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Rule 42 and 43 ITC Reversal: Common Credit Advisory in 2026

Reviewed by CA and CS Team, Patron Accounting LLP ICAI & ICSI Registered| 15+ Years Experience| Last Updated: Verify Credentials →

Documents: Outward supply ledger, exempt vs taxable split, capital goods register, and GSTR-3B Table 4(B).

Fees: Starting from INR 4,999 (Exl GST and Govt. Charges) - per advisory engagement.

Eligibility: Every taxpayer with mixed taxable plus exempt supplies - banks, NBFCs, real estate, education, healthcare.

Timeline: Monthly reversal computation plus annual reconciliation in September of the next FY.

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Rule 42 and 43 Reversal at a Glance

📌 TL;DR - ITC Reversal Rule 42 and 43 Services at a Glance

Rule 42 and Rule 43 of the CGST Rules 2017 govern the proportionate reversal of input tax credit on common credits - inputs and input services under Rule 42, capital goods under Rule 43 - where a registered taxpayer uses them partly for taxable supplies and partly for exempt supplies or non-business purposes. The reversal is computed monthly in GSTR-3B Table 4(B) under Section 17(1) and 17(2) of the CGST Act, with mandatory annual reconciliation by September of the next FY. Failure attracts interest at 18 percent per annum under Section 50(3).

Rule 42 and Rule 43 ITC reversal is the structured apportionment of input tax credit between taxable and exempt supplies under Section 17 of the CGST Act 2017. The two rules cover different credit types - Rule 42 for inputs and input services with monthly D1 plus D2 reversal, and Rule 43 for capital goods amortised over the 60-month useful life. Both require monthly entries in GSTR-3B Table 4(B) and a mandatory annual reconciliation in September of the next FY.

With 10,000+ Indian businesses served, 800+ Rule 42/43 advisory engagements completed across banks, NBFCs, real estate, education, and healthcare sectors, and a 99.4 percent audit-defensible reversal working rate, Patron Accounting LLP runs the full scoping-to-annual-reconciliation cycle for taxpayers with common credits. The reversal is formula-driven, but the discipline is engagement-driven - the right team holds the line at booking and reconciles it at year-end.

Content is reviewed quarterly for accuracy.

What Is Rule 42 and Rule 43 ITC Reversal?

Rule 42 and Rule 43 of the CGST Rules 2017 prescribe the exact formula and periodicity for reversing input tax credit when a registered taxpayer uses inputs, input services, or capital goods partly for taxable supplies (including zero-rated) and partly for exempt supplies or non-business purposes under Section 17(1) and 17(2) of the CGST Act.

Rule 42 covers inputs and input services with a monthly D1 reversal (proportionate to exempt turnover) plus a deemed 5 percent D2 reversal for non-business use. Rule 43 covers capital goods with the ITC spread over a 60-month useful life and monthly Te reversal applied for any month where the asset is used for exempt or non-business purposes.

The two rules require monthly disclosure in GSTR-3B Table 4(B) and a binding annual reconciliation in the September return of the next FY. Failure to reconcile attracts interest at 18 percent per annum under Section 50(3).

Key Terms for ITC Reversal Rule 42 and 43:

