How to Claim Input Tax Credit (ITC) in FY 2026-27: Step-by-Step Guide
ITC is one of the most powerful features of GST — but also one of the most misunderstood. This guide explains exactly who can claim ITC, the 4 mandatory conditions under Section 16(2), blocked credits under Section 17(5), and how to fill GSTR-3B Table 4 correctly for FY 2026-27.
In this article
1. What is Input Tax Credit (ITC)?
Input Tax Credit (ITC) is the mechanism under GST that allows a registered business to offset the GST paid on purchases (input tax) against the GST collected from customers on sales (output tax). You pay GST only on the value added at your stage of the supply chain, not on the full transaction value.
Example: You purchase raw materials paying ₹18,000 as GST (IGST). You sell the finished product and collect ₹27,000 as GST from your customer. Instead of paying ₹27,000 to the government, you use the ₹18,000 ITC to offset it. Net GST payable = ₹9,000. The ₹18,000 you already paid to your supplier is the Input Tax Credit you claim.
ITC is available on inputs (raw materials), input services (professional fees, freight, advertising), and capital goods (machinery, equipment) used in the course of business. It is governed by Sections 16, 17, and 18 of the CGST Act, 2017, and is reported monthly in GSTR-3B Table 4. The total ITC ecosystem is designed to eliminate the cascading effect (tax on tax) that existed under the pre-GST regime.
For FY 2026-27, the ITC framework has tightened considerably compared to the early GST years. The provisional ITC facility is gone, GSTR-2B matching is mandatory, and the GST department has advanced analytics to flag mismatches between supplier and recipient returns. Getting ITC right is no longer optional.
2. The 4 Mandatory Conditions to Claim ITC [Section 16(2)]
Section 16(2) of the CGST Act lays down four conditions that must ALL be satisfied simultaneously before you can claim ITC on any purchase. Failure on any single condition disqualifies the claim entirely:
All 4 conditions must be met simultaneously
Missing even one condition means ITC cannot be claimed for that invoice, regardless of how much GST you paid. There are no exceptions.
- Condition (a) — Valid Tax Invoice or Debit Note: You must possess a tax invoice or debit note issued by a registered supplier. The invoice must contain all mandatory particulars under Rule 46 of CGST Rules — GSTIN of supplier and recipient, HSN/SAC code, taxable value, GST rate and amount, place of supply. A proforma invoice, quotation, delivery challan, or receipt voucher does NOT qualify as a tax invoice for ITC purposes.
- Condition (b) — Goods or Services Must Be Received: The goods must have been actually received by you, or the services must have been actually rendered to you. For goods received in installments (continuous supply of goods), ITC can be claimed on each installment as and when received. Bill-to-ship-to transactions (where goods are delivered to a third party on your behalf) also qualify, subject to conditions in Section 16(2)(b).
- Condition (c) — Tax Must Have Been Paid by the Supplier: The GST on that invoice must have been paid to the government by your supplier. You cannot claim ITC on tax that your supplier has collected from you but not remitted to the government. This is the core reason why GSTR-2B matching became mandatory — GSTR-2B reflects only invoices where suppliers have filed and tax is tracked as payable to government.
- Condition (d) — Invoice Must Appear in GSTR-2B [Section 16(2)(aa)]: Inserted by the Finance Act 2021 and effective from January 2022, this is now the strictest condition. ITC can only be claimed to the extent it is reflected in your GSTR-2B for the relevant tax period. GSTR-2B is a static auto-drafted statement generated from your supplier's GSTR-1. If your supplier has not filed their GSTR-1, the invoice will NOT appear in your GSTR-2B, and you cannot claim ITC for it until it does. Provisional ITC (previously 5-20% of 2B-eligible credit) was abolished entirely with this amendment.
