If your business sells both taxable and exempt goods or services, claiming 100 percent of the input tax credit appearing in your purchase ledger is illegal. Everyday operating expenses such as factory rent, statutory audit fees, telecommunications, warehouse security, and general software subscriptions support the entirety of business operations. They cannot be identified exclusively with taxable sales.
The GST portal does not calculate this apportionment automatically. While Form GSTR-2B tells you what your suppliers uploaded, your accounts team must run the statutory mathematical formula under Rule 42 to determine how much credit stays in the electronic credit ledger and how much must be surrendered. Failing to reverse this credit monthly exposes the enterprise to demand notices under Section 73, Section 74, or Section 74A, coupled with mandatory interest under Section 50.
Statutory framework: Section 17 restrictions on mixed supplies
The statutory basis for credit apportionment originates in the primary statute rather than administrative discretion:
- Section 17(1) of the CGST Act: Where goods or services are used partly for business purposes and partly for other purposes (such as personal consumption), credit is restricted strictly to the tax attributable to business use.
- Section 17(2) of the CGST Act: Where goods or services are used partly for effecting taxable supplies (including zero-rated exports and SEZ deliveries) and partly for exempt supplies, credit is restricted strictly to the tax attributable to taxable and zero-rated supplies.
- Section 17(3) of the CGST Act: The value of exempt supplies includes supplies subject to reverse charge under Section 9(3), transactions in securities, sale of land, and sale of building subject to clause (b) of paragraph 5 of Schedule II.
To translate these principles into rupee calculations, the Central Board of Indirect Taxes and Customs framed Rule 42 of the CGST Rules for inputs and input services. Capital goods apportionment is handled separately under Rule 43 over a 60-month useful life.
Step 1: segregation of total input tax credit (T)
The calculation under Rule 42(1) runs on monthly figures for each GST registration. You begin by compiling the total input tax on all inputs and input services received during the tax period, denoted as symbol T. Next, categorize and subtract specific items to isolate the shared pool:
| Symbol | Classification in Rule 42(1) | Treatment in accounts and returns |
|---|---|---|
| T | Total input tax on inputs and input services during the month | Starting gross credit pool from purchase register matched with GSTR-2B |
| T1 | Input tax on items intended exclusively for non-business purposes | Ineligible: excluded from electronic credit ledger |
| T2 | Input tax on items intended exclusively for exempt supplies | Ineligible: excluded from electronic credit ledger |
| T3 | Input tax on items blocked under Section 17(5) | Ineligible: motor vehicles, catering, club memberships, etc. |
| C1 | Credit credited to Electronic Credit Ledger: C1 = T - (T1 + T2 + T3) |
Eligible base credited to ledger before common apportionment |
| T4 | Input tax on items used exclusively for taxable supplies (including zero-rated) | Fully eligible: retained 100 percent in business ledger |
| C2 | Common credit: C2 = C1 - T4 |
Shared pool subject to Rule 42 apportionment formula |
Common mistake: Deducting Section 17(5) blocked credit after calculating common credit. Blocked credit must be stripped out in category T3 upfront so that ineligible tax never enters common credit C2.
Step 2: the Rule 42 apportionment formula
Once common credit C2 is established, calculate the portion attributable to exempt supplies and personal use using the statutory ratios:
1. Exempt supply reversal (D1):
D1 = (E / F) × C2
Where E is the aggregate value of exempt supplies during the tax period, and F is the total turnover in the State of the registered person during the tax period.
2. Non-business use reversal (D2):
D2 = 5% × C2
Where common inputs and input services are used partly for business and partly for non-business or personal purposes.
3. Net eligible common credit (C3):
C3 = C2 - (D1 + D2)
This remaining balance C3 represents the legitimate portion of common credit that the business is permitted to retain.
Under Rule 42(1)(i), if the turnover details E and F are not available for the current month (or if the taxpayer had zero turnover in the period), the values of E and F from the last tax period for which turnover details exist must be used.
