University · GST Calculators

ITC Reversal Calculator Rules 42 & 43.

Apportion common input tax credit between taxable and exempt supplies the way the CGST Rules actually prescribe it — the T/T1–T4 exclusion ladder, C1 and C2, the D1 and D2 reversals, the annual true-up with Section 50 interest, and the 60-month capital-goods mechanics of Rule 43.

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What are you computing?

Inputs (₹)

T — total input tax on inputs & input services

All ITC on inputs and input services for the tax period (capital goods go to Rule 43).

T1 — used for purposes other than business

T2 — used exclusively for exempt supplies

T3 — blocked u/s 17(5)

Motor vehicles, food & catering, works contract for immovable property, etc.

T4 — used exclusively for taxable supplies

Includes zero-rated supplies. Whatever is left of C1 after T4 is the common credit C2.

E — aggregate value of exempt supplies

Include Section 17(3) deemed values: outward RCM supplies, securities at 1% of sale value, land / building at stamp-duty value.

F — total turnover in the State

State-level, for the tax period. If there is no turnover this period (or figures are unavailable), use the last tax period for which details are available.

Computation ladder

T	Total input tax on inputs & input services for the period	₹5,00,000
T1	Attributable to purposes other than business	₹20,000
T2	Attributable exclusively to exempt supplies	₹30,000
T3	Blocked / ineligible u/s 17(5)	₹15,000
C1	T − (T1 + T2 + T3) — credited to electronic credit ledger	₹4,35,000
T4	Attributable exclusively to taxable (incl. zero-rated) supplies	₹2,50,000
C2	C1 − T4 — common credit	₹1,85,000
E ÷ F	Exempt turnover ÷ total turnover in the State (20.00%)	₹20,00,000 ÷ ₹1,00,00,000
D1	C2 × (E ÷ F) — attributable to exempt supplies	₹37,000
D2	5% of C2 — deemed attributable to non-business purposes	₹9,250
C3	C2 − D1 − D2 — eligible common credit retained	₹1,38,750

Reversal for the period (D1 + D2)₹46,250

GSTR-3B disposition

Report D1 + D2 as a permanent reversal in Table 4(B)(1) of GSTR-3B for the tax period. It is not a temporary 4(B)(2) reversal — it cannot be reclaimed later except through the Rule 42(2) annual true-up.

Why this matters

Every reversal needs an audit trail.

Rule 42/43 workings are among the first asks in a GST audit or departmental scrutiny — a month-wise ladder with the annual true-up is the difference between a clean reply and a demand notice.

Keep going

CORAA cross-checks every ITC position.

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Checking whether a credit is blocked before it ever reaches the common pool? Run the Section 17(5) blocked credit checker first — T3 comes straight from it.

How Rules 42 and 43 apportion common credit

Section 17(2) of the CGST Act restricts input tax credit to the portion attributable to taxable (including zero-rated) supplies when a registered person makes both taxable and exempt supplies, or uses inputs partly for business and partly for other purposes. Rule 42 operationalises this for inputs and input services: start with T (total input tax for the period), strip out T1 (non-business use), T2 (exclusively exempt use) and T3 (blocked u/s 17(5)) to get C1, the amount credited to the electronic credit ledger. Deduct T4 (exclusively taxable use) to isolate C2, the common credit.

C2 is then split by formula: D1 = C2 × (E ÷ F), where E is the aggregate value of exempt supplies and F the total turnover in the State for the period (if there is no turnover in the period, or the figures are unavailable, E and F are taken from the last tax period for which details are available). D2 is a flat 5% of C2, deemed attributable to non-business purposes. D1 + D2 is reversed in Table 4(B)(1) of GSTR-3B; C3 = C2 − D1 − D2 is the common credit the taxpayer keeps. Under Section 17(3), the value of exempt supply for this ratio includes outward supplies taxed in the recipient's hands under reverse charge, transactions in securities (taken at 1% of sale value), and sale of land and completed buildings (taken at stamp-duty value).

