Common Credit, Step by Step: Rules 42 and 43

A business that makes both taxable and exempt supplies reverses part of its credit every month, by a formula. Many such businesses do not think of themselves as making exempt supplies at all. A trader earning rent from a residential flat, a company that sells a plot of land, or a manufacturer that sells shares from its treasury all make supplies that count as exempt for this purpose. Each month’s reversal is provisional. The whole year is recomputed by the September return of the next year, and any shortfall is reversed with interest from 1 April. For 2025-26 that recomputation falls in the GSTR-3B for September 2026, due on 20 October 2026 for monthly filers.

The principle of apportionment and the logic of the formula are explained in Apportionment and Reversal of Credit. This guide follows the calculation through the returns: the monthly figures, the annual true-up, the rows of GSTR-3B and GSTR-9, and the points that commonly go wrong.

What to have ready

Item	Where it comes from
Input tax for the month by invoice, tagged as non-business, exempt, blocked, exclusively taxable or common	Books, matched with GSTR-2B (portal)
Exempt, nil-rated and non-GST outward supplies for the month, including land, building, securities and reverse charge supplies at their prescribed values	Books; GSTR-1 and GSTR-3B table 3.1 (portal)
Total turnover in the State for the month	Books; GSTR-1 (portal)
Register of common capital goods with invoice date and tax (A), to track the five-year life	Books (fixed asset register)
Monthly D1, D2 and Te reversed during the year	Books; GSTR-3B table 4(B)(1) (portal)
Annual totals of C2, E and F for the true-up	Books; financial statements

The rules and their dates

Section 17(1) and (2) of the CGST Act restrict credit to the share attributable to business and to taxable supplies, including zero-rated supplies. Rule 42 of the CGST Rules applies the restriction to inputs and input services. Rule 43 applies it to capital goods.

The rules as they now stand have been shaped by these amendments:

Notification	Effect	From
3/2019-Central Tax	Entry 92A of List I added to the duties excluded from E and F; clause (a) of the rules’ common Explanation omitted	1 February 2019
16/2019-Central Tax	Reversal of D1 and D2 “in FORM GSTR-3B or through FORM GST DRC-03”, replacing addition to output tax liability; T1 to T4 declared “at summary level in FORM GSTR-3B”; the real estate provisions in rules 42(3) to (6) and 43(2) to (5)	1 April 2019
16/2020-Central Tax	Rule 43(1)© and (d) substituted, clause (f) omitted, and the five-year useful life explained	1 April 2020
14/2022-Central Tax	Duty credit scrips added to the items excluded from exempt supplies (clause (d) of Explanation 1 to rule 43)	5 July 2022
19/2022-Central Tax	References to FORM GSTR-2 omitted from both rules	1 October 2022
38/2023-Central Tax	Clause © of Explanation 1 to rule 43 omitted; Explanation 3 inserted, valuing sales from arrival duty-free shops	Explanation 3 from 1 October 2023

The monthly computation for inputs and input services

Rule 42(1) works through these terms. The definitions are the rule’s own.

Term	Meaning under rule 42(1)
T	“the total input tax involved on inputs and input services in a tax period”
T1	input tax on inputs and input services “intended to be used exclusively for the purposes other than business”
T2	input tax on those “intended to be used exclusively for effecting exempt supplies”
T3	input tax “on which credit is not available under sub-section (5) of section 17”
C1	credit credited to the electronic credit ledger: C1 = T − (T1 + T2 + T3)
T4	credit “attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted but including zero rated supplies”
C2	common credit: C2 = C1 − T4
E	“the aggregate value of exempt supplies during the tax period”
F	“the total turnover in the State of the registered person during the tax period”
D1	credit attributable to exempt supplies: D1 = (E ÷ F) × C2
D2	credit attributable to non-business purposes, where common inputs are used partly for them: five per cent of C2
C3	eligible common credit: C3 = C2 − (D1 + D2)

Rule 42(1)(g) requires T1, T2, T3 and T4 to be “determined and declared by the registered person … at summary level in FORM GSTR-3B”. Clause (l) requires C3, D1 and D2 to be “computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax”. Clause (m) requires D1 plus D2 to be “reversed by the registered person in FORM GSTR-3B or through FORM GST DRC-03”.

Where a tax period has no turnover, or the information is not available, the proviso to clause (i) uses E and F of “the last tax period for which the details of such turnover are available”. A further proviso allows credit on a mixed purchase that “has been identified and segregated at the invoice level” to be placed directly in T1, T2 and T4.

