Banking and NBFC 50 percent ITC rule: GSTR-2B guide

Accounting teams at banks and NBFCs deal with hundreds of thousands of inward transactions every month. Because financial institutions earn interest on loans (an exempt supply under GST) alongside processing fees, credit card charges, and advisory income (taxable supplies), ordinary taxpayers would need to track exempt versus taxable turnovers under Section 17(2) and perform detailed monthly calculations under Rule 42. In our tool and in practice on the portal, we found that calculating monthly dynamic ratios creates immense reconciliation friction for high-volume lenders. To eliminate this administrative burden, Parliament enacted a simplified statutory alternative under Section 17(4) of the CGST Act.

However, applying this 50 percent rule creates distinct reconciliation challenges when matching purchase registers against Form GSTR-2B. Many finance teams make the mistake of netting the 50 percent reduction before recording entries in Form GSTR-3B, or they misclassify inter-branch transactions. Understanding the exact statutory hierarchy under Section 17(4) and Rule 38 protects financial institutions from audit scrutiny, interest liabilities under Section 50, and erroneous reversals.

The statutory option under Section 17(4) and Rule 38

The legal framework for the 50 percent mechanism is set out in Section 17(4) of the CGST Act. This provision applies specifically to a banking company or a financial institution, including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances. Eligible entities have two statutory choices:

1. Comply with Section 17(2) by calculating actual monthly reversals using the turnover ratio under Rule 42 for inputs and input services and Rule 43 for capital goods.
2. Avail every month an amount equal to 50 percent of the eligible input tax credit on inputs, capital goods, and input services in that month, while the remaining 50 percent lapses.

Under the first proviso to Section 17(4), once an entity exercises this option, the choice cannot be withdrawn during the remaining part of that financial year. The procedural steps are prescribed in Rule 38 of the CGST Rules:

• The financial institution must first identify and exclude any tax paid on purchases used exclusively for non-business purposes.
• It must completely exclude credits blocked under Section 17(5), such as food and beverages, club memberships, or employee motor vehicles. These blocked credits are entirely inadmissible.
• It must segregate supplies received from distinct persons (branches of the same entity sharing the same PAN), which are entitled to full credit under the second proviso to Section 17(4).
• Fifty percent of the remaining eligible input tax is availed as admissible credit, and the balance 50 percent must be reversed in Form GSTR-3B.

Inter-branch cross-charges and the distinct persons exemption

National banks and NBFCs operate through registered offices across multiple Indian states. Under Section 25(4) of the CGST Act, each state registration is treated as a distinct person. Head offices frequently issue tax invoices for software licenses, centralized IT support, human resources, and treasury functions to operating branches across the country.

Subjecting these internal cross-charges to a 50 percent reduction would lead to substantial tax cascading, because the supplying branch pays 100 percent output GST on the service while the receiving branch would lose half the credit. To prevent this distortion, the second proviso to Section 17(4) provides an explicit statutory exemption:

“Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.” Second proviso to Section 17(4)

The Central Board of Indirect Taxes and Customs addressed this exact question in its official CBIC Sectoral FAQs on Banking, Insurance and Stock Brokers Sector (Question 19). The Board confirmed that when a registered branch receives supplies from another branch of the same bank on which GST has been paid, the recipient branch is entitled to 100 percent credit of the tax charged, provided both share the same PAN.

GSTR-3B reporting: Table 4A vs Table 4B(1) mechanics

For several years after the launch of GST, taxpayers often keyed net credit amounts directly into Table 4(A)(5) of Form GSTR-3B. On 06 July 2022, CBIC issued CBIC Circular No. 170/02/2022-GST, which fundamentally restructured how ITC is reported in monthly returns.

Under Circular 170/02/2022-GST, financial institutions must report their figures using gross accounting principles:

1. Gross credit auto-population: All eligible and ineligible input tax appearing in Form GSTR-2B must be recognized in Table 4(A). For general vendor purchases, this sits in Table 4(A)(5) ("All other ITC"), while inter-branch distributed credits from an Input Service Distributor flow into Table 4(A)(4).
2. Permanent reversal in Table 4(B)(1): Because the 50 percent restriction under Section 17(4) and Rule 38 represents credit that lapses permanently and can never be reclaimed, it must be reported in Table 4(B)(1) ("As per rules 38, 42 & 43 of CGST Rules and section 17(5)").
3. Table 4(B)(2) is for temporary reversals only: Temporary deferrals, such as unpaid vendor invoices approaching the 180-day limit under Rule 37 or invoices where goods or services have not yet been received under Section 16(2)(b), belong in Table 4(B)(2) ("Others"). Never enter Rule 38 reversals in Table 4(B)(2).
4. Net eligible credit in Table 4(C): The GST portal automatically calculates Table 4(C) as Table 4(A) minus Table 4(B). This resulting amount is credited to the electronic credit ledger and utilized against outward tax liabilities.

For a detailed breakdown of permanent versus reclaimable return rows, review our practical guide on GSTR-3B Table 4B ITC reversal rules. If your central office distributes shared vendor invoices rather than cross-charging them, verify your operational structure against the statutory requirements in our guide on mandatory ISD registration rules.

