Summary: CBIC Circular No. 261/07/2026-GST dated 26 October 2026 clarifies the operation of the fifty percent input tax credit option available to banking companies and financial institutions, including NBFCs, under Section 17(4) of the CGST Act. The circular explains that registrations engaged in accepting deposits or extending loans and advances may exercise this option, while registrations carrying on unrelated activities alone are outside its scope. Once exercised, the option applies across the entity’s registrations engaged in the qualifying activities. It further clarifies the application of the second proviso to Section 17(4), restricting full credit on supplies between registrations under the same PAN to transactions involving registrations that have opted for the provision. Detailed guidance is provided for reporting eligible, blocked, temporarily ineligible and permanently reversed credit in GSTR-3B, both before and after the adoption of the Invoice Management System. The circular also advises officers not to take an adverse view of different reporting methodologies followed in earlier periods where the credit actually availed complies with the stated principles. These clarifications are particularly important for banks and NBFCs reviewing branch-wise ITC eligibility, inter-branch transactions, reversals and GST return reporting.
Introduction
Section 17(4) gives a banking company or a financial institution, including an NBFC, that accepts deposits or extends loans and advances, a choice. It can either apportion credit between taxable and exempt supplies under Section 17(2) in the usual way, or it can simply take fifty percent of the eligible credit on inputs, input services and capital goods and reverse the rest. The option, once exercised, cannot be withdrawn during the financial year. The second proviso adds that the fifty percent restriction does not apply to tax paid on supplies received from another registration of the same PAN. The provision is short, and the variety of practices that grew around it is what prompted Circular No. 261/07/2026 GST dated 26.10.2026.
Who can opt and who must
The first clarification deals with groups that hold several registrations, some of which do not carry on the core banking activity. The circular says a registration of a bank or NBFC that is not engaged in accepting deposits or extending loans and advances, the example given being a registration engaged only in bullion trading, has neither the option nor the obligation to follow Section 17(4). A registration that is engaged in the core activity, and may also be engaged in other services, has the option. Once one such registration opts for Section 17(4), every other registration of the same bank or NBFC that is engaged in the core activity must also follow Section 17(4). The option is therefore entity wide across all the core activity registrations, not something to be exercised registration by registration.
The second proviso only works between two opting registrations
The second clarification narrows the relief in the second proviso. The question was whether tax on supplies received from a registration of the same PAN that has not opted for Section 17(4) is still outside the fifty percent restriction. The circular reads the proviso in the context of registrations that have opted for Section 17(4) and says the relaxation is available only on supplies received from another registration of the same PAN which has also opted for Section 17(4). So an inter branch supply from a bullion trading registration, or from any registration that is not under Section 17(4), falls within the fifty percent restriction in the hands of the receiving branch.
How to report it in GSTR 3B
The third clarification is the operational one and it draws on Circular 170/02/2022 on ITC reporting and the Invoice Management System that has been in place since October 2024. The circular gives two sets of steps.
Reporting where IMS was not used
Where IMS was not used, the taxpayer starts with the credit auto populated in GSTR 3B from GSTR 2B, other than reverse charge credit, and adds the reverse charge credit claimed in that return. Out of this the taxpayer first identifies what is eligible under Section 16. From the eligible amount, credit on inputs and input services used for non business purposes and credit blocked under Section 17(5) is reversed permanently in Table 4(B)(1). Credit covered by the second proviso, that is on supplies from another opting registration of the same PAN, is availed in full. Fifty percent of the remaining amount is availed and the other fifty percent is permanently reversed in Table 4(B)(1) of the same return. Credit that cannot yet be called eligible because a Section 16 condition is not satisfied, but may become eligible later, is reversed temporarily in Table 4(B)(2). When the condition is met, it is reclaimed in Table 4(A)(5) of a later return within the Section 16(4) time limit, shown also in Table 4(D)(1), and the fifty percent exercise is then applied to it at that stage.
Reporting after IMS-related amendments
After the IMS related amendments to the CGST Rules are notified, and in cases where IMS was used even before that, the sequence changes at the front end. Invoices on which credit is not presently eligible for want of a Section 16 condition are kept pending on IMS rather than accepted and reversed. Such credit does not enter GSTR 2B and does not auto populate in GSTR 3B. Credit on accepted and deemed accepted documents flows into GSTR 2B and GSTR 3B, and on that amount plus the reverse charge credit the same Section 17(5) reversal, second proviso availment and fifty percent computation is carried out as in the first method.
No adverse view on past reporting
The last paragraph of the clarification is the one that compliance teams will welcome most. The circular acknowledges that taxpayers under Section 17(4) have followed different reporting practices in different periods and advises field formations not to take an adverse view of a different methodology for past periods, so long as the amount of credit actually availed is in line with the principles set out. In other words the question in audit should be whether the net credit taken is right, not whether it was reversed in Table 4(B)(1) or 4(B)(2) or netted off before reporting. This is a useful line to have in hand when an auditor builds a demand on reporting mechanics alone.
What banks and NBFCs should do now
Three things follow. First, map every registration of the entity and classify it as core activity or not, because the option under Section 17(4) travels across all core registrations once any one of them exercises it. Second, review inter branch supplies and confirm that the second proviso is being applied only on receipts from registrations that have themselves opted, because the circular has closed the wider reading. Third, align the GSTR 3B working to the two step sequence in the circular, with the Section 17(5) reversal and the second proviso credit dealt with before the fifty percent cut is applied to the balance. Where IMS is in use, the pending function becomes the place to park credit that is not yet eligible, and the Table 4(B)(2) route is no longer needed for that purpose.
The circular is narrow in scope and will not interest most taxpayers. For the banking and NBFC sector, however, it settles the entity wide nature of the option, the scope of the second proviso, and the reporting sequence, and it gives a measure of protection for the past. That is as much as a clarificatory circular can reasonably do.
