What Is Input Tax Credit (ITC) Under GST?

Written by : Knowledge Centre Team

2026-08-06

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Ever felt like you are paying tax on tax? Input Tax Credit (ITC) under GST allows businesses to claim a credit for taxes paid on inputs, reducing their output liability. Here is how that will work in practice.

Assume you are a manufacturer of a product. You buy input material and pay tax on the purchase. There are three input materials required for manufacturing your final product. To produce a single unit, the taxes you pay when purchasing the input products X, Y, and Z are ₹500, ₹250, and ₹150, respectively. When you sell your final product after manufacturing is complete, you must pay a tax of ₹1200 again. There is a way to reduce your tax liability when paying output tax. You can remove the taxes you have paid on inputs. Let us look at how you can do it. But before that, let us understand GST briefly.

Key Takeaways

Goods and Services Tax (GST) is the indirect tax levied on the supply of various goods and services
Input Tax Credit (ITC) under GST is the mechanism that allows registered businesses to claim credit for tax paid on purchases made
There are three types of taxes in GST: Integrated Goods and Services Tax (IGST), State Goods and Services Tax (SGST), and Central Goods and Services Tax (CGST)
Input Tax Credit (ITC) is not allowed on purchases from unregistered dealers, composition-scheme suppliers, or for personal use
To claim ITC, log into the GST portal, reconcile GSTR-2B, enter the eligible credit in GSTR-3B, submit the return, pay the balance tax if required, and file it

What is GST?

GST is known as the Goods and Services Tax. Earlier in India, consumers had to pay multiple taxes, such as VAT, service tax, and excise duty. GST is an indirect tax that has replaced almost all earlier indirect taxes, with a few exceptions: electricity, petroleum products, and alcohol for consumption are taxed separately by the state. It is levied on the supply of goods and services and came into effect on 1st July 2017.

GST has removed the cascading effect on the sale of goods and services. It eliminates the tax on tax. Hence, the cost of goods decreases.

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Types of Taxes in GST

There are three types of taxes in GST: Integrated Goods and Services Tax (IGST), State Goods and Services Tax (SGST), and Central Goods and Services Tax (CGST). CGST and SGST are levied together on intra-state transactions, while IGST is levied on inter-state transactions. The tax rate under GST is decided by the GST Council, rather than being fixed solely by the Central Government. It applies to the tax levied on the supply of goods and services. The table below will help you better understand the difference between them.

Type	Who Benefits	Collected By	Applicable Transactions
CGST	Central Government	Central Government	Within a single state (intrastate)
SGST	State Government	State Government	Within a single state (intrastate)
IGST	Central Government and State Government	Central Government	Between two different states or a state and a Union Territory (interstate)

What is Input Tax Credit in GST?

Input tax credit (ITC) is the credit that manufacturers receive for paying input taxes on inputs used in manufacturing products. In the example we discussed earlier, the credit you will receive as a manufacturer is ₹900 (₹500 + ₹250 + ₹150). Using this input tax credit, you can offset the output tax against the input tax already paid. Hence, you will only pay ₹300 (₹1200 - ₹900) tax on the product sale. Below are other important points related to Input Tax Credit:

As a dealer, you are also entitled to ITC if you have purchased goods for resale
ITC does not apply to all types of inputs; certain goods and services are specifically excluded under the law
The eligibility for ITC is subject to specific conditions, such as holding a valid tax invoice, having received the goods and services, and the supplier actually having paid the government tax

There are certain circumstances when you are not eligible to claim input tax credits. Some of the conditions are:

Goods purchased from unregistered dealers
Goods bought from dealers registered under the Composition Scheme
Goods purchased for personal consumption or received for free as gifts, or goods purchased from abroad
Goods notified in the negative list by the respective state governments

How to Claim ITC in GST?

Let us assume you buy goods from Mr Seller. In this case, you will be eligible to claim the credit on purchases based on the invoices. The credit can be claimed by following the steps below:

The seller will upload the details of all tax invoices issued in GSTR1
Once the details are uploaded successfully, the details concerning sales to you will be reflected in GSTR-2B
You will be reviewing each invoice to accept, reject, or mark it as pending through the Invoice Management System (IMS)
Once accepted, the eligible ITC would be reflected in GSTR-2B and would be auto-populated into the GSTR-3B return t
Now, when you file GSTR-2B, you will be able to claim this eligible ITC, which gets credited to your 'Electronic Credit Ledger'
You can adjust it against future output tax liability, as refunds of unutilised ITC are allowed only in specific cases

Recommended Reading - GST Login Guide

Did You Know?