Common Credit: Input tax credit on goods or services used partly for taxable supplies and partly for exempt supplies or non-business purposes - the credit that must be apportioned under Rule 42 or Rule 43.
T1, T2, T3 (Rule 42): T1 is ITC used exclusively for non-business; T2 is ITC used exclusively for exempt supplies; T3 is ITC blocked under Section 17(5) - all three are excluded from common credit upfront.
T4 (Rule 42): ITC on inputs and input services attributable exclusively to taxable supplies including zero-rated - fully eligible and deducted from C1 to derive the common credit C2.
C1 and C2 (Rule 42): C1 = T minus (T1 plus T2 plus T3) - credit in the electronic credit ledger after exclusive ineligibles. C2 = C1 minus T4 - the residual common credit subject to D1 and D2 reversal.
D1 (Rule 42): D1 = (E divided by F) times C2, where E is exempt supplies and F is total turnover in the State - the proportionate ITC reversal attributable to exempt supplies.
D2 (Rule 42): D2 = 5 percent of C2 - a deemed reversal towards non-business use, applicable only when T1 (non-business specific credit) is not separately identifiable.
Tc, Tr, Te (Rule 43): Tc = total ITC on a capital good divided by 60 (monthly attribution); Tr = aggregate Tc for all common-use capital goods in the period; Te = Tr times (E divided by F) - the monthly reversal added to output tax liability.
Useful Life of Capital Goods: 60 months (5 years) from the date of invoice as deemed by Rule 43 - reversal computation runs for this entire period.
Exempt Supply (Section 2(47)): Includes nil-rated supplies, wholly exempt supplies under Section 11 or Section 6 of the IGST Act, and non-taxable supplies (alcohol, petroleum). Excludes zero-rated supplies (exports and SEZ).
Annual Reconciliation: Year-end recomputation using the annual E/F ratio - if annual is higher than aggregated monthly, pay the difference; if lower, claim the excess as ITC. Final entry by the GSTR-3B of September of next FY.

Capital Goods Clock 60-Month Reversal

Who Must Apply Rule 42 and Rule 43

Every registered taxpayer who uses inputs, input services, or capital goods partly for taxable supplies and partly for exempt supplies or non-business purposes must apply Rule 42 (for inputs and input services) and Rule 43 (for capital goods). The most common sectors and use cases:

Mandatory Application

Banks and Non-Banking Financial Companies (NBFCs) with deposit interest as exempt supply (the Rule 38 alternative 50% reversal option is also available)
Real estate developers selling both residential (exempt under certain conditions) and commercial (taxable) units
Healthcare providers offering both clinical services (exempt) and ancillary taxable supplies
Educational institutions providing exempt education plus taxable supplies (canteen, hostel, training)
Manufacturers producing both exempt and taxable products (dairy with milk exempt and cheese taxable)
Insurance companies with a life insurance exempt and general insurance taxable mix
Cooperative societies with member-related exempt activities and external taxable trading
Any registered person with mixed-use machinery, office equipment, or vehicles

Annual Reconciliation Deadline

The final annual reconciliation under both Rule 42 and Rule 43 must be completed in the GSTR-3B of September of the next financial year (or the actual date of filing GSTR-9 for that FY, whichever is earlier). Missing this deadline triggers interest under Section 50(3) of the CGST Act at 18 percent per annum on the differential amount.

Patron Accounting Services for Rule 42/43

Service	What We Do
Common Credit Identification and Bucketing	Vendor-invoice-level identification of T1 (exclusive non-business), T2 (exclusive exempt), T3 (Section 17(5) blocked), T4 (exclusive taxable), and the residual C2 (common credit) for an accurate Rule 42 base.
Monthly Rule 42 D1 and D2 Computation	Per-period exempt-to-total turnover ratio (E/F) capture, D1 reversal computation (E/F times C2), D2 deemed 5 percent reversal where T1 is not separately identified, and the Table 4(B) entry in GSTR-3B.
Capital Goods Register and Rule 43 Tc Schedule	A comprehensive capital goods register with date-of-invoice, ITC value, useful-life expiry (60 months), monthly Tc computation, and aggregate Tr for common-use assets - tracked across all GSTINs.
Annual Reconciliation in September of Next FY	Year-end recomputation using the annual E/F ratio, comparison with aggregated monthly D1/D2 (Rule 42) and Te (Rule 43), differential payment or excess ITC claim, and Section 50(3) interest verification.
Sale of Capital Goods Before 60 Months	When a common-use capital good is sold or transferred before the 60-month useful life expires, we compute the higher of (a) ITC for the remaining useful life or (b) GST on transaction value, ensuring no under-payment.
GSTR-9 Table 7 and GSTR-9C Part IV Mapping	Year-end annual return alignment - mapping monthly Rule 42/43 reversal to GSTR-9 Table 7 (ITC reversal), Part IV ITC reconciliation in GSTR-9C, and Notification 13/2025 disclosures for FY 2024-25 onwards.

