When does Rule 42 apply?

When inputs or input services are used partly for taxable (including zero-rated) supplies and partly for exempt or non-business purposes. The common credit is apportioned by exempt turnover to total turnover.

What is the 5% reversal?

Rule 42 deems 5% of the common credit to be attributable to non-business use and requires it to be reversed, in addition to the exempt proportion.

Is interest income exempt turnover for Rule 42?

For businesses other than banks and NBFCs, interest on deposits, loans and advances is excluded from exempt turnover, so FD interest does not trigger a reversal.

How is the annual true-up done?

After the year ends, recompute D1 and D2 using full-year turnover. Any shortfall is added to output tax in a return filed by September with 18% interest from 1 April; any excess can be reclaimed.

Where is the reversal reported in GSTR-3B?

In table 4(B)(1), 'As per rules 38, 42 and 43'. Blocked credit under 17(5) goes to 4(B)(2) or 4(D)(1), not here.

ITC Reversal Calculator (Rule 42 & 43)

Common input tax credit to reverse when you make both taxable and exempt supplies, for the month and the annual true-up.

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Computation

Annual true-up uses the whole year's turnover; the difference is paid with interest or reclaimed.

T – total input tax on inputs & services (₹)

₹

T1 – used exclusively for non-business (₹)

₹

T2 – used exclusively for exempt supplies (₹)

₹

T3 – blocked under 17(5) (₹)

₹

T4 – used exclusively for taxable supplies (₹)

₹

E – exempt turnover for the period (₹)

₹

F – total turnover for the period (₹)

₹

Common credit on capital goods, Tc (₹)

₹

Reversal

Exempt ratio E ÷ F

0.00%

C1 – credit to ledgerT − T1 − T2 − T3

₹ 0

C2 – common creditC1 − T4

₹ 0

D1 – exempt shareC2 × E ÷ F

₹ 0

D2 – 5% non-business

₹ 0

C3 – eligible common credit

₹ 0

Reverse in 3B table 4(B)(1)

₹ 0

Indicative only. Rules 42 and 43 of the CGST Rules, 2017. Exempt turnover excludes interest on deposits, loans and advances, and sale of land/building beyond the deemed value, per Explanation 1 to Rule 43. Reverse-charge supplies and the Schedule III adjustments are not modelled.

How it works

Segregate

Credit used only for taxable supplies is fully yours; only for exempt or non-business, fully lost; blocked under 17(5), never available.

Common credit

What remains is common. The exempt share (E ÷ F) plus a deemed 5% for personal use is reversed.

Capital goods

Common capital-goods credit is spread over 60 months and the exempt share of each month's slice is reversed.

The reversal that gets missed in GSTR-3B

Section 17(2) restricts input tax credit to the portion attributable to taxable supplies. Businesses with interest income, exempt sales, healthcare, education or residential rent are all making exempt supplies and must apportion common credit every month in 3B table 4(B)(1), then true-up after the year ends using annual turnover, paying any shortfall with 18% interest before the September return. Audits and ASMT-10 notices regularly pick this up from the mismatch between exempt turnover in GSTR-1 and the absence of reversals in 3B.

What counts as exempt

Nil-rated, wholly exempt and non-taxable supplies, plus the value of land/building under Schedule III and securities at 1%.

Interest income

Interest on deposits and loans is excluded from exempt turnover for non-banking businesses, so a trader with FD interest does not reverse for it.

Annual true-up

Recompute with full-year E and F. Excess reversal can be reclaimed; shortfall is paid with interest from 1 April.

Ineligible vs reversed

Rule 42 reversal goes in 4(B)(1); blocked credit under 17(5) is reported in 4(B)(2) / 4(D)(1), not netted silently.