Purchasing heavy machinery, packaging units, or server equipment involves large rupee sums of input tax credit. If your plant manufactures both taxable finished goods and exempt agricultural items, taking full credit without reversal creates immediate audit exposure. In practice, tax officers cross-check annual exempt turnover against capital asset additions and demand interest under Section 50 when common equipment has escaped monthly apportionment.
Unlike regular inputs where monthly purchases are apportioned under Rule 42 common credit formula, capital goods carry durable economic value. The Goods and Services Tax law reflects this longevity by spreading the credit evaluation over five years. Let us examine the exact statutory formula, the definition of useful life, and a complete rupee ledger example.
Statutory basis for capital goods apportionment
Apportionment rules rest on specific sections of the Central Goods and Services Tax Act:
- Section 17(1) of the CGST Act: Where goods are used partly for business purposes and partly for other purposes, credit is restricted to input tax attributable to business use.
- Section 17(2) of the CGST Act: Where goods are used partly for taxable supplies including zero-rated supplies and partly for exempt supplies, credit is restricted to tax attributable to taxable supplies.
- Section 16(3) of the CGST Act: If depreciation is claimed on the tax component of the cost of capital goods under the Income-tax Act, 1961, input tax credit is not allowed.
To implement Section 17(2) for long-term equipment, the Central Board of Indirect Taxes and Customs framed Rule 43 of the CGST Rules. In our tool, accountants often review inward assets from GSTR-2B before deciding whether an invoice represents an exclusive capital good or a shared factory asset.
Initial classification of capital goods under Rule 43(1)
Whenever capital goods arrive at your factory or corporate office, categorize the inward tax invoice into one of three buckets:
| Rule 43(1) clause | Asset usage description | Accounting and return treatment |
|---|---|---|
| Clause (a) | Capital goods used exclusively for non-business purposes or exclusively for exempt supplies | Not credited to electronic credit ledger. Declared as ineligible in GSTR-3B Table 4(D)(2). |
| Clause (b) | Capital goods used exclusively for taxable supplies (including zero-rated exports) | Credited in full to electronic credit ledger in GSTR-3B Table 4(A)(5). No monthly reversal required. |
| Clause (c) | Common capital goods used for both taxable and exempt supplies (denoted as A) | Credited in full to electronic credit ledger upfront. Useful life fixed at 60 months. Subject to monthly reversal formula. |
In addition, capital assets falling under the negative list in Section 17(5) blocked credit, such as general passenger vehicles, remain ineligible at the threshold and do not enter the common pool.
Common mistake: Withholding credit on common capital goods at purchase. Under Rule 43(1)(c), the entire tax on invoice A is credited to your electronic credit ledger immediately. The exempt share is recovered through small monthly reversals over 60 months, preserving working capital in month one.
The 60-month useful life assumption and core formulas
Rule 43(1)(c) fixes the useful life of any capital asset at five years (60 months) from the date of the invoice. Even if your internal balance sheet depreciates factory machinery over 10 years, GST compliance strictly adheres to the 60-month denominator.
The monthly arithmetic follows a four-step sequence:
Step 1: Aggregate common credit (Tc)
Tc = Sum of input tax A on all active common capital assets
Where multiple common machines operate simultaneously, Tc represents the combined tax value of all assets whose 60-month lifespan remains active.
Step 2: Monthly credit attribution (Tm)
Tm = Tc / 60
This isolates the one-month slice of common credit for each asset.
Step 3: Opening monthly pool of active assets (Tr)
Tr = Aggregate of Tm for all common capital goods whose useful life remains
When all common assets are grouped together, Tr equals the sum of individual Tm values active during the tax period.
Step 4: Monthly exempt reversal (Te)
Te = (E / F) × Tr
Where E is the aggregate value of exempt supplies in the State during the tax period, and F is total turnover in the State during the tax period.