Our Process

How Rule 42 and Rule 43 Reversal Works - Step by Step

From identifying total ITC through the D1/D2 and Te formulas to the binding September annual reconciliation, here is exactly how Patron Accounting runs a Rule 42/43 engagement.

Step 1

Identify Total ITC (T) for the Period

Aggregate all inward supply ITC for the tax period from GSTR-2B and the purchase register - including inputs, input services, and capital goods. This is T, the starting point for both Rule 42 and Rule 43.

From 2B + books Inputs to capex

Total ITC 01

Step 2

Segregate Exclusive Credits (T1, T2, T3)

Identify ITC for exclusively non-business use (T1), exclusively exempt supplies (T2), and Section 17(5) blocked credits (T3). These three buckets are taken out of the common credit calculation up front.

3 buckets Excluded upfront

T1/T2/T3 02

Step 3

Compute C1 (Credit to Electronic Ledger)

C1 = T minus (T1 plus T2 plus T3). This is the credit that actually flows to the electronic credit ledger after removing the exclusive ineligibles.

C1 derived Ledger credit

C1 03

Step 4

Identify T4 - Exclusive Taxable Supplies

From C1, separate out the ITC attributable exclusively to taxable supplies including zero-rated supplies. This T4 is fully eligible and does not enter the common pool.

Taxable only Fully eligible

T4 04

Step 5

Compute C2 - Common Credit Base

C2 = C1 minus T4. This is the common credit pool that must be apportioned between taxable and exempt usage under Rule 42.

Common pool Apportion base

C2 05

Step 6

Apply Rule 42 D1 (Exempt Apportionment)

D1 = (E divided by F) times C2, where E is the value of exempt supplies and F is the total turnover in the State for the tax period. D1 is added to output tax liability for the month.

E/F applied Output liability

D1 06

Step 7

Apply Rule 42 D2 (Deemed Non-Business)

D2 = 5 percent of C2, applicable only when T1 (non-business specific credit) is not separately identifiable. If T1 is identified in Step 2, D2 does not apply - this avoids double reversal.

5% of C2 No double count

D2 07

Step 8

For Rule 43 - Compute Monthly Tc Per Capital Good

For every capital good in common use, divide the total ITC by 60 (useful life in months). Sum these monthly attributions across all such assets to derive Tr for the period.

ITC / 60 Aggregate Tr

Tc 08

Step 9

Apply Rule 43 Te (Exempt Apportionment)

Te = Tr times (E divided by F) for the month. Te is added to output tax liability monthly for the entire 60-month useful life of each capital good in common use.

Monthly Te 60-month run

Te 09

Step 10

Annual Reconciliation in September of Next FY

Aggregate monthly D1+D2 (Rule 42) and Te (Rule 43) for the FY. Recompute using the annual E/F ratio. If the annual amount exceeds the monthly aggregate, pay the differential in the September GSTR-3B; if lower, claim the excess as ITC.

Annual E/F Differential cleared

Reconcile 10

Documents and Data Checklist

Keep these ready for an efficient Rule 42/43 engagement:

Outward supply ledger split into taxable, exempt, nil-rated, zero-rated, and non-taxable categories
Inward supply ledger with HSN/SAC tagging and exclusive-use marking (T1, T2, T3, T4)
Capital goods register with date-of-invoice, GSTIN, ITC value, and useful-life expiry date
GSTR-1 outward supply summaries for the FY for accurate E and F computation
GSTR-2B downloads with eligible and ineligible ITC bifurcation
Prior period Rule 42 and Rule 43 working files (for capital goods carried over)
GSTR-3B Table 4(B) reversal history for the FY
Sale and transfer register for capital goods (for pre-60-month disposal computation)
Annual financial statements for Section 17(2) cross-validation