The value of exempt supplies: what E includes and excludes

E is where most of the judgement lies. Four sets of provisions shape it.

The definition. Under section 2(47), “exempt supply” includes supplies at nil rate, supplies exempted under section 11, and “non-taxable supply”, which is any supply “not leviable to tax” under the CGST or IGST Act. Supplies of alcoholic liquor for human consumption, and of the petroleum products not yet brought under GST, fall within that last part.

Section 17(3). The value of exempt supply “shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building”. A supplier of services taxed under reverse charge therefore counts them in E, though they are taxable.

The Explanation to section 17(3). It excludes the value of Schedule III activities from exempt supply, “except”:

(i) the value of activities or transactions specified in paragraph 5 of the said Schedule; and

(ii) the value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule.

Paragraph 5 is the sale of land and, subject to Schedule II, of building. The present wording of the Explanation was substituted by section 139 of the Finance Act, 2023 from 1 October 2023 (Notification No. 28/2023-Central Tax). The value prescribed for paragraph 8(a), the supply of warehoused goods before clearance for home consumption, is set by Explanation 3 to rule 43, also from 1 October 2023. It is “the value of supply of goods from Duty Free Shops at arrival terminal in international airports to the incoming passengers”. Other Schedule III activities stay out of E: high-sea sales, other sales of warehoused goods, and merchanting trade, for example.

Valuation. The Explanation to rule 45, which applies to the whole Chapter, fixes two values:

(a) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and

(b) the value of security shall be taken as one per cent. of the sale value of such security.

Exclusions. Explanation 1 to rule 43, “for the purposes of rule 42 and this rule”, provides that the aggregate value of exempt supplies “shall exclude”:

• clause (b): the value of services by way of accepting deposits, extending loans or advances “in so far as the consideration is represented by way of interest or discount”, except for a banking company or a financial institution, including a non-banking financial company, engaged in those services; and
• clause (d): the value of supply of duty credit scrips specified in Notification No. 35/2017-Central Tax (Rate).

Clauses (a) and © have been omitted. The Explanation to rule 42(1)(i) also excludes from both E and F “the amount of any duty or tax levied under entry 84 and entry 92A of List I … and entry 51 and 54 of List II”. These are the central excise duties and the State taxes on petroleum products, tobacco and alcohol that are outside GST.

Life insurance. CBIC’s Circular No. 214/08/2024-GST of 26 June 2024 dealt with the part of a life insurance premium allocated to investment or savings, which is left out of taxable value under rule 32(4). It clarified that this part is not an exempt or non-taxable supply, and that the insurer is not required to reverse credit on account of it.

Capital goods: rule 43 each month

Rule 43 does not use T1 to T4. Capital goods used exclusively for non-business or exempt purposes are not credited (clause (a)). Those used exclusively for taxable supplies are credited in full (clause (b)). For all others, the tax on the invoice, “A”, is credited to the ledger directly, and each month:

• Tc is the aggregate of A for common capital goods “whose useful life remains during the tax period” (clause (d));
• Tm = Tc ÷ 60, the month’s share of common credit (clause (e)), the useful life being “five years from the date of invoice”;
• Te = (E ÷ F) × Tr, the share attributable to exempt supplies (clause (g)), with E and F measured as for rule 42.

Clause (g) still refers to “Tr”, which was defined in clause (f) until Notification No. 16/2020-Central Tax omitted that clause from 1 April 2020. The series guide on apportionment explains why Tm is the only per-period figure the rule now computes.

Under clause (h), Te “along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability”. Clause (i) requires Te to be computed separately for each tax and “declared in FORM GSTR-3B”. Outside real estate projects, rule 43 has no annual recomputation. Each month’s Te is final.

The annual true-up for inputs and input services

Rule 42(2) requires the rule 42(1) credit to be “calculated finally for the financial year before the due date for furnishing of the return for the month of September following the end of the financial year to which such credit relates”. The annual D1 is computed on the year’s E, F and C2, and the annual D2 is five per cent of the year’s C2. The result is compared with the total of D1 and D2 reversed month by month:

• If the annual figure is higher, under clause (a) the excess is “reversed by the registered person in FORM GSTR-3B or through FORM GST DRC-03 in the month not later than the month of September following the end of the financial year”. The registered person is also “liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from the first day of April of the succeeding financial year till the date of payment”. That rate is 18 per cent (Notification No. 13/2017-Central Tax).
• If the monthly reversals were higher, under clause (b) “such excess amount shall be claimed as credit by the registered person in his return for a month not later than the month of September following the end of the financial year”.