Under Rule 43(1)(h), this monthly amount Te, along with applicable interest if returns are delayed, must be added to your output tax liability or reversed in Table 4(B)(1) during every month of the remaining 60-month lifecycle.
Worked example: step-by-step rupee calculation
For example, let us track a real case of M/s Deccan Precision Engineering, an industrial manufacturer in Aurangabad, Maharashtra. The company supplies taxable CNC components (18 percent GST) and exempt defense training parts.
In October 2026, the company purchases two new capital assets and continues using an older common testing unit:
- Asset 1 (Specialized lathe): Used solely for taxable components. Tax paid: ₹1,80,000 (IGST). Under clause (b), full ₹1,80,000 is credited to ledger; zero monthly reversal.
- Asset 2 (Solar packaging unit): Common asset used for packaging both taxable and exempt components. Purchase invoice date: 5 October 2026. Tax paid: ₹3,60,000 (IGST). Under clause (c), full ₹3,60,000 is credited to ledger in October 2026.
- Asset 3 (Digital testing bench): Purchased 12 months earlier in October 2025 for common use. Original tax paid: ₹1,20,000 (IGST). Useful life remaining: 48 months.
During October 2026, the company records the following turnover figures in Maharashtra:
- Taxable turnover: ₹75,00,000
- Exempt turnover (E): ₹25,00,000
- Total turnover in the State (F): ₹1,00,00,000 (
₹75,00,000 + ₹25,00,000) - Exempt turnover ratio (E / F):
25,00,000 / 1,00,00,000 = 0.25 (25%)
Step-by-step arithmetic verification
Let us compute the monthly figures for October 2026:
- For Asset 2: Common tax A2 = ₹3,60,000. Monthly credit
Tm2 = ₹3,60,000 / 60 = ₹6,000. - For Asset 3: Common tax A3 = ₹1,20,000. Monthly credit
Tm3 = ₹1,20,000 / 60 = ₹2,000. - Aggregate monthly common credit:
Tr = Tm2 + Tm3 = ₹6,000 + ₹2,00,00 = ₹8,000. - Exempt reversal Te:
(E / F) × Tr = 0.25 × ₹8,000 = ₹2,000.
Here is the monthly working summary for October 2026:
| Asset / Component | Original tax (₹) | Monthly Tm (₹) | October 2026 status | Monthly reversal Te (₹) |
|---|---|---|---|---|
| Asset 1 (Taxable lathe) | 1,80,000 | 0 | Full credit retained | 0 |
| Asset 2 (Common packaging) | 3,60,000 | 6,000 | Month 1 of 60 | 1,500 |
| Asset 3 (Common bench) | 1,20,000 | 2,000 | Month 13 of 60 | 500 |
| Total common pool (Tr) | 4,80,000 | 8,000 | Active pool | 2,000 |
Verification of net rupee impact for October 2026:
- Gross ITC credited to ledger in October: Asset 1 (₹1,80,000) + Asset 2 (₹3,60,000) = ₹5,40,000.
- Monthly reversal Te added to liability or reversed in Table 4(B)(1): ₹2,000.
- Net cash benefit in electronic credit ledger for October:
₹5,40,000 - ₹2,000 = ₹5,38,000.
Switching asset usage: 5 percentage points per quarter rule
Capital assets frequently change roles during their five-year operational lifespan. Rule 43 contains specific transition mechanisms for these shifts:
1. From exclusively exempt to common use
Suppose you bought a testing device solely for exempt supplies two years ago, taking zero credit under clause (a). Now, your product mix changes, and the machine also tests taxable items. Under the proviso to Rule 43(1)(c), you can now bring it into the common pool.
The input tax is reduced at the rate of five percentage points for every quarter or part quarter from the date of the invoice. The reduced figure is credited to the electronic credit ledger and added to common credit Tc.
2. From exclusively taxable to common use
Conversely, if an asset originally bought solely for taxable supplies begins serving exempt lines, the full tax was already credited upfront. Under the proviso to Rule 43(1)(d), input tax reduced by five percentage points per quarter is added to aggregate common credit Tc to commence monthly reversals for its remaining months.
