Capital goods are where the credit is large and the paperwork lasts for years. This guide follows a purchase through the rules in order: is it capital goods, is the credit allowed, is it cut back by how the asset is used, and what happens on sale. Five invoices then run through it in rupees.
For the wider rules, start with input tax credit meaning: the conditions and how GSTR-2B decides it.
What counts as capital goods
Section 2(19) of the CGST Act defines capital goods in one sentence:
“"capital goods" means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;” Section 2(19), CGST Act
The test is your own accounting: on the wording of the definition, a machine that goes into the fixed-asset register is capital goods in your hands. Section 2(59) defines “input” as goods “other than capital goods”, so the two do not overlap, and Section 16(1) covers both.
Section 16 has no instalment mechanism: nothing in its text spreads the credit over several years. The five-year, 60-month idea comes from Rule 43 and works on the reversal side, as shown below.
Where capital goods ITC stands, case by case
| Situation | Rule | What happens to the credit |
|---|---|---|
| Used exclusively for supplies other than exempt supplies (zero-rated supplies included) | Rule 43(1)(b) | Indicated in GSTR-3B and credited to the electronic credit ledger |
| Used exclusively for non-business purposes, or exclusively for exempt supplies | Rule 43(1)(a) | Indicated in GSTR-3B and not credited to the ledger |
| Common use, not covered by the two rows above | Rule 43(1)(c), (e), (h) | Tax on the invoice is credited directly; the exempt-supply share is added back to output tax over the useful life |
| Depreciation claimed on the tax component | Section 16(3) | No credit on that tax component |
| Motor vehicle for persons, seating capacity not more than thirteen including the driver | Section 17(5)(a) | Blocked, unless used for the listed supplies |
| Works contract or goods and services for construction of immovable property other than plant and machinery | Section 17(5)(c), (d) | Blocked |
| Capital goods sold later | Section 18(6), Rule 44(6) | Pay the higher of two amounts |
Every row sits on top of the ordinary Section 16 conditions. The ITC conditions guide covers those.
Section 16(3): depreciation on the GST part
“Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.” Section 16(3), CGST Act
The check sits in the fixed-asset register. If a machine is capitalised at the invoice value including GST and depreciation runs on that whole figure, the tax part has been depreciated and the credit on it is not allowed. If it is capitalised without the tax, the clause is not triggered. The income-tax side is for your CA; for GST, both must not happen on the same tax amount.
Plant and machinery against the building that houses it
Section 17(5)(c) blocks works contract services supplied for construction of an immovable property “other than plant and machinery”. Clause (d) blocks goods or services received for such construction on own account, including when used in the course or furtherance of business. Explanation 1 says construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation.
The Explanation at the end of Section 17 defines plant and machinery as apparatus, equipment and machinery fixed to earth by foundation or structural support that are used for making outward supply. It includes such foundation and structural supports and excludes land, building or any other civil structures, telecommunication towers, and pipelines laid outside the factory premises. A press fixed on its foundation is plant and machinery; the shed over it is a civil structure. Older notes quote clause (d) as “plant or machinery”; the current text says “plant and machinery”. The Section 17(5) list with examples has the full clause-wise table.
Common capital goods and Rule 43
Rule 43 applies to capital goods that attract Section 17(1) and (2): used partly for business and partly for other purposes, or partly for taxable supplies (zero-rated included) and partly for exempt supplies. Its three boxes are in the table above. For the third box, nothing is lost up front. Each tax period the common credit attributable to the period is Tm = Tc / 60, where Tc is the common credit on capital goods whose useful life remains, and useful life is taken as five years from the date of the invoice. The share attributable to exempt supplies is worked out under clause (g) from the ratio of exempt supplies to the total turnover in the State for the tax period, and it is added, with interest, to your output tax liability in every tax period of the useful life.
As arithmetic: if common capital goods carry ₹3,60,000 of credit, Tm = ₹3,60,000 / 60 = ₹6,000 a month. Only the exempt-supply share of that ₹6,000 is added back, and its size depends on the exempt-to-turnover ratio for the month. We have not worked that ratio here; ask your CA to set it up. Rule 43 says the amount is computed separately for each tax head and declared in GSTR-3B. GSTN’s help labels Table 4(B)(1) “Reversal of ITC - As per rule 42 & 43 of CGST/SGST rules”; confirm with your CA which line carries your add-back. Rule 43 also has a separate formula for construction of apartments, not covered here.
Selling capital goods: Section 18(6)
When you supply capital goods or plant and machinery on which ITC was taken, Section 18(6) says you pay the higher of two amounts: the ITC taken, reduced as prescribed, or the tax on the transaction value under Section 15. Rule 44(6) fixes the first amount in the same way as Rule 44(1)(b): the credit for the remaining useful life in months, pro rata, with useful life taken as five years. That is credit × remaining months / 60. If the ITC-based amount is higher than the tax on the transaction value, it forms part of your output tax liability and is furnished in GSTR-1.
Take a machine on which ₹90,000 of ITC was taken, sold after 27 months of use. Remaining life is 60 − 27 = 33 months, so the ITC-based amount is ₹90,000 × 33 / 60 = ₹49,500. The tax on the transaction value in the table below is a made-up illustration figure, not a statement of the GST rate on any asset.
| Sale | Transaction value | Tax on transaction value | ITC-based amount | Amount to pay |
|---|---|---|---|---|
| Sale A | ₹2,00,000 | ₹36,000 | ₹49,500 | ₹49,500 |
| Sale B | ₹4,00,000 | ₹72,000 | ₹49,500 | ₹72,000 |
In Sale A, selling cheap does not bring the amount below the credit still attributable to the machine’s remaining life. In Sale B, the tax on the sale value is the higher figure. The illustration in Rule 44(1)(b) counts remaining months ignoring a part of a month, so count months the same way and confirm the figure with your CA.