For a monthly filer, the September return is due on 20 October. A filer under the quarterly scheme files a return for July to September, not for “the month of September”. The rule does not address that case in terms, and the quarterly return due on 22 or 24 October is the return that covers September.

Real estate projects are computed once, for the project as a whole, at completion or first occupation, under rules 42(3) to (6) and 43(2) to (5), using carpet area in place of value.

Reporting in GSTR-3B

Circular No. 170/02/2022-GST of 6 July 2022 treats rule 42 and 43 reversals as “absolute in nature and … not reclaimable”. They are reported in table 4(B)(1), “As per rules 38, 42 and 43 of CGST Rules and sub-section (5) of section 17”, as relabelled by Notification No. 14/2022-Central Tax. Because GSTR-2B carries all credit into table 4(A), eligible or not, T1, T2 and T3 also leave the ledger through 4(B)(1), together with D1 and D2 and the rule 43 amounts. The circular’s own illustration puts the rule 42 and 43 reversal and the section 17(5) credit together in 4(B)(1).

Two awkward fits remain:

• Rule 43’s Te. The rule still says Te is “added to the output tax liability”, while the circular and the form place rule 43 in 4(B)(1). Rule 43(1)(h) speaks of “applicable interest” without saying what that is.
• The rule 42(2)(b) claim. Neither the circular nor the form says where a credit claimed back at the annual true-up is entered. Table 4(A)(5), “All other ITC”, is the only availment row available. Table 4(D)(1) and the portal’s reclaim statement record only reversals made in 4(B)(2), so a 4(B)(1) amount reclaimed through 4(D)(1) fails the portal’s check.

The row-by-row treatment of table 4 is in Reporting Credit in GSTR-3B Table 4. Interest under rule 42(2)(a) is entered in table 5.1 of GSTR-3B, or paid through DRC-03.

Reporting in GSTR-9

FORM GSTR-9 reports the reversals in table 7C (“As per Rule 42”) and table 7D (“As per Rule 43”), and section 17(5) credit in table 7E. The annual excess reversed in the next year’s September return falls in that year’s returns. For 2024-25 onwards, the instructions to table 12, as amended by Notification No. 13/2025-Central Tax, require the “aggregate value of reversed ITC of the financial year which has been reversed through the return filed in next financial year filed upto 30th November” to be declared there, and state that it “will not be part of Table 7”. The instructions do not name a table for a claim under rule 42(2)(b).

Portal steps and signing

The GSTR-3B user manual describes the “Eligible ITC” tile, in which the reversals are entered in table 4(B)(1), and the “Interest and Late fee” tile, in which rule 42(2)(a) interest is entered. A reversal or interest paid outside the return is paid through DRC-03, selecting the cause of payment on the form. GSTR-3B is signed by the authorised signatory, by digital signature certificate in the case of a company under rule 26, and by digital signature or electronic verification code otherwise.

A worked illustration

The figures below are an illustration only. Real computations are made separately for each tax, under rule 42(1)(l).

One month (June 2025). A business in one State has:

Item	Rs
T	1,50,000
T1, exclusively non-business	5,000
T2, exclusively for exempt supplies	10,000
T3, blocked under section 17(5)	15,000
C1 = T − (T1 + T2 + T3)	1,20,000
T4, exclusively for taxable supplies	60,000
C2 = C1 − T4	60,000

Its turnover in the State for June is Rs 1.5 crore, of which Rs 30 lakh is exempt (residential rent and a sale of shares valued at one per cent of sale value), so E ÷ F = 0.20. Some common inputs are also used for non-business purposes.

• D1 = 0.20 × 60,000 = Rs 12,000
• D2 = 5 per cent × 60,000 = Rs 3,000
• C3 = 60,000 − 15,000 = Rs 45,000
• Table 4(B)(1): T1 + T2 + T3 + D1 + D2 = Rs 45,000
• Credit retained: T4 + C3 = Rs 1,05,000, which equals T less table 4(B)(1).

A machine (rule 43). On 1 July 2025 the business buys a machine for common use, with integrated tax of Rs 6,00,000 (A). Tm = 6,00,000 ÷ 60 = Rs 10,000. In a month whose E ÷ F is 0.20, Te = Rs 2,000, reversed in table 4(B)(1). The calculation is repeated each month until June 2030, using that month’s ratio.