3. Who Can and Cannot Claim ITC?
Not all GST-registered businesses are eligible to claim ITC. The eligibility depends on the registration type and the nature of supplies made:
| Taxpayer Type | Can Claim ITC? | Notes |
|---|---|---|
| Regular registered taxpayer | Yes | Full ITC on all eligible purchases subject to 4 conditions under Sec 16(2) |
| Composition scheme taxpayer | No | Not eligible — composition dealers cannot claim or pass on ITC; they pay a flat rate on turnover |
| Exporter (Zero-rated supply) | Yes | Can claim ITC and apply for refund under LUT (without payment of IGST) or with payment of IGST |
| Input Service Distributor (ISD) | Yes | Can receive and distribute ITC to branches / units under revised Section 20 (mandatory ISD from April 2025) |
| Unregistered person | No | Must obtain GST registration to become eligible for ITC |
| Non-resident taxable person | Limited | Only on imports; cannot claim ITC on domestic purchases within India |
| Exempt-only supplier | No | Businesses making only exempt supplies cannot claim ITC; must use Rule 42/43 to apportion if they also make taxable supplies |
4. Blocked Credits under Section 17(5)
Even when all four conditions of Section 16(2) are satisfied, certain categories of ITC are permanently blocked under Section 17(5). These are considered to have personal or non-business use components, and the law denies ITC on them as a policy decision:
- Motor Vehicles for <13 Passengers: Cars, SUVs, motorcycles purchased for use of directors, employees, or business operations are blocked under Sec 17(5)(a). Exception: ITC is allowed if you are in the business of transport of passengers, imparting driving training, or dealing (buying/selling) in such vehicles.
- Food, Beverages and Outdoor Catering: Restaurant bills, office canteen vendor bills, catering for office events — all blocked under Sec 17(5)(b)(i). Exception: If the catering is an obligatory service mandated by any law (like a statutory canteen under the Factories Act), ITC may be claimed.
- Club Memberships: Gym memberships, golf club memberships, health club, and recreational facility fees paid for employees — fully blocked under Sec 17(5)(b)(ii).
- Health Insurance (unless mandatory): Mediclaim and group health insurance premiums for employees are blocked under Sec 17(5)(b)(iii) UNLESS the health insurance is mandated by any law or terms of employment contract. If your employee agreement mandates it, the ITC becomes claimable.
- Personal Travel / Vacation Benefits: Travel benefits extended to employees for personal travel, leisure, or family holidays — blocked under Sec 17(5)(b)(iv). Normal business travel remains fully eligible for ITC.
- Works Contract for Construction of Immovable Property: If you hire a contractor to construct or renovate an office building, factory, or warehouse for your own use, ITC on that works contract service is blocked under Sec 17(5)(c). Exception: If you are in the business of constructing buildings for sale, ITC is available on construction inputs.
- Goods/Services for Personal Consumption: Anything procured for personal use by directors, partners, or employees that is not for furtherance of business is blocked under Sec 17(5)(g).
Very common mistake: Many businesses claim ITC on health insurance premiums, company car purchases, and office renovation works contracts. All three are blocked under Section 17(5). Incorrect ITC claims are recovered with interest at 24% per annum plus a penalty of 10-100% of the tax amount. Always verify Section 17(5) applicability before recording ITC.
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Try free for 14 days →5. The 7-Step ITC Claiming Process
Follow these seven steps every month to claim ITC correctly, avoid demand notices, and maximise your eligible credit:
Receive and Verify Invoice from Supplier
Collect the original tax invoice, debit note, or bill of entry (for imports). Verify it is a GST-compliant invoice with all mandatory fields under Rule 46: supplier GSTIN, your GSTIN as recipient, HSN/SAC code, taxable value, applicable GST rate, and GST amount split as CGST+SGST or IGST.
Verify Supplier GSTIN Status and HSN Code
Cross-check the supplier GSTIN on the GST portal or within LekhaBooks (which has built-in GSTIN verification) to confirm it is active and not cancelled. Verify the HSN code is correct for the goods or SAC for services, and that the GST rate matches the applicable rate under the GST rate schedule.
Enter Invoice in LekhaBooks Purchase Register
Record the purchase invoice in your accounting system with the correct expense category, HSN/SAC, supplier GSTIN, and GST amount. LekhaBooks automatically checks Section 17(5) blocked credit categories and flags ineligible ITC at the point of entry, preventing inadvertent claims on blocked items like motor vehicles or health insurance.
Wait for GSTR-2B to Be Generated (14th of Next Month)
GSTR-2B is auto-generated on the 14th of every month covering all supplier GSTR-1/IFF filings up to the 11th. For quarterly filers using QRMP, GSTR-2B is generated on the 13th of the month following the quarter. Do not claim ITC before checking GSTR-2B — per Section 16(2)(aa), only invoices appearing in GSTR-2B are eligible for ITC. If an invoice is missing from 2B, follow up with your supplier to file their GSTR-1.