Worked example with verified arithmetic
Consider M/s Shaurya Manufacturing Industries, located in Pune, Maharashtra. The company manufactures both taxable industrial valves (GST at 18 percent) and exempt agricultural pump components (exempt under notification). In the tax period of October 2026, the company recorded the following turnover in Maharashtra:
- Taxable turnover: ₹80,00,000
- Exempt turnover (E): ₹20,00,000
- Total turnover in the State (F): ₹1,00,00,000 (
₹80,00,000 + ₹20,00,000) - Exempt turnover ratio (E / F):
20,00,000 / 1,00,00,000 = 0.20 (20%)
The company inward tax figures for inputs and input services in October 2026 are broken down by tax head in the working paper below:
| Step / Formula component | CGST (₹) | SGST (₹) | IGST (₹) | Total (₹) |
|---|---|---|---|---|
| Gross inward tax (T) | 1,75,000 | 1,75,000 | 1,50,000 | 5,00,000 |
| Less: Exclusively personal use (T1) | 5,000 | 5,000 | 0 | 10,000 |
| Less: Exclusively exempt inputs (T2) | 20,000 | 20,000 | 10,000 | 50,000 |
| Less: Blocked credit Section 17(5) (T3) | 10,000 | 10,000 | 20,000 | 40,000 |
| Credit to ledger C1 = T - (T1 + T2 + T3) | 1,40,000 | 1,40,000 | 1,20,000 | 4,00,000 |
| Less: Exclusively taxable inputs (T4) | 70,000 | 70,000 | 60,000 | 2,00,000 |
| Common credit C2 = C1 - T4 | 70,000 | 70,000 | 60,000 | 2,00,000 |
| Exempt reversal D1 = (E / F) × C2 (20%) | 14,000 | 14,000 | 12,000 | 40,000 |
| Non-business reversal D2 = 5% × C2 | 3,500 | 3,500 | 3,000 | 10,000 |
| Total monthly reversal (D1 + D2) | 17,500 | 17,500 | 15,000 | 50,000 |
| Eligible common credit C3 = C2 - (D1 + D2) | 52,500 | 52,500 | 45,000 | 1,50,000 |
| Final net usable ITC for month (T4 + C3) | 1,22,500 | 1,22,500 | 1,05,000 | 3,50,000 |
Verification of totals across all tax heads:
- Starting gross credit T = ₹5,00,000.
- Ineligible upfront: T1 (₹10,000) + T2 (₹50,000) + T3 (₹40,000) = ₹1,00,000.
- Eligible base C1 credited to electronic credit ledger =
₹5,00,000 - ₹1,00,000 = ₹4,00,000. - Specific taxable credit T4 = ₹2,00,000, leaving Common Credit C2 =
₹4,00,000 - ₹2,00,000 = ₹2,00,000. - Ineligible common credit to be reversed: D1 (₹40,000) + D2 (₹10,000) = ₹50,000.
- Net usable credit retained =
C1 - (D1 + D2) = ₹4,00,000 - ₹50,00,00 = ₹3,50,000, which exactly reconciles toT4 (₹2,00,000) + C3 (₹1,50,000) = ₹3,50,000.
Monthly reporting in Form GSTR-3B: Table 4(B)(1)
The mechanics of how these figures are presented on the GST portal are critical. Under the circular instructions and GSTN system design:
- Table 4(A)(5) [All other ITC]: You declare the full C1 amount (or total GSTR-2B eligible credit) of ₹4,00,000.
- Table 4(B)(1) [As per rules 42 & 43 of CGST/SGST rules]: You manually enter the reversal sum
D1 + D2 = ₹50,000(CGST ₹17,500, SGST ₹17,500, IGST ₹15,000). - Table 4(C) [Net ITC Available]: The system automatically computes
Table 4(A) minus Table 4(B), reflecting net usable credit of ₹3,50,000 available to offset outward tax liabilities.
Permanent vs temporary reversals: Reversals under Rule 42 are permanent in nature. Therefore, they must strictly be declared in Table 4(B)(1). Temporary reversals that can be re-claimed in subsequent periods (such as Rule 37 180-day non-payment or receipt of goods in instalments) are declared in Table 4(B)(2).
Annual true-up under Rule 42(2): deadline and interest rules
Because monthly turnover fluctuates, monthly Rule 42 calculations are interim approximations. During festive quarters, exempt sales may surge, while in lean quarters, taxable sales may predominate. Rule 42(2) mandates a comprehensive year-end reconciliation across the full 12-month period.
Statutory timeline for true-up
Under Rule 42(2), the taxpayer must recalculate D1 and D2 for the entire financial year using the total annual turnover (F) and total annual exempt turnover (E) of the State, before the due date for filing the return for the month of September following the end of the financial year. Following the amendment to Section 16(4) by the Finance Act 2022, this compliance window extends up to 30th November.
