Summary: Rules 42 and 43 of the CGST Rules prescribe the mechanism for determining and reversing Input Tax Credit where goods, services or capital goods are used partly for taxable supplies, exempt supplies or non-business purposes. Rule 42 applies to inputs and input services and requires identification of exclusive and common credits, followed by proportionate reversal based on exempt turnover and, where applicable, non-business use. The calculation is generally undertaken for each tax period and subsequently recalculated on annual figures. Rule 43 applies to capital goods and operates on a five-year or 60-month useful-life basis, with the exempt portion of common capital-goods credit determined and reversed periodically. The article explains Sections 17(1) and 17(2), important definitions, the T1–T4 and C1–C3 mechanism, D1 and D2 calculations, Rule 43 formulas, changes in use of capital goods, GSTR-3B and GSTR-9 reporting, and the differences between Rules 42 and 43 through detailed numerical examples.
Rule 42 and Rule 43 of CGST Rules, 2017 – explained simply, with examples
Most businesses buy goods and services that are used for more than one purpose – partly for taxable sales, partly for exempt sales, and sometimes partly for personal use. GST allows credit only for the business and taxable portion. Rules 42 and 43 lay down the exact method to work out that portion and to reverse the rest. This article explains both rules in plain language, step by step, with worked examples.
- 1. Introduction to Rule 42 and Rule 43
- 1.1 Why reversal is required
- 1.2 Which rule applies
- 2. Relevant important definitions
- 3. Rule 42 – Explanation and method of calculation
- 3.1 When Rule 42 applies
- 3.2 Step-by-step method
- 3.3 Key compliance points
- 4. Example – Rule 42
- 5. Rule 43 – Explanation and method of calculation
- 5.1 Basic idea
- 5.2 Classify each capital good on purchase
- 5.3 Monthly formula for common capital goods
- 6. Example – Rule 43
- 7. Other information
- 7.1 Yearly reversal – Rule 42(2)
- 7.2 Change in usage of capital goods – Rule 43
- 7.3 Reporting
- 8. Comparison – Rule 42 vs Rule 43
- Key takeaways
1. Introduction to Rule 42 and Rule 43
1.1 Why reversal is required
- Section 17(1)of the CGST Act: where goods or services are used partly for business and partly for other purposes, credit is allowed only for the business portion.
- Section 17(2): where goods or services are used partly for taxable supplies (including zero-rated supplies) and partly for exempt supplies, credit is allowed only for the taxableportion.
- Sections 17(1) and 17(2) state the principle; Rules 42 and 43give the formula.
1.2 Which rule applies
| Rule | Applies to | Common examples | Method in one line |
|---|---|---|---|
| Rule 42 | Inputs and input services | Raw material, rent, electricity, telephone, professional fees | Common credit divided every month in the ratio of exempt turnover to total turnover, plus 5% for non-business use; recalculated at year-end |
| Rule 43 | Capital goods | Machinery, computers, furniture, equipment | Full credit taken upfront; exempt share of 1/60th of the credit given back every month for 5 years |
What does “reversal” mean?
Reversal means giving back credit that relates to exempt supplies or personal use.
2. Relevant important definitions
| Term | Meaning in simple words | Reference |
|---|---|---|
| Inputs/input services | Goods (other than capital goods) and services used in the course of business. | Sec 2(59), 2(60) |
| Capital goods | Goods whose value is capitalised in the books of account and which are used in business. For Rule 43, useful life is taken as 5 years from the invoice date. | Sec 2(19); Rule 43(1)(c) |
| Exempt supply | Supplies attracting nil rate or wholly exempt from tax, and non-taxable supplies (e.g. petrol, alcohol for human consumption). | Sec 2(47) |
| Value of exempt supply | Also includes supplies on which the recipient pays tax under reverse charge, transactions in securities (1% of transaction value), sale of land and (subject to conditions) sale of building (SDV) | Sec 17(3) |
| Zero-rated supply | Exports and supplies to SEZ. Treated as taxable – no reversal is needed for them. | Sec 16, IGST Act |
| Common credit | Credit on items used for both taxable and exempt supplies, or for both business and personal use. | C2 (Rule 42); Tc (Rule 43) |
| E | Aggregate value of exempt supplies during the tax period. | Rules 42 & 43 |
| F | Total turnover in the State of the registered person during the tax period. | Rules 42 & 43 |
Adjustments to E and F
- Excluded from E:interest or discount on deposits, loans or advances – except for the banks and financial institutions including NBFCs; value of Duty Credit Scrips.
- Included in E:supplies from Duty Free Shops at arrival terminals of international airports to incoming passengers (w.e.f. 01.10.2023).
3. Rule 42 – Explanation and method of calculation
3.1 When Rule 42 applies
- Inputs or input services used partly for business and partly for non-businesspurposes; or
- Inputs or input services used partly for taxable (including zero-rated) supplies and partly for exempt supplies.