Reconcile GSTR-2B with Your Purchase Register
Match every invoice in your purchase register against GSTR-2B line by line. Identify: (a) Invoices in 2B but not in your books — verify if genuinely received and enter them; (b) Invoices in your books but not in 2B — follow up with the supplier to file their GSTR-1 or IFF; (c) Amount mismatches between your invoice copy and 2B — request credit note or debit note from the supplier to correct.
Fill GSTR-3B Table 4 Before Due Date
GSTR-3B is due by the 20th of the following month (for monthly filers) or 22nd/24th of the month following the quarter (for QRMP filers). Enter the reconciled ITC figures in Table 4 based only on 2B-matched invoices. Unclaimed ITC from GSTR-2B can be carried forward to subsequent months but must be claimed before the November 30 annual deadline.
Apply Rule 88A Set-Off Order for ITC Utilisation
When the GST portal applies your ITC balance against output tax liability, Rule 88A mandates a specific set-off order: (i) IGST credit must be used first against IGST liability, then against CGST, then against SGST/UTGST; (ii) CGST credit can only be used against CGST liability; (iii) SGST credit can only be used against SGST liability. Cross-utilisation of CGST against SGST or vice versa is not permitted.
6. GSTR-3B Table 4 Explained: What to Fill in Each Cell
Table 4 of GSTR-3B is titled "Eligible ITC." It has multiple rows and sub-sections that are frequently filled incorrectly, leading to demand notices. Here is a complete breakdown of each row:
| Table 4 Row | What to Enter |
|---|---|
| 4A(1) — Import of Goods | ITC on import of goods into India (IGST paid via bill of entry filed with customs). This also includes goods received from SEZ units under cover of a bill of entry. |
| 4A(2) — Import of Services | ITC on import of services from a supplier outside India where you pay IGST under reverse charge mechanism as per Section 5(1) of the IGST Act, 2017. |
| 4A(3) — RCM Inward Supplies | GST you pay under reverse charge (RCM) on notified domestic services — e.g., legal services from advocate, freight charges from GTA, security services, director remuneration. RCM ITC must be claimed in the same month as the RCM payment in cash. |
| 4A(4) — ISD Credit | ITC distributed to you by your head office or centralised unit acting as an Input Service Distributor (ISD) via Form GSTR-6. Mandatory for common input services used across multiple GST registrations from April 2025. |
| 4A(5) — All Other ITC | Regular domestic purchase invoices from registered suppliers — the bulk of most businesses' ITC. The GSTN auto-populates this from GSTR-2B eligible credit. You must manually remove any Section 17(5) blocked credits before finalising. |
| 4B(1) — Rule 42/43 Reversal | ITC reversed for inputs and input services used partly for exempt or non-business purposes (Rule 42) and capital goods used for exempt supplies (Rule 43). Calculated using the exempt/total turnover ratio. |
| 4B(2) — Other Reversals | Reversals for Rule 37 (supplier not paid within 180 days), blocked credits inadvertently claimed, and any other reversal not covered by Rule 42/43. Include interest-bearing reversals here. |
| 4C — Net ITC Available | Auto-calculated by the portal: 4A total minus 4B total = Net eligible ITC available for utilisation against your output GST liability. |
| 4D — Ineligible ITC | Section 17(5) blocked credits and ITC on exempt supplies that appeared in GSTR-2B but are NOT claimable. This is a disclosure-only field — amounts entered here are NOT added to 4A. Failure to disclose ineligible ITC in 4D is treated as suppression and attracts higher penalty. |
Critical note for 4A(5) and 4D: Since June 2021, the GSTN portal auto-populates Table 4A(5) with all ITC from GSTR-2B, including blocked credits. You must manually review, separate, and move any Section 17(5) blocked items from 4A(5) to 4D before filing your GSTR-3B. Failing to do this means you are claiming inadmissible credit — an offence under Section 122.
7. When You Must Reverse ITC
ITC already claimed in a previous GSTR-3B must be reversed (treated as output tax payable) in these situations. Failure to reverse on time attracts interest at 18% per annum from the date of erroneous claim:
- Rule 37 — Non-payment to Supplier within 180 Days: If you have not paid the supplier (both consideration and GST) within 180 days of the invoice date, you must reverse the ITC in GSTR-3B Table 4B(2) of the relevant month. Once you pay the supplier after the reversal, you can re-claim the ITC in the GSTR-3B for the month of payment. However, interest from the date of original claim to reversal date must still be paid.