Tobacco products would now attract a 40% tax as per the new GST rules

Source: India Today

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ITC Rules During GST Rate Change: What Businesses Need to Know

When the GST rate changes, the input tax credit and tax liability depend on the specific transaction stage, which can be the invoice issued, the payment received, or the supply completed. Certain rules get applied across businesses, which they need to know:

Advances received for supplies: GST rate on advances (when supply is pending or invoice not issued) will be determined as per the time of supply provisions under Section 14 of the CGST Act.
Purchases before a GST rate change: If inward supplies were received before a rate change and tax was charged at the then-prevailing rate, ITC can still be availed at that rate, subject to conditions under Section 16(1) and Section 49.
Impact on imports: IGST on imports will follow the notified GST rates unless exempted separately.
Using ITC after rate reduction: If GST on your outward supply is reduced (e.g., post 22nd September 2025), you can continue to use accumulated ITC in your electronic ledger to discharge future liabilities under Section 49(4).
Exempt outward supplies after rate change: If your supply becomes exempt after the notified rate change, ITC relating to such supplies must be reversed for sales made post-change.
Refund under inverted duty structure: Refund of accumulated ITC is allowed only when the input tax rate is higher than the output tax rate. However, if the difference arises merely due to rate revisions at different times (same goods, different rates), a refund is not permitted.
Stock on hand during rate change: Supplies made on or after the effective date of revised rates will attract the new GST rate, regardless of stock purchased earlier.
E-way bills during rate change: No need to cancel or regenerate e-way bills for goods already in transit. Existing e-way bills remain valid for their original validity period under Rule 138 of the CGST Rules.

How to Avoid Paying Extra Taxes?

Maintaining a record of all eligible GST purchases and sales allows you to claim ITC, thus reducing your GST liability. However, in your personal finances as well, you can reduce your annual tax liabilities using investments and relevant expenses. Interestingly, for individual health and life insurance premiums, the GST has been lowered to zero.

Tax-Saving Investments for Individuals: There are many tax-saving plans available to reduce tax liability. Some of these plans you must have as an individual investor, while others help you meet your long-term financial goals:
1. Term Insurance Plan: Individuals can buy these to protect their families, while corporates can buy them as a group plan for their employees. It provides life cover to the insured, and you can avail of tax benefits on the premium paid. It is primarily available under the old tax regime, as the new tax regime removes most deductions.
2. Unit Linked Insurance Plan: ULIPs act as a savings plan with an equity investment option and the safety of an insurance plan. You can use this plan to safeguard your child’s goals or save to build a big corpus for your retirement.
3. Guaranteed Savings and Investment Plan: If you feel that you cannot afford to take any chances with your money, this is the plan for you. These long-term tax-saving investment plans give tax benefits, protection from early death, and a guaranteed maturity value.
Tax-Saving Investments for Corporates: Investing in your employees’ welfare always pays off in performance. The following investment plans help take the burden off your shoulders to fund some of these benefits. Additionally, these plans will also offer tax rebates for your business.
Group Gratuity Scheme/Plan: A life insurance plan that helps you provide your employees with gratuity and leave salary. This plan also offers investment options, and you can invest in either traditional or unit-linked plans.
Group Mediclaim Insurance: A group health policy that covers the emergency medical bills of your employees and their covered family members.
Group Term Life Insurance: The best employers not only take care of employees while they are working with them, but also ensure their financial safety from unforeseen events.

Conclusion

For businesses, ITC is central to GST’s promise of eliminating cascading taxes. By ensuring compliance, understanding ITC conditions, and staying updated on rate changes and reversals, businesses can optimise cash flows and avoid penalties.

Good financial management helps you save money, whether from monthly expenses or taxes, in business and in life. Filing returns before due dates avoids last-minute rush, errors, and penalties, while tax-saving investments help build for long-term goals.

Most tax-saving investments, like term life, health insurance, ULIP, PPF, and NPS, are things you need anyway to secure your dependents or your future while building a retirement corpus.

Glossary

CGST: Portion of GST collected by the Central Government on intra-state transactions
SGST: The GST portion collected by the State Government on intra-state transactions
GSTR-2B: It is an auto-drafted static ITC statement generated for every registered taxpayer
GSTR-3B: A mandatory, self-declared monthly summary return under GST
Invoice Management System (IMS): It is the process of digitally tracking and processing supplier invoices

FAQs

In India, income tax credit and tax rebates are claimed by resident individuals who meet the specific tax criteria. Other than this, businesses and corporate conglomerates get relief over various double taxation agreements or incentives on investments made.

To claim Input Tax Credit (ITC) under GST, a registered taxpayer needs to fulfil the specific eligibility criteria under Section 16 of the CGST Act along with following the strict compliance rules. Section 16 of the CGST Act sets four conditions for claiming ITC: valid invoice, actual goods/services received, tax paid by supplier to govt, and recipient's return filed.

The new rule allows businesses to use their remaining CGST and SGST credit in any order they choose to pay off the remaining IGST liability once the entire IGST credit is exhausted.

It usually depends on the type of goods and services that you have availed. It is available for economy-class flight tickets along with regular goods and raw materials. It is denied for accommodation, restaurant services, beauty, and fitness services.

No, it cannot be claimed on all purchases. It can only be claimed on goods and services used for business purposes, which then become taxable supplies. All purchases must be made by registered dealers and buyers, as reflected in the auto-drafted statement.

ITC for any goods or services made needs to be claimed by 30th November of the following financial year or before the date of filing the annual return for the specific financial year.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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What Is Input Tax Credit (ITC) Under GST?

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Types of Taxes in GST

What is Input Tax Credit in GST?

How to Claim ITC in GST?

Did You Know?

ITC Rules During GST Rate Change: What Businesses Need to Know

How to Avoid Paying Extra Taxes?

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