Worked example: five capital purchases in one month
An engineering company in Coimbatore closes its September 2026 tax period. GSTR-2B is generated on 14 October 2026 and GSTR-3B is due on 20 October 2026. All five invoices are in GSTR-2B and all assets have been received. The amounts are made-up illustration figures: the GST charged on each invoice as shown, not a statement of the GST rate on any asset.
| Purchase | GST charged | Check | Claim |
|---|---|---|---|
| CNC lathe, value ₹9,00,000, used only for taxable supplies | ₹1,62,000 | Rule 43(1)(b): credited to the ledger | ₹1,62,000 |
| Packing line fixed on a foundation in the factory, value ₹6,00,000 | ₹1,08,000 | Plant and machinery, not caught by Section 17(5)(c) or (d) | ₹1,08,000 |
| Boiler used for taxable and exempt supplies, value ₹20,00,000 | ₹3,60,000 | Rule 43(1)(c): credited; exempt share added back each month | ₹3,60,000 |
| Press brake, value ₹3,00,000, capitalised with the GST and depreciated on the full ₹3,54,000 | ₹54,000 | Section 16(3): depreciation claimed on the tax component | ₹0 |
| Contractor’s works contract for a new factory shed, capitalised, value ₹15,00,000 | ₹2,70,000 | Section 17(5)(c): construction other than plant and machinery | ₹0 |
| Total | ₹9,54,000 | ₹6,30,000 |
The five invoices carry ₹1,62,000 + ₹1,08,000 + ₹3,60,000 + ₹54,000 + ₹2,70,000 = ₹9,54,000 of GST. The claim is ₹1,62,000 + ₹1,08,000 + ₹3,60,000 = ₹6,30,000. The remaining ₹54,000 + ₹2,70,000 = ₹3,24,000 is not claimable, and ₹6,30,000 + ₹3,24,000 = ₹9,54,000. A reconciliation that stops at “Matched” would show all ₹9,54,000 as clean.
The boiler is the one to diarise. On ₹3,60,000 of credit, Tm is ₹6,000 a month for 60 months from the invoice date, and every month the exempt-supply share of it goes into output tax with interest. For the press brake, the choice sits in the asset register: either the tax stays out of the depreciable cost and the credit is available, subject to the other conditions, or the depreciation stays and the credit goes. Your CA decides which.
How capital goods show up in a reconciliation
- Nothing in the 2B match knows your asset register. GSTR-2B is built from what suppliers report. Whether the item is capitalised, whether depreciation is claimed on the tax, and which Rule 43 box applies come from your books. See how GSTR-2B decides the ITC you can claim, and the Section 16(4) guide for late-arriving capital invoices.
- Machines delivered in parts. Under the first proviso to Section 16(2), where goods against an invoice are received in lots or instalments, credit is taken upon receipt of the last lot or instalment. For a line installed in stages, hold the claim until the final delivery.
- Add a capital-goods schedule to the purchase register. Invoice date (the start of the 60 months), credit by tax head, Rule 43 box, depreciation flag. You need it for the monthly Tm and again for Section 18(6) on sale.
Common mistakes
- Taking credit and depreciating the same tax. The register and the return disagree, and nobody sees it until a notice.
- Treating the shed as plant and machinery. Buildings and other civil structures are excluded from the definition.
- Forgetting the exit. Selling an asset on which credit was taken carries a Section 18(6) payment. Check it before the sale invoice is raised.
Frequently asked questions
What are capital goods under GST?
Section 2(19) of the CGST Act defines capital goods as goods whose value is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
Can I claim ITC on capital goods and depreciation on the GST amount?
No. Section 16(3) says that where depreciation is claimed on the tax component of the cost of capital goods and plant and machinery under the Income-tax Act, 1961, the input tax credit on that tax component is not allowed. Settle the treatment with your CA before the asset is capitalised.
Is ITC on capital goods claimed at once or over five years?
Section 16 has no instalment rule. Under Rule 43, credit on capital goods used only for taxable supplies is credited to the electronic credit ledger, and for common-use capital goods the tax on the invoice is credited directly. The five-year useful life in Rule 43 is used to attribute the common credit to each month, one sixtieth at a time, so that the part linked to exempt supplies can be added to your output tax liability.
Is ITC allowed on capital goods used to build a factory shed?
Not where Section 17(5)(c) or (d) applies, that is, works contract services or goods and services received for construction of an immovable property other than plant and machinery. The definition of plant and machinery excludes land, buildings and other civil structures, so a shed is outside it.
Get the matched list before you classify the assets
gstr2bmatch.in compares your purchase register with GSTR-2B and shows which invoices are matched, mismatched, missing from 2B or only in 2B, with the rupee ITC at risk. It does not decide whether an item is capital goods, whether depreciation was claimed on the tax, or which Rule 43 box applies, so those stay in your asset schedule. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Related guides
- input tax credit meaning: conditions and how GSTR-2B decides it
- blocked credit in GST: the section 17(5) list with examples
- ineligible input tax credit: eligible vs ineligible ITC
- itc conditions before claiming: what an invoice must satisfy
- ITC on free replacement warranty goods: Circular 195 explained
- Debit note received from supplier: time limit to claim ITC under GST
- How to calculate input tax credit and the order in which it is set off
- ITC reversal on goods sent for exhibition abroad not sold: GST rules and Circular 108
Last checked: 1 Oct 2026. Sources: CGST Act, Section 2, CGST Act, Section 16, CGST Act, Section 17, CGST Act, Section 18, CGST Rules, Rule 43, CGST Rules, Rule 44, GSTR-3B help, Table 4.