What Is Input Tax Credit (ITC) Under GST?

Written by : Knowledge Centre Team

2025-12-02

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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 tax you pay while purchasing input products X, Y, and Z is ₹500, 250, ₹150, respectively. When you sell your final product after manufacturing is complete, you again have to pay a tax of ₹1200. There is a way to reduce your tax liability when paying output tax. You can remove the taxes you have paid on inputs from your output tax liability.

We will look at how you can do it. Before that, let us understand GST.

What is GST?

GST is known as Goods and Services Tax. Earlier, in India, a consumer used to pay many different taxes like VAT, service tax, excise, etc. GST is an indirect tax that has replaced almost all the earlier indirect taxes. 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). The central government has fixed different taxation rates under each of the above three categories. 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	Centralgovernment	Between two different states or a state and a Union Territory, (interstate)
			Union Territory (interstate)

What is Input Tax Credit (ITC) in GST?

Input tax credit (ITC) is the credit manufacturers receive for paying input taxes towards inputs used in the manufacturing of 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
Every state in India has different conditions in this regard

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 registered dealers who have chosen 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
The same data will be reflected in the system when you file your taxes.
You will accept the details. It confirms that the deal was done between the two parties and that the information shared by the seller is correct
Once accepted, the tax on purchases gets credited to your 'Electronic Credit Ledger'
You can adjust it against future output tax liability. If there is no future output tax liability, you can claim the refund

Recommended Reading - GST Login Guide

Special Announcements on ITC

Advances received for supplies: GST rate on advances (when supply is pending or invoice not issued) will be determined as per 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.

Tax Saving Investments as 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.
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. ULIP Plans from Canara HSBC Life Insurance let you invest for up to a 99-year term.
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 you back in terms of 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 has an investment value, and you can invest in traditional or unit-linked plans.
Group Mediclaim Insurance: A group health policy that can take care of the emergency medical bills of your employees and their covered family members.
Group Term Life Insurance: The best employers not only take care of the employees while they are working with them, but also ensure the financial safety of their employees from unforeseen events.

Good financial management helps you save money, whether from your monthly expenses or taxes, both in business and in life. You can avoid last-minute rush, errors and penalties by simply filing your returns before the due dates. For additional savings, invest in tax-saving options and build for your long-term goals.

Most tax-saving investments are those you need anyway in your financial life to either secure your dependents or your future. For example, term life and health insurance plans are necessary for long-term financial safety against contingencies. Similarly, ULIP, PPF and NPS investments help you build a good corpus for retirement.

Conclusion

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.

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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