Quarterly reduction calculation: A quarter means a period of three months ending on the last day of March, June, September, or December. Any fraction of a quarter counts as a complete quarter for the 5 percent reduction.
Reporting Rule 43 reversal in Form GSTR-3B
Compliance on the GST portal requires entering these figures into designated summary fields in Form GSTR-3B:
- Table 4(A)(5) [All other ITC]: Claim the gross eligible tax from your inward invoices (in our example, ₹5,40,000).
- Table 4(B)(1) [As per rules 42 and 43 of CGST/SGST rules]: Enter the monthly reversal amount Te (in our example, ₹2,000).
- Table 4(C) [Net ITC Available]: The portal automatically subtracts 4(B)(1) from 4(A)(5), leaving net available credit of ₹5,38,000.
Per the GSTN GSTR-3B filing manual, Table 4(B)(1) is reserved strictly for permanent reversals that cannot be reclaimed. For a broader overview of capital purchases, refer to our guide on ITC on capital goods under GST.
Capital goods register maintenance for five years
Because Rule 43 spans 60 months, tax teams must keep a running capital goods schedule. The schedule must record:
- Invoice number, supplier GSTIN, and capitalisation date.
- Original invoice tax broken down into CGST, SGST, and IGST.
- Classification under clause (a), clause (b), or clause (c).
- Monthly Tm value (original tax divided by 60).
- Elapsed months count and expiry date of the 60-month window.
- Monthly Te reversals declared in GSTR-3B.
When an asset reaches 60 months from its invoice date, remove its Tm from Tr. Continuing to include expired assets results in unlawful excess reversals.
Related guides
- ITC reversal on sale of capital goods: Section 18(6) and Rule 44 calculation formula
- ITC reversal on goods sent for exhibition abroad not sold: GST rules and Circular 108
- Pharma expired medicine ITC reversal: circular rules and procedure
- ITC on free replacement warranty goods: Circular 195 explained
Frequently asked questions
What is the useful life of capital goods under Rule 43?
Under Rule 43(1)(c) of the CGST Rules, the useful life of any capital asset is statutorily fixed at five years (60 months) from the date of the purchase invoice. This 60-month duration applies regardless of the commercial or accounting depreciation rate used in your financial statements.
How is monthly common credit Tm calculated for capital goods?
Monthly common credit Tm is derived by dividing the total tax on the common capital asset (Tc) by 60 months (Tm = Tc / 60). This attributes an equal one-sixtieth share of input tax to each monthly tax period across its five-year statutory lifespan.
What is the formula for exempt credit reversal Te under Rule 43?
The monthly reversal attributable to exempt supplies is calculated using the formula Te = (E / F) multiplied by Tr, where E is aggregate exempt turnover in the State, F is total turnover in the State during the month, and Tr is the aggregate of all Tm values for active common capital goods.
Where is Rule 43 reversal reported in Form GSTR-3B?
The monthly reversal amount Te is declared in Table 4(B)(1) of Form GSTR-3B, titled As per rules 42 and 43 of CGST/SGST rules. Because this reversal is permanent and cannot be re-claimed, it must not be entered in Table 4(B)(2).
How does an asset switch from exempt use to common use under Rule 43?
When a capital asset originally used exclusively for exempt supplies shifts to common use, the taxpayer takes credit on the invoice reduced by five percentage points for every calendar quarter or part quarter that elapsed during exclusive exempt use. The reduced amount is credited to the electronic credit ledger and added to common credit Tc.
Reconcile your inward capital invoices
Match your capital asset purchase invoices against GSTR-2B before filing GSTR-3B. Your files are read in your browser and never uploaded to any server.
Last checked: 15 October 2026. Sources: CBIC CGST Rule 43, GSTN GSTR-3B User Manual.