Common Challenges and Patron Solutions

Challenge	Impact	How Patron Accounting Solves It
Mixing Up T1, T2, T3 in the Computation	Companies often lump exclusive non-business, exclusive exempt, and Section 17(5) blocked credits into a single bucket - this collapses the Rule 42 logic and either over- or under-reverses, exposing the taxpayer to scrutiny.	Three-bucket invoice tagging at the booking stage in the ERP - T1, T2, T3 tags maintained separately so the Rule 42 formula runs accurately every month without year-end firefighting.
D2 Applied When T1 is Already Identified	D2 (5 percent of C2 deemed non-business reversal) applies only when T1 is not separately identifiable. Many taxpayers apply both T1 and D2, creating a double reversal and unnecessary cash outflow.	Our Rule 42 engine checks the T1 separation status before applying D2 - if T1 is captured cleanly at booking, D2 is suppressed. An annual review ensures consistency with the prior-year position.
Capital Goods Register Not Maintained Over 60 Months	Rule 43 requires the Te reversal to continue monthly for the entire 60-month useful life across multiple FYs. Many taxpayers stop tracking after the first year, leaving exposure on subsequent reversals.	An asset-level capital goods register with auto-amortisation - each common-use capital good runs its own 60-month clock with monthly Te entries until expiry, and sale-before-60-months scenarios trigger automatic higher-of-two computation.
Annual Reconciliation Missed or Wrong	The September of next FY reconciliation is the binding final position. Many taxpayers compute monthly Rule 42/43 but skip the annual recomputation - the resulting under-reversal accumulates interest under Section 50(3) at 18 percent per annum.	A calendar-locked annual reconciliation engagement starting July of each FY, with all monthly aggregates recomputed against the annual E/F ratio and the differential cleared via the September GSTR-3B - no Section 50(3) interest exposure.

Rule 42 and 43 Advisory Fees

Fee Component	Amount
Patron Accounting Professional Fees	Starting from INR 4,999 (Exl GST and Govt. Charges) - per advisory engagement
Standard Annual Engagement	INR 4,999 - single GSTIN, single FY, Rule 42 + Rule 43 working, annual reconciliation
Comprehensive Annual	INR 14,999 - single GSTIN, multi-period setup (up to 3 FY), capital goods register, GSTR-9 mapping
Multi-State Group	INR 29,999 (group) - up to 5 GSTINs (same PAN), state-wise E/F tracking, consolidated reconciliation
Monthly Recurring	INR 3,999/mo per GSTIN - ongoing monthly Rule 42/43 computation plus GSTR-3B Table 4(B) population
Sector Playbook (Real Estate/Bank/NBFC)	On request - sector-specific implementation with ERP integration
Interest, Tax, and Late Fees	Billed separately at actuals - Section 50(3) interest on differential reversal, late fees on GSTR-3B, and any tax payable on the annual differential; Rule 38 scoping included where applicable

All fees and charges listed are indicative only and do not constitute a binding offer. Final amounts may vary depending on the volume of work and the complexity involved.

Professional service charges for drafting, filing, and representation are separate from the statutory fees. The exact fee depends on the complexity of the case, disputed amount, and number of hearings required. Contact us for a detailed quote.

Get a free ITC Reversal Rule 42 and 43 consultation - Call +91 945 945 6700 or WhatsApp us. No-obligation assessment.

Time Taken for the Rule 42/43 Engagement

Stage	Estimated Timeline
Scoping call and risk assessment	1-2 days (pre-engagement)
T1/T2/T3/T4 bucketing of invoice register	3-5 days (discovery)
Capital goods register reconstruction (Rule 43)	3-5 days (setup)
Monthly Rule 42 D1/D2 plus Rule 43 Te computation	2-3 days (per month)
Annual reconciliation (September of next FY)	5-7 days (year-end)
GSTR-9 Table 7 plus GSTR-9C Part IV mapping	2-3 days (annual return)

The mandatory annual reconciliation deadline is the GSTR-3B of September of next FY or the GSTR-9 filing date, whichever is earlier. Monthly computation runs every tax period; the binding final position is set at year-end.

Key Benefits

Benefits of Professional Rule 42/43 Support

Section 17(1)/(2) Compliance Enforced

Monthly formula application keeps apportionment compliant.

