue cash flow. Chasing the supplier is cheaper than defending an excess claim.

If the link between the two returns still confuses you, our explainer on how to claim input tax credit through GSTR-1 and GSTR-3B lays out who files what and in which order.

What Is Ineligible ITC Under GST and Which Credits Are Blocked?

Ineligible ITC under GST is credit that Section 17(5) of the CGST Act denies even when you hold a valid invoice. The usual suspects are motor vehicles with seating capacity of up to 13 persons, food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, club memberships, and health and fitness centre services. Credit is also blocked on construction of immovable property on your own account (plant and machinery is treated differently), goods or services for personal consumption, and goods lost, stolen, destroyed, written off or given away as gifts or free samples.

Most of these have exceptions that matter. A driving school or taxi operator can claim credit on vehicles used for its core service, and a caterer can claim credit on catering it supplies onward. The same car bought for a director is blocked. The use decides the answer, not the item. One more judgement call: a Diwali hamper for clients is a gift, so the credit is blocked even though it feels like marketing. Tag these in your ledger when they are booked, because finding them in March is painful.

What Are the ITC Reversal Rules Under GST and When Must You Reverse Credit?

ITC reversal means paying back credit you already claimed, by reporting it in Table 4(B) of GSTR-3B. Search for ITC reversal rules GST and you land in a maze of rule numbers, so here is the short version. Our annual return checklist also shows where year-end adjustments surface in GSTR-9.

Rules 42 and 43: exempt and personal use

If you use inputs for both taxable and exempt supplies, Rule 42 requires a proportionate reversal, worked out monthly and trued up at year end. Rule 43 does the same for capital goods, spread over a notional five-year life. Banks and NBFCs that opt for the 50% route follow Rule 38 instead.

Rule 37: supplier unpaid beyond 180 days

If you haven't paid a supplier within 180 days of the invoice date, reverse the ITC and pay interest under Section 50(1) at 18% a year. You can claim it again once you pay. MSMEs with long credit terms trip on this often, so run a creditor ageing report every month.

Rule 37A: supplier has not paid the tax

Under Rule 37A, if your supplier hasn't paid the tax by 30 September following the financial year end, you reverse the credit by the November return of that year, and can re-claim it when the supplier pays. It hurts most when the supplier is a small trader who files late. Check the current rule text before relying on this summary.

What Are the Common ITC Mistakes That Trigger Notices?

Four mistakes cause most ITC notices: claiming without GSTR-2B support, missing the Section 16(4) deadline, ignoring blocked credits, and skipping reversals.

Take the deadline first. For FY 2025-26 invoices, the last date to claim is 30 November 2026, or the date you file your annual return, whichever is earlier. Miss it and the credit is gone for good. Confirm against the latest notifications before you rely on it.

Here's an illustrative case, not a named client. A Bhopal trader claimed Rs 2.4 lakh in April on invoices from a supplier who filed GSTR-1 quarterly. The invoices reached GSTR-2B only in July, and a mismatch notice landed in between. After the trader began monthly reconciliation and asked key suppliers to use the Invoice Furnishing Facility (IFF), the mismatches mostly stopped.

Wrongly claimed and used credit attracts interest at 24% a year under Section 50(3), plus possible penalty. If you spot an error, paying the amount voluntarily through Form DRC-03 before a notice arrives is usually cheaper than waiting.

If your purchase volumes are high or you make both taxable and exempt supplies, a professional review of your input tax credit under GST position, covering GSTR-2B matching, blocked-credit tagging and Rule 42 workings, is worth the fee.

Action Plan: What to Do This Week

Work through these in order, because each step feeds the next:

1. Download GSTR-2B for every month of FY 2025-26 and reconcile it with your books before 30 November 2026.
2. Tag blocked categories in your ledger, including vehicles, gifts, catering and club fees.
3. Run a 180-day ageing report on unpaid supplier invoices and reverse what is overdue.
4. Calculate Rule 42 and 43 reversals if you make any exempt supplies.
5. Save the working papers, so your annual return and any reply to a notice use the same numbers.

If that reconciliation turned up gaps you can't explain, you are not alone, and it is fixable before the deadline. The team at Chandwani & Company can review your ITC position and tell you what to claim, reverse or park. Speak to our team with your GSTR-2B and purchase register in hand.

Frequently Asked Questions

Q1. Can I claim ITC if my supplier has not filed GSTR-1?

A1. No, not yet. The invoice won't appear in your GSTR-2B, so the Section 16(2)(aa) condition isn't met. Don't claim it provisionally. Follow up with the supplier, and claim the credit in the month it appears, as long as that is before the Section 16(4) deadline.

Q2. What is the last date to claim ITC for FY 2025-26?

A2. The deadline is 30 November 2026, or the date you file your GSTR-9 annual return, whichever is earlier. After that, the credit lapses for those invoices. Because notifications and extensions can change timelines, check the latest CBIC circulars or the GST portal before relying on the date.

Q3. Can I claim ITC on a laptop or machinery bought for my business?

A3. Yes, if you use it for business, the invoice carries your GSTIN, and it isn't a blocked category. Capital goods qualify. One catch: under Section 16(3) you can't claim depreciation on the GST portion you've taken as ITC. Choose one benefit, not both.

Q4. Can I claim ITC on GST paid under reverse charge?

A4. Yes, but in two steps. You must first pay the reverse charge tax in cash, since the credit ledger can't be used for it. Then you claim the same amount as ITC in Table 4(A) of GSTR-3B, subject to the usual Section 16 conditions and Section 17(5) blocks.

Q5. Can I use ITC to pay late fees or interest?

A5. No. The electronic credit ledger can pay only tax. Interest, late fees and penalties must be paid from the electronic cash ledger. If a late filing triggers a fee, keep enough cash balance for it, because spare ITC won't help.