- Rule 42 — Common Inputs Used for Exempt Supplies: If your business makes both taxable and exempt supplies (e.g., you sell goods under GST and also rent out property exempt from GST), a portion of ITC on common inputs and input services must be reversed monthly. The reversal amount = (Exempt turnover / Total turnover) x Total common input ITC for the month. An annual reconciliation is done and the final reversal/reclaim happens via March GSTR-3B.
- Rule 43 — Capital Goods for Exempt Supplies: Similar to Rule 42, but applies to ITC on capital goods over a 60-month period. Monthly reversal = (1/60) x Total ITC on capital goods x (exempt turnover / total turnover). This can result in significant reversals for businesses with capital-intensive exempt supply lines.
- Supplier Issues Credit Note: When your supplier issues a credit note reducing the original invoice value (e.g., for goods returned or price revision), the ITC must be reduced by the amount corresponding to the credit note, in the month the credit note appears in your GSTR-2B.
- Goods Returned: If you return goods to the supplier via a debit note and the supplier acknowledges it with a credit note, reverse the ITC proportionate to the goods returned in the month the credit note is reflected in GSTR-2B.
8. ITC Claim Deadline for FY 2026-27
Under Section 16(4) of CGST Act, ITC for any financial year must be claimed by the earlier of two dates:
- 30 November of the following financial year — For FY 2026-27, this means the deadline is 30 November 2027.
- Date of filing GSTR-9 (Annual Return) for that financial year — whichever of the two dates is earlier applies.
Provisional ITC is completely abolished
Before Section 16(2)(aa) was notified, businesses could claim provisional ITC of up to 20% (later reduced to 5%) on invoices not yet reflected in GSTR-2B. This facility was completely abolished. You can claim ITC only on invoices that appear in GSTR-2B. If your supplier does not file GSTR-1 on time and the November 30 deadline passes without the invoice appearing in 2B, that ITC is permanently lost.
For FY 2025-26: Any unclaimed ITC from FY 2025-26 must be claimed by 30 November 2026 (or the GSTR-9 filing date for FY 2025-26, whichever is earlier). If you have been deferring reconciliation for old months, act immediately — the deadline is imminent.
9. How LekhaBooks Automates ITC Claiming
Manual ITC reconciliation for a business with hundreds of purchase invoices per month is extremely time-consuming and error-prone. LekhaBooks integrates directly with the GSTN to automate every step of the ITC claiming workflow:
- GSTR-2B Auto-Sync: LekhaBooks automatically fetches your GSTR-2B from GSTN on the 15th of every month. No manual download, no Excel uploads. The data flows directly into the purchase reconciliation module.
- One-Click Reconciliation Dashboard: The system automatically matches your purchase invoices recorded in LekhaBooks against GSTR-2B line by line. The reconciliation dashboard shows matched invoices (claimable ITC), invoices in 2B not in your books (check for genuineness), invoices in your books not in 2B (follow up with supplier), and amount mismatches — all in one screen with supplier-wise drill-down.
- GSTR-3B Table 4 Pre-Fill: After reconciliation, LekhaBooks auto-populates all cells of GSTR-3B Table 4 — rows 4A(1) through 4D — based on reconciled data. Section 17(5) blocked credits are automatically moved from 4A(5) to 4D. You review, make any adjustments, and file. The risk of wrong entries in GSTR-3B is eliminated.
- Section 17(5) Blocked Credit Alerts: When you record a purchase invoice in LekhaBooks, the system checks the expense category and HSN/SAC code against the Section 17(5) blocked list and immediately alerts you if the ITC is ineligible. No more inadvertent motor vehicle or health insurance ITC claims.
- Rule 37 — 180-Day Payment Reminder: LekhaBooks tracks payment dates against all purchase invoices. It sends automatic alerts 160 days after invoice date (20 days before the 180-day reversal trigger). You either confirm payment or trigger an ITC reversal in GSTR-3B — avoiding surprise demand notices from the department.
- Annual ITC Deadline Alerts: The system tracks the Section 16(4) deadline (November 30) and GSTR-9 filing date, and alerts you with 60-day and 30-day advance notices about unclaimed ITC from prior months. Prevents permanent ITC losses due to missed deadlines.