The monthly working is provisional. Rule 42(2) requires a recomputation on full-year figures, settled not later than 30 November following the end of the financial year: a shortfall is added to output tax liability with interest under Section 50(1) — currently 18% p.a. — running from 1 April of the succeeding financial year until payment, while an excess reversal can be reclaimed as credit. Rule 43 does the same job for capital goods on a time-spread basis: useful life is fixed at five years (60 months) from the invoice date, Tm = Tc ÷ 60 is the credit attributable to each tax period, and Te = Tm × (E ÷ F) is reversed every period of the useful life, with applicable interest. Credit on capital goods that move from exclusive exempt or non-business use into common use enters Tc after a reduction of 5 percentage points per quarter or part thereof (mechanics recast by Notification 16/2020-Central Tax, w.e.f. 1 April 2020).

Worked example — Rule 42 monthly reversal

In a tax period, a registered person has total input tax on inputs and input services of ₹5,00,000: ₹20,000 relates to non-business use (T1), ₹30,000 exclusively to exempt supplies (T2), ₹15,000 is blocked u/s 17(5) (T3), and ₹2,50,000 is exclusively for taxable supplies (T4). Exempt turnover E is ₹20,00,000 against total State turnover F of ₹1,00,00,000.

Inputs

T / T1 / T2 / T3₹5,00,000 / ₹20,000 / ₹30,000 / ₹15,000

C1 = T − (T1+T2+T3)₹4,35,000

T4 → C2 = C1 − T4₹2,50,000 → ₹1,85,000

E ÷ F₹20,00,000 ÷ ₹1,00,00,000 = 20%

Output

D1 = C2 × (E ÷ F)₹37,000

D2 = 5% of C2₹9,250

Reversal (Table 4(B)(1))₹46,250

C3 retained₹1,38,750

Only the common credit C2 of ₹1,85,000 is apportioned — T1, T2 and T3 never reach the ledger and T4 stays fully available. Of C2, 20% follows the exempt turnover ratio (D1 = ₹37,000) and a further flat 5% is deemed non-business (D2 = ₹9,250). The ₹46,250 goes into GSTR-3B Table 4(B)(1) as a permanent reversal, and the whole ladder is redone on annual figures by 30 November following the year end.

Common mistakes

Skipping D2 because usage is "fully business"

The rule prescribes D2 as a flat 5% of C2 deemed attributable to non-business purposes — it is a standard-rate deeming, and departmental officers routinely demand it wherever Rule 42 is triggered, even when the taxpayer asserts every input is used only for business. If you take the position that D2 applies only where there is actual partial non-business use, document the legal basis; the safer, litigation-tested course is to reverse it whenever common credit exists.

Forgetting the annual true-up — and its interest

The monthly D1/D2 is provisional. Rule 42(2) requires recomputation on full-year E, F and C2, settled not later than 30 November following the FY. A shortfall carries Section 50(1) interest (18% p.a.) computed from 1 April of the succeeding FY to the date of payment — the interest clock runs even if you discover the gap only at annual-return time.

Computing E without the Section 17(3) deemed values

For this ratio, "exempt supply" is wider than the exemption notifications: it pulls in outward supplies on which the recipient pays tax under reverse charge, transactions in securities at 1% of sale value, and sale of land or completed buildings at stamp-duty value. Treasury operations or a one-off land sale can move E materially. (Interest on deposits and loans is excluded from the ratio for persons other than banks/financial institutions under the rule's explanations — check the current text for your facts.)

Running capital-goods credit through Rule 42

Capital goods have their own machinery. Rule 43 spreads the common credit over a fixed 60-month useful life (Tm = Tc ÷ 60) and reverses Te = Tm × (E ÷ F) every tax period, with applicable interest — a one-shot Rule 42-style reversal in the month of purchase is wrong in both directions. Conversions from exclusive to common use enter Tc only after the 5%-per-quarter reduction.

Reversing in Table 4(B)(2) instead of 4(B)(1)

GSTR-3B distinguishes permanent reversals (Table 4(B)(1) — Rules 38, 42, 43 and Section 17(5)) from temporary, reclaimable ones (Table 4(B)(2)). Parking a Rule 42/43 reversal in 4(B)(2) misstates the reclaimable-credit ledger and draws scrutiny when the auto-populated GSTR-2B comparison runs.