Rule 42 D1/D2 Computed Correctly

No double reversal when T1 is separately identified.

Rule 43 Register Maintained 60 Months

Full useful-life tracking - no exposure on late-year reversal.

September Reconciliation Closed

Section 50(3) interest exposure prevented every year.

Pre-60-Month Sale Handled

Higher-of-two computation applied automatically on disposal.

GSTR-9 / 9C Pre-Populated

Table 7 and Part IV ITC reconciliation from monthly data.

99.4% Audit-Defensible Working

Zero adverse adjustments in scrutiny over three FYs.

Same Team Advises and Defends

15+ years of practice - the team handles any Section 61/73/74 scrutiny.

Trust Signals and Outcome Proof

10,000+ Businesses Served | 4.9 Google Rating | 50,000+ Documents Filed | 15+ Years of Practice

Trusted by Hyundai, Asian Paints, Bridgestone, and 10,000+ Indian banks, NBFCs, real estate developers, education institutions, and healthcare providers.

Patron has run 800+ Rule 42 and Rule 43 advisory engagements across banks, NBFCs, real estate developers, education institutions, healthcare providers, and manufacturers with mixed taxable plus exempt supplies - a 99.4 percent audit-defensible reversal working rate and zero adverse adjustments during department scrutiny in the last three financial years.

With offices in Pune, Mumbai, Delhi, and Gurugram, Patron Accounting serves businesses across India - both in-person and remotely. See our GST audit support in Pune for local assistance.

Rule 42 vs Rule 43 at a Glance

Parameter	Rule 42 (Inputs and Input Services)	Rule 43 (Capital Goods)
Scope	Inputs and input services in common use	Capital goods in common use
Governing Section	Section 17(1) and 17(2) CGST Act	Section 17(1) and 17(2) CGST Act
Reversal Formula	D1 = (E/F) x C2 plus D2 = 5% x C2	Te = Tr x (E/F); Tc = ITC/60
Useful Life Assumption	Not applicable - period-based	60 months (5 years) from invoice date
Periodicity of Reversal	Monthly	Monthly for 60 months
Annual Reconciliation	September of next FY	September of next FY
Pre-60-Month Sale (Capital Goods)	Not applicable	Pay higher of (a) ITC for remaining life or (b) tax on transaction value
Reporting in GSTR-3B	Table 4(B)(2) (Rule 42)	Table 4(B)(2) (Rule 43)
Interest on Mismatch	Section 50(3) - 18% per annum	Section 50(3) - 18% per annum
Bank/NBFC Alternative	Rule 38 (flat 50% reversal option)	Rule 38 applies to both 42 and 43

Related Services

GST Services - the complete GST services hub covering registration, returns, ITC, refunds, notices and audits.
GST Returns - the monthly GSTR-1 and GSTR-3B where Rule 42/43 reversals get reported in Table 4(B).
GST Annual Returns - GSTR-9 Table 7 and GSTR-9C Part IV ITC reconciliation.
GST Audit - Section 61 scrutiny and Section 65 department audit citing Rule 42/43 working.
GST Registration - state-wise GSTIN for accurate Rule 42 E/F per State.
GST Returns for E-Commerce Operator - the Section 9(5) supplies impacting the exempt vs taxable mix.
Private Limited Company Compliance - annual compliance dovetailing with annual ITC reconciliation.