- The calculation is made for every tax period(normally a month).
3.2 Step-by-step method
| Step | Symbol | What it means | Treatment |
|---|---|---|---|
| 1 | T | Total input tax on inputs and input services in the tax period | Starting point |
| 2 | T1 | Used exclusively for non-business purposes | Not allowed |
| 3 | T2 | Used exclusively for exempt supplies | Not allowed |
| 4 | T3 | Blocked under Section 17(5) | Not allowed |
| 5 | C1 = T – (T1 + T2 + T3) | Credit credited to the electronic credit ledger | Allowed provisionally |
| 6 | T4 | Used exclusively for taxable supplies (including zero-rated) | Fully allowed |
| 7 | C2 = C1 – T4 | Common credit | To be divided |
| 8 | D1 = (E ÷ F) × C2 | Part of common credit relating to exempt supplies | Reverse |
| 9 | D2 = 5% × C2 | Deemed non-business part (only if common items are also used for non-business) | Reverse |
| 10 | C3 = C2 – (D1 + D2) | Eligible common credit | Allowed |
3.3 Key compliance points
1. T1, T2, T3 and T4 are determined and declared at summary level in FORM GSTR-3B– Rule 42(1)(g).
2. C3, D1 and D2 are computed separatelyfor CGST, SGST/UTGST and IGST – Rule 42(1)(l).
3. D1 + D2 are reversed in GSTR-3B(Table 4(B)(1)) or through DRC-03 – Rule 42(1)(m).
4. Invoice-level option:where an invoice clearly relates to non-business or exempt use, put it directly in T1 / T2; the balance of that invoice goes to T4 – proviso to Rule 42(1)(m).
4. Example – Rule 42
ABC Traders sells packaged food (taxable) and fresh fruits (exempt). The office phone is also used by the owner at home. Figures for April 2025:
| Particulars | Symbol | Amount (₹) |
|---|---|---|
| Total ITC on inputs and input services | T | 1,00,000 |
| Laptop bag bought for the owner (personal) | T1 | 5,000 |
| Crates used only for fresh fruits (exempt) | T2 | 10,000 |
| Food and beverages for staff (blocked u/s 17(5)) | T3 | 5,000 |
| Packing material used only for packaged food | T4 | 30,000 |
| Exempt turnover – fresh fruits | E | 20,00,000 |
| Total turnover in the State | F | 1,00,00,000 |
–
| Step | Calculation | Amount (₹) |
|---|---|---|
| C1 | 1,00,000 – (5,000 + 10,000 + 5,000) | 80,000 |
| C2 | 80,000 – 30,000 | 50,000 |
| D1 | (20,00,000 ÷ 1,00,00,000) × 50,000 = 20% × 50,000 | 10,000 |
| D2 | 5% × 50,000 | 2,500 |
| C3 | 50,000 – (10,000 + 2,500) | 37,500 |
| Eligible ITC | T4 + C3 = 30,000 + 37,500 | 67,500 |
| Reversal | D1 + D2 = 10,000 + 2,500 | 12,500 |
In simple words
Out of ₹1,00,000 of GST paid, ₹20,000 is never allowed (personal, exempt-only and blocked items). ₹30,000 is fully allowed. Of the shared ₹50,000, 20% relates to exempt sales and 5% is treated as personal use, so ₹12,500 is reversed. Final credit: ₹67,500.
5. Rule 43 – Explanation and method of calculation
5.1 Basic idea
- A capital good is used for several years, so its credit is not divided once. Its useful life is taken as 5 years (60 months) from the date of invoice.
- Each month, 1/60th of the common credit is treated as used, and the exempt share of that 1/60this added to output tax.
5.2 Classify each capital good on purchase
| Clause | Capital good used | Treatment of ITC |
|---|---|---|
| 43(1)(a) | Exclusively for non-business or exempt supplies | Shown in GSTR-3B; not credited to the electronic credit ledger |
| 43(1)(b) | Exclusively for taxable supplies (including zero-rated) | Shown in GSTR-3B; fully credited |
| 43(1)(c) | For both – common use (amount denoted “A”) | Credited in full upfront; exempt share reversed monthly over 60 months |
5.3 Monthly formula for common capital goods
| Symbol | Formula/meaning | Clause |
|---|---|---|
| A | Tax on the invoice of each common capital good – credited directly to the electronic credit ledger | 43(1)(c) |
| Tc | Aggregate of “A” for all common capital goods whose useful life remains during the tax period | 43(1)(d) |
| Tm = Tc ÷ 60 | Common credit attributable to the tax period | 43(1)(e) |
| Te = (E ÷ F) × Tm | Common credit attributable to exempt supplies for the tax period | 43(1)(g) |
| Te | Reversed in every tax period of the useful life | 43(1)(h) |
- Te is computed separatelyfor CGST, SGST/UTGST and IGST and declared in GSTR-3B – Rule 43(1)(i).