The year (2025-26). The year’s figures are: C2 Rs 7,20,000; exempt supplies Rs 3 crore; turnover in the State Rs 18 crore. E ÷ F = 1/6.

• Annual D1 = 7,20,000 ÷ 6 = Rs 1,20,000
• Annual D2 = 5 per cent × 7,20,000 = Rs 36,000
• Annual total: Rs 1,56,000
• Reversed month by month during the year: D1 Rs 1,08,000 and D2 Rs 36,000, a total of Rs 1,44,000
• Excess to reverse: Rs 12,000, in table 4(B)(1) of the September 2026 GSTR-3B, filed on 20 October 2026
• Interest under rule 42(2)(a): from 1 April 2026 to 20 October 2026, counting both days, 203 days: Rs 12,000 × 18 per cent × 203 ÷ 365 = Rs 1,201, in table 5.1
• GSTR-9 for 2025-26: the monthly reversals in tables 7C and 7D; the Rs 12,000 in table 12

Had the monthly reversals exceeded the annual figure, the difference could have been claimed as credit in a return no later than the September 2026 return.

Common points of dispute

• Items missed from E. Sales of land at stamp duty value, securities at one per cent of sale value, interest earned by a bank or NBFC, residential rent, and outward supplies on which the recipient pays reverse charge are all in E. Interest earned by other businesses on deposits, loans and advances is not.
• Schedule III items included in E. Only paragraph 5 and the prescribed part of paragraph 8(a) are counted. Other Schedule III activities are kept out by the Explanation to section 17(3).
• F. F is “total turnover in the State”, not aggregate turnover across States, and excludes the duties named in the Explanation to rule 42(1)(i).
• Classification of inputs. Credit placed in T4 escapes reversal. An officer may treat a purchase as common where the recipient has treated it as used exclusively for taxable supplies.
• D2. D2 applies only “if common inputs and input services are used partly for business and partly for non-business purposes”. Where there is no non-business use, D2 is nil.
• Interest on monthly reversals not made. A monthly reversal that is omitted leaves credit in the ledger to which the business was not entitled. Interest then runs under section 50(3) and rule 88B(3) from the date of utilisation, separately from the rule 42(2)(a) interest on the annual excess.
• The annual excess paid late. Rule 42(2)(a) fixes interest at the section 50(1) rate from 1 April “till the date of payment”. An excess not reversed by September is also credit retained without entitlement, open to a demand.

Consequences

Under-reversal is recovered through a demand under section 73 or 74 for periods up to 2023-24, or under section 74A from 2024-25, with interest and penalty. E ÷ F can be recomputed by an officer from the returns and financial statements: exempt and non-GST turnover reported in GSTR-3B table 3.1© and (e) and in GSTR-9 table 5, and income from land, shares and interest in the accounts. The point may be raised in scrutiny (Answering a Scrutiny Notice on Credit) or audit.

What can still be put right

• Monthly reversals short. The shortfall is reversed in table 4(B)(1) of a later GSTR-3B, or paid through DRC-03, with interest under section 50(3) where the credit was utilised. Rule 42(1)(l) and (m) allow DRC-03 expressly.
• The annual true-up missed. The excess can still be reversed, or paid by DRC-03, with interest from 1 April under rule 42(2)(a).
• Excess reversed. The rule 42(2)(b) claim must be made by the September return. Section 39(9) separately allows corrections up to 30 November after the year or the date of the annual return, if earlier.

The general routes are in Correcting Mistakes in Returns and Late Returns.

The procedure in order

1. Each month, sort input tax into T1, T2, T3, T4 and common credit, splitting mixed invoices where possible.
2. Compute E and F for the month, including section 17(3) items at their prescribed values and leaving out the excluded items.
3. Compute D1 and D2 for each tax, and reverse them, with T1, T2 and T3, in table 4(B)(1).
4. For common capital goods, compute Tm and Te each month for five years and report Te in table 4(B)(1).
5. After the year, recompute D1 and D2 on the year’s figures.
6. Reverse any excess, with interest from 1 April, by the September return, or claim back any surplus by the same return.
7. Report the reversals in tables 7C and 7D of GSTR-9, and the annual excess reversed in the next year in table 12.

The next guide covers what happens when the department stops credit from being used at all: blocking of the credit ledger under rule 86A, and the one per cent cash requirement in rule 86B.