Handling shortfall vs excess reversals
Compare the aggregate monthly reversals (D1 + D2) actually declared in GSTR-3B during the year with the final annual calculation:
| Scenario | Comparison | Statutory remedy under Rule 42(2) |
|---|---|---|
| Shortfall in reversal (Reversed too little during the year) | Final annual (D1 + D2) exceeds total monthly reversals | Declare the differential reversal in GSTR-3B Table 4(B)(1) or pay via Form GST DRC-03 not later than the November return. Pay interest under Section 50(1) at 18 percent per annum calculated from 1st April of the succeeding financial year until the date of payment. |
| Excess reversal (Reversed too much during the year) | Total monthly reversals exceed final annual (D1 + D2) | Re-claim the surplus amount as credit in Form GSTR-3B Table 4(A)(5) in any return filed not later than the return for the month of September (up to 30th November) following the financial year end. |
Interest trap under Section 50(1): If your annual true-up reveals an under-reversal of ₹1,00,000 and you discharge it on 20th November 2027, interest does not run from November. The law stipulates that interest runs retrospectively from 1st April 2027 until the payment date. Running monthly reconciliations prevents massive accumulated interest liabilities.
Why clean GSTR-2B reconciliation is vital before Rule 42
Every step in the Rule 42 formula depends on the integrity of starting variable T. If your accounting records contain duplicate bills, invoices rejected under the Invoice Management System (IMS), or supplier invoices that were never filed in GSTR-1, your gross credit base is inaccurate.
Applying the E / F formula on an unverified gross credit figure causes compounding calculation errors. If you inadvertently include a supplier invoice that was not communicated in GSTR-2B, the tax department will issue an automated mismatch notice in Form GST DRC-01C under Rule 88D for excess credit claim, while simultaneously auditing your Rule 42 apportionment. For detailed rules on overall input tax eligibility criteria, refer to our guide on ITC claim rules under GST and our detailed analysis of common credit under GST Rules 42 and 43.
Related guides
- ITC reversal on sale of capital goods: Section 18(6) and Rule 44 calculation formula
- Pharma expired medicine ITC reversal: circular rules and procedure
- Post supply discount ITC reversal commercial credit note
- How to calculate input tax credit and the order in which it is set off
Frequently asked questions
What is the common credit formula under Rule 42?
Common credit C2 equals C1 minus T4, where C1 is total input tax T minus non-business credit T1, exempt credit T2, and blocked credit T3 under Section 17(5). From C2, you reverse D1 = (E / F) x C2 for exempt supplies and D2 = 5% of C2 if common inputs are used for personal consumption, leaving eligible common credit C3 = C2 minus (D1 + D2).
Where is Rule 42 reversal reported in Form GSTR-3B?
The monthly reversal sum of D1 and D2 must be entered in Table 4(B)(1) of Form GSTR-3B, titled As per rules 42 & 43 of CGST/SGST rules. This table is for permanent reversals that cannot be reclaimed.
When must the annual Rule 42 true-up calculation be completed?
Under Rule 42(2), the final annual calculation must be completed for the entire financial year before the due date for furnishing the return for the month of September (extended to 30th November) following the end of the financial year.
How is a shortfall in annual Rule 42 reversal discharged?
If final annual reversals exceed the monthly reversals already made, the difference must be reversed in GSTR-3B or paid through Form GST DRC-03 with interest under Section 50(1) calculated from 1st April of the succeeding financial year until the date of payment.
Can excess reversed ITC under Rule 42 be re-claimed?
Yes. If final annual calculations show that excess credit was reversed during the monthly returns, the surplus amount may be re-claimed as credit in Form GSTR-3B in Table 4(A)(5) for a month not later than the return for September following the end of the financial year.
Establish accurate starting ITC with browser reconciliation
Before applying the Rule 42 formula, your gross credit figure T must match actual supplier filings. Drop your monthly GSTR-2B JSON or Excel file and your purchase register into gstr2bmatch.in to instantly catch missing invoices, value discrepancies, and IMS Pending items in rupees. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 15 October 2026. Official statutory sources: CGST Rules, Rule 42 (Apportionment of credit on inputs and input services), CGST Act, Section 17 (Apportionment of credit and blocked credits), and CBIC GST Portal.