- Unlike Rule 42, there is no separate 5% non-business reversal(clause (f) omitted w.e.f. 01.04.2020) and no yearly recalculation for ordinary businesses.
6. Example – Rule 43
XYZ Ltd. buys a machine on 1 April 2025 for common use. GST on the invoice is ₹6,00,000. In May 2025, exempt turnover is ₹30 lakh and total turnover in the State is ₹1.5 crore.
| Step | Calculation | Amount (₹) |
|---|---|---|
| A | GST on invoice – credited in full in April 2025 | 6,00,000 |
| Tc | Only one common capital good within its useful life | 6,00,000 |
| Tm | 6,00,000 ÷ 60 | 10,000 |
| E ÷ F | 30,00,000 ÷ 1,50,00,000 | 20% |
| Te | 20% × 10,000 – Reduced in GSTR 3B | 2,000 |
Five-year view (if the exempt share stays at 20%)
- Monthly reversal: ₹2,000 × 60 months = ₹1,20,000(April 2025 to March 2030).
- Credit finally retained: ₹6,00,000 – ₹1,20,000 = ₹4,80,000.
- In reality Te changes every month with that month’s E ÷ F; after 5 years, the machine drops out of Tc.
7. Other information
7.1 Yearly reversal – Rule 42(2)
- Monthly D1 and D2 are based on monthlyE and F. After the year ends, they must be recalculated on full-year figures.
- Time limit:before the due date of the return for September following the end of the financial year.
- Final D1 + D2 more than monthly total (short reversal):reverse the difference in GSTR-3B / DRC-03 with interest under Section 50(1) (18% p.a.) from 1 April of the next financial year till the date of payment.
- Final D1 + D2 less than monthly total (excess reversal):claim the difference as credit in a return not later than the September return.
Example – FY 2025-26
- D1 + D2 reversed month-wise: ₹1,50,000. D1 + D2 on annual figures: ₹1,80,000. Short reversal: ₹30,000.
- Reversed in the September 2026 return on 20 October 2026. Interest = 30,000 × 18% × 203/365 = ₹3,003(1 April 2026 to 20 October 2026).
- If the annual figure had been ₹1,20,000, the excess ₹30,000 could be claimed backby the September 2026 return.
7.2 Change in usage of capital goods – Rule 43
- From exclusive exempt / non-business [43(1)(a)] to common use [43(1)(c)]:credit “A” is allowed, but the ineligible part for the period of exempt use (“Te ie”) is worked out at 5 percentage points for every quarter or part of a quarter, and reversed in the month in which credit is claimed. Section 18(4) will not apply to such goods.
- From exclusive taxable [43(1)(b)] to common use [43(1)(c)]:the credit already claimed is added to Tc, and monthly reversal starts from then.
Example – change in usage
- Computer bought on 1 April 2025, GST ₹1,00,000, used only for exempt supplies – no credit taken.
- From 1 February 2026 it is used for both. Period of exempt use: April 2025 to January 2026 = 3 full quarters + 1 part quarter = 4 quarters. Out of the total ITC of ₹1,00,000, 5% is reduced for each quarter. For 4 quarters, the total reduction is 20% (4 × 5%), i.e., ₹20,000.
- Accordingly, ₹20,000 is reversed, and the remaining ₹80,000 is eligible to be claimed as ITC.
7.3 Reporting
- Monthly reversals: GSTR-3B Table 4(B)(1).
- Annual return: GSTR-9 Table 7C(Rule 42) and Table 7D (Rule 43).
8. Comparison – Rule 42 vs Rule 43
| Point | Rule 42 | Rule 43 |
|---|---|---|
| Applies to | Inputs and input services | Capital goods |
| Common credit taken | After monthly reversal (C3) | Full amount upfront (A) |
| Basis of reversal | (E ÷ F) × C2 every month | (E ÷ F) × (Tc ÷ 60) every month |
| Non-business use | Additional 5% of C2 (D2) | No separate 5% rule |
| Spread of credit | Month of purchase | 60 months (5 years) |
| Yearly recalculation | Yes – by September return of next FY | No (except real estate) |
| Interest | On short reversal from 1 April of next FY | – |
| Change in usage | No specific provision | 5% per quarter rule / add to Tc |
| GSTR-9 reporting | Table 7C | Table 7D |
Key takeaways
1. Credit is allowed only for business and taxable use.
2. Remove non-business, exempt-only and blocked credit first; divide only the common credit.
3. Rule 42 divides common credit every month and must be trued-up at year-end.
4. Rule 43 gives full credit on common capital goods and recovers the exempt share over 60 months.
5. Maintain monthly working papers and a capital goods register – they are the first documents asked for in an audit.
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Disclaimer: This article is for general understanding only and is based on Rules 42 and 43 of the CGST Rules, 2017. Readers should refer to the latest notifications and seek professional advice before acting.