Legal and Compliance Framework

Element	Provision
Governing Act	Central Goods and Services Tax Act 2017
Primary Section	Section 17(1) - business vs non-business apportionment
Primary Section	Section 17(2) - taxable vs exempt apportionment
Operating Rule	Rule 42 - inputs and input services reversal mechanism
Operating Rule	Rule 43 - capital goods reversal mechanism over 60-month life
Alternative for Banks/NBFCs	Rule 38 - optional 50 percent reversal in lieu of Rule 42/43
Linked Section	Section 16 - ITC eligibility (Rule 42/43 operates within the Section 16 framework)
Linked Section	Section 17(5) - blocked credits (the T3 component of Rule 42)
Linked Section	Section 50(3) - interest at 18% per annum on Rule 42/43 mismatch
Linked Section	Section 2(47) - definition of exempt supply
Reporting in GSTR-3B	Table 4(B)(2) - "Others" reversal where Rule 42 and Rule 43 amounts are disclosed
Reporting in GSTR-9	Table 7 - ITC reversed during the FY (Rule 42 and Rule 43 sub-rows)
Reporting in GSTR-9C	Part IV - ITC reconciliation including Rule 42/43 disclosures
Annual Reconciliation Deadline	GSTR-3B of September of next FY or GSTR-9 filing date, whichever earlier
Capital Good Pre-60-Month Sale	Pay higher of (a) ITC for remaining useful life or (b) GST on transaction value
Authority	CBIC and GST Network (GSTN)

Interest on Rule 42 and Rule 43 reversal mismatch: 18 percent per annum under Section 50(3) of the CGST Act 2017 on the differential amount between the annual recomputation and the aggregated monthly reversal. Demand proceedings: wrong or short reversal attracts Section 73 (non-fraud) or Section 74 (fraud) demand proceedings with applicable penalty and interest. Rule 38 carve-out: banks, financial institutions, and NBFCs may opt for a flat 50 percent ITC reversal under Rule 38 in lieu of the Rule 42/43 formula - irrevocable for the FY once opted.

Authoritative references: India Code - Section 17 CGST Act 2017, CBIC - Rule 42 and Rule 43 CGST Rules, CBIC - Rule 38 (Bank/NBFC alternative), the GST Portal - GSTR-3B Filing, and CBIC GST Notifications.

What is the difference between Rule 42 and Rule 43?

Rule 42 governs the proportionate reversal of ITC on inputs and input services used commonly for taxable and exempt supplies, computed monthly using D1 (E/F times C2 for exempt apportionment) and D2 (5 percent of C2 deemed non-business). Rule 43 governs ITC on capital goods used commonly, spread over the deemed 60-month useful life with monthly Te (Tr times E/F) reversal. Both operate under Section 17(1) and 17(2) of the CGST Act 2017.

How is the Rule 42 D1 reversal calculated?

D1 = (E divided by F) times C2, where E is the aggregate value of exempt supplies in the tax period, F is the total turnover in the State, and C2 is the common credit (C1 minus T4). The result is added to output tax liability for the month and reported in GSTR-3B Table 4(B)(2). Annual recomputation in September of next FY uses annual E and F values.

How is Rule 43 capital goods ITC reversal computed?

Step 1: Compute Tc = total ITC on the capital good divided by 60 (useful life in months). Step 2: Sum Tc across all common-use capital goods for the tax period to derive Tr. Step 3: Apply Te = Tr times (E divided by F) for the month. Te is added to output tax liability monthly for the entire 60-month useful life. Annual recomputation follows the same logic with annual E/F.

When is the annual reconciliation under Rule 42/43 due?

The mandatory annual reconciliation must be completed in the GSTR-3B of September of the next financial year, or the actual date of filing the GSTR-9 annual return for that FY, whichever is earlier. Failure to reconcile by this deadline triggers interest under Section 50(3) of the CGST Act at 18 percent per annum on the differential amount.

What happens when a capital good is sold before 60 months?

Under Rule 43, if a common-use capital good is sold, disposed of, or transferred before the 60-month useful life expires, the registered taxpayer must pay the higher of (a) the ITC attributable to the remaining useful life of the capital good, or (b) the GST on the transaction value of the sale. This is reported in the GSTR-3B of the period of sale.

Is D2 (5 percent deemed non-business reversal) always applicable?

No, D2 applies only when T1 (ITC on inputs and services used exclusively for non-business purposes) is not separately identifiable. If T1 is identified and excluded at Step 2 of Rule 42, D2 should not be applied - applying both T1 and D2 creates double reversal and unnecessary cash outflow. The intent is to capture non-business ITC either through T1 (specific) or D2 (deemed), not both.