Worked example: monthly ITC computation for an NBFC

Consider Pragati Finance Ltd, a registered NBFC operating in Maharashtra. In October 2026, the company downloads its Form GSTR-2B and reconciles it against its purchase register. All suppliers have filed their returns on time, and every invoice meets the conditions of Section 16(2).

The company records the following inward tax breakdown for the month:

• Inward business services from third-party vendors (audit, cloud hosting, branch rent, legal counsel): IGST ₹8,00,000, CGST ₹6,00,000, SGST ₹6,00,000 (Total ₹20,00,000).
• Commercial capital goods purchased for branch automation: CGST ₹1,50,000, SGST ₹1,50,000 (Total ₹3,00,000).
• Ineligible expenses under Section 17(5) (annual servicing and repair of executive cars): CGST ₹50,000, SGST ₹50,000 (Total ₹1,00,000).
• Inter-branch service invoices received from its Karnataka branch under the same PAN: IGST ₹4,00,000 (Total ₹4,00,000).

Step-by-step credit calculation under Rule 38

1. Identify blocked credit under Section 17(5): Total ₹1,00,000 (CGST ₹50,000 and SGST ₹50,000). This amount cannot be claimed under any circumstances.
2. Segregate inter-branch supplies under the second proviso to Section 17(4): Total ₹4,00,000 (IGST ₹4,00,000). This amount is 100 percent eligible and is set aside from the 50 percent division.
3. Calculate base credit subject to 50 percent restriction: Third-party services (₹20,00,000) plus capital goods (₹3,00,000) equals ₹23,00,000 (IGST ₹8,00,000, CGST ₹7,50,000, SGST ₹7,50,000).
4. Compute 50 percent admissible and lapsed credit:
   • Admissible credit (50 percent): IGST ₹4,00,000, CGST ₹3,75,000, SGST ₹3,75,000 (Total ₹11,50,000).
   • Lapsed credit to be reversed (50 percent): IGST ₹4,00,000, CGST ₹3,75,000, SGST ₹3,75,000 (Total ₹11,50,000).
5. Calculate total permanent reversal for Table 4(B)(1): Lapsed Rule 38 credit (₹11,50,000) plus Section 17(5) blocked credit (₹1,00,000) equals ₹12,50,000 (IGST ₹4,00,000, CGST ₹4,25,000, SGST ₹4,25,000).
6. Determine net ITC credited to ledger in Table 4(C): Gross Table 4(A) credit (₹28,00,000) minus Table 4(B)(1) reversal (₹12,50,000) equals ₹15,50,000 (IGST ₹8,00,000, CGST ₹3,75,000, SGST ₹3,75,000). Notice that the net eligible IGST of ₹8,00,000 consists of ₹4,00,000 (50 percent of vendor IGST) plus ₹4,00,000 (100 percent of inter-branch IGST).

Reconciliation workflow between GSTR-2B and purchase register

Under Section 16(2)(aa) of the CGST Act and Rule 36(4), no taxpayer can take input tax credit unless the invoice details have been furnished by the supplier in Form GSTR-1 and communicated in Form GSTR-2B. This rule applies with equal force to financial institutions choosing the 50 percent option.

A structured monthly reconciliation workflow for banking and NBFC accounting teams follows these stages:

When running this workflow between the 14th and the 20th of the month, verify four operational safeguards:

• Separate inter-branch GSTINs before splitting: Configure your ERP accounting system (SAP, Oracle Financials, Tally Prime, or custom core banking software) to tag inward invoices from suppliers sharing the first 10 digits of your bank PAN. These invoices must be bypassed from the automated 50 percent reversal routine.
• Review capital goods invoices: Unlike ordinary commercial entities where common capital goods require 60-month tracking under Rule 43, the 50 percent mechanism covers capital goods directly in the month of acquisition. The remaining 50 percent lapses immediately, eliminating monthly depreciation schedules for GST purposes.
• Track credit notes accurately: When a vendor issues a financial credit note or tax credit note appearing in Table 4 of Form GSTR-2B, the credit reduction must be split 50-50 to match the original claim ratio.
• Document vendor non-payment: Even under the 50 percent mechanism, the second proviso to Section 16(2) requires payment of invoice value and tax to third-party suppliers within 180 days. If payment fails, 50 percent of the original credit must be reversed under Table 4(B)(2), not Table 4(B)(1), because it can be reclaimed upon eventual payment.

Related guides

• GSTR-2B reconciliation: complete guide to ITC matching
• Restaurant ITC blocked under GST 5 percent
• GSTR-2B reconciliation for e-commerce sellers: tCS, logistics ITC, and marketplace invoices
• GSTR-2B reconciliation for travel agencies and tour operators

Frequently asked questions

Last checked: 19 October 2026. Sources: Section 17 CGST Act, Rule 38 CGST Rules, CBIC Sectoral FAQs on Banking Sector, CBIC Circular No. 170/02/2022-GST, and GSTN Form GSTR-3B User Manual.