Frequently asked questions

What is ITC reversal under Rule 42?+

Rule 42 of the CGST Rules 2017 apportions input tax credit on inputs and input services used partly for taxable and partly for exempt supplies (or partly for non-business purposes). After excluding T1 (non-business), T2 (exclusively exempt) and T3 (blocked u/s 17(5)) from total input tax T, and carving out T4 (exclusively taxable), the balance C2 is common credit. D1 = C2 × exempt turnover ÷ total turnover, and D2 = 5% of C2, are reversed each tax period.

What do T1, T2, T3 and T4 mean in Rule 42?+

T is total input tax on inputs and input services for the period. T1 is the portion used for purposes other than business; T2 the portion used exclusively for exempt supplies; T3 the portion blocked under Section 17(5). C1 = T − (T1+T2+T3) is what reaches the electronic credit ledger. T4 is the portion attributable exclusively to taxable supplies (including zero-rated). C2 = C1 − T4 is the common credit that gets apportioned.

How are D1 and D2 calculated?+

D1 = C2 × (E ÷ F), where E is the aggregate value of exempt supplies and F the total turnover in the State for the tax period — using the last available period's figures if the current period has none. D2 = 5% of C2, deemed attributable to non-business purposes. Both are added to output tax liability / reversed in GSTR-3B Table 4(B)(1). The remainder, C3 = C2 − D1 − D2, is the eligible common credit.

What counts as exempt turnover (E) for Rules 42 and 43?+

Beyond supplies exempted by notification and nil-rated supplies, Section 17(3) deems the value of exempt supply to include outward supplies on which the recipient pays tax under reverse charge, transactions in securities (valued at 1% of sale value), and sale of land and of completed buildings (valued at stamp-duty value). Exempt supply excludes zero-rated exports/SEZ supplies — those stay on the taxable side of the ratio.

When must the Rule 42 annual recomputation be done?+

Before the close of the window ending 30 November following the end of the financial year (the date was aligned to 30 November by the 2022 amendments; it was previously the September return due date). Recompute D1 and D2 on whole-year figures: pay any shortfall via GSTR-3B or DRC-03 with Section 50(1) interest from 1 April of the succeeding FY, or reclaim any excess as credit in GSTR-3B.

What interest applies on short reversal of ITC?+

Interest under Section 50(1) of the CGST Act — currently notified at 18% per annum — on the shortfall between the annually recomputed D1 + D2 and the amounts reversed during the year, running from 1 April of the financial year following the one the credit relates to, until the date of payment.

How does Rule 43 work for capital goods?+

Capital-goods credit used commonly for taxable and exempt supplies is pooled as Tc, with useful life fixed at five years (60 months) from the invoice date. Each tax period, Tm = Tc ÷ 60 is the attributable credit and Te = Tm × (E ÷ F) is reversed, with applicable interest, for every period of the remaining useful life. Capital goods shifted from exclusive exempt/non-business use into common use join Tc after a 5-percentage-points-per-quarter reduction (framework as amended w.e.f. 1 April 2020).

Where is the Rule 42/43 reversal shown in GSTR-3B?+

In Table 4(B)(1) — "ITC reversed as per Rules 38, 42 and 43 and Section 17(5)". This is a permanent reversal; it is not re-claimable through Table 4(D)(1) the way temporary Table 4(B)(2) reversals are. The only later adjustment is the Rule 42(2) annual true-up.

Authoritative sources

Rules 42 & 43, CGST Rules 2017 (CBIC) — Read with Sections 17(2), 17(3) and 50(1) of the CGST Act. Rule 43 mechanics recast by Notification 16/2020-Central Tax w.e.f. 01-04-2020; the true-up outside date moved to 30 November by the 2022 amendments. Verify the current text before filing.

Always confirm against the latest version of the source. Regulations evolve and amendments are common.

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Last reviewed: 2026-07-29 · For informational purposes only — not professional advice.