Can banks and NBFCs opt out of Rule 42/43?

Yes, Rule 38 of the CGST Rules allows banks, financial institutions including NBFCs to opt for a flat 50 percent ITC reversal in lieu of the formula-based Rule 42 and Rule 43 computation. The 50 percent option is irrevocable for the financial year once exercised. The remaining 50 percent ITC plus all RCM credits and intra-group supplies (same PAN) remain fully available.

Rule 42 aur Rule 43 ITC reversal kaise calculate kare?

Rule 42 aur 43 monthly proportionate ITC reversal hai jab koi taxpayer goods ya services taxable plus exempt supplies dono ke liye use karta hai. Rule 42 inputs aur input services ke liye hai - D1 = (E/F) x C2 (exempt portion) aur D2 = 5% x C2 (non-business deemed) ka monthly reversal hota hai. Rule 43 capital goods ke liye hai - useful life 60 months, monthly Tc aur Te calculate karke 5 saal tak reversal continue hota hai. Annual reconciliation September next FY mein hoti hai. Section 50(3) ka 18 percent interest miss hone par lagta hai.

Quick Answers

Rule 42 Scope: Inputs and input services in common (taxable plus exempt) use.
Rule 43 Scope: Capital goods in common use - spread over the 60-month useful life.
Rule 42 D1 Formula: D1 = (E/F) x C2 - exempt supplies apportionment.
Rule 42 D2 Formula: D2 = 5% x C2 - deemed non-business (only if T1 not separated).
Rule 43 Te Formula: Te = Tr x (E/F); Tc = Total ITC / 60.
Annual Reconciliation: September GSTR-3B of next FY or GSTR-9 date, whichever earlier.
Interest on Mismatch: 18% per annum under Section 50(3) CGST Act.
Bank/NBFC Alternative: Rule 38 - flat 50% reversal option (irrevocable for the FY).

Why the September Reconciliation Cannot Be Missed

Rule 42 and Rule 43 reversal is not optional - every taxpayer with mixed taxable plus exempt supplies must apply the formula every month and reconcile annually by September of next FY. Missed reconciliation triggers interest at 18 percent per annum under Section 50(3) of the CGST Act on the differential between the annual recomputation and the aggregated monthly reversal.

Wrong application - T1/D2 double reversal, missed capital goods Tc, dropped 60-month tracking - shows up at department scrutiny under Section 61 and Section 65, with Section 73 or 74 demand proceedings to follow.

The September of next FY GSTR-3B is the binding final position - the discipline starts at the booking stage of every common-use invoice and the capital goods register entry on day one of the asset.

From Legal Mandate to Monthly Formula

Rule 42 and Rule 43 of the CGST Rules implement the apportionment principle of Section 17(1) and 17(2) of the CGST Act - they translate the broad legal mandate of "business plus exempt use means proportionate ITC" into precise monthly formulas with mandatory annual reconciliation.

The technical detail is significant - the T1 vs D2 logic, the 60-month capital goods clock, the September of next FY deadline, the higher-of-two on a pre-60-month sale, and the Rule 38 carve-out for banks and NBFCs. Patron Accounting LLP, with 15+ years of indirect tax practice and 800+ Rule 42 and Rule 43 engagements across banks, NBFCs, real estate, education, and healthcare, runs the full scoping-to-September workflow with audit-defensible working files at every step. The reversal is formula-driven, but the discipline is engagement-driven - the right CA and CS team holds the line at booking and reconciles it at year-end.

Pair this with our GST Returns monthly filing, GST Annual Returns for the Table 7 and Part IV disclosures, and GST Audit for Section 61/65 scrutiny defence.

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Content Created: 27 May 2026 | Last Updated: | Next Review: 1 September 2026 | Reviewed By: CA & CS Team, Patron Accounting LLP

This page is reviewed quarterly (Tier 1 cadence) and on any CBIC notification on Rule 42, Rule 43, or Rule 38, GST Council recommendation on Section 17(1)/(2), or court ruling on the exempt supply definition under Section 2(47).

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