Circular No. 261/07/2026-GST: ITC Rules for Banks and NBFCs under Section 17(4)

The CBIC has issued Circular No. 261/07/2026-GST dated 26.10.2026 under Section 168(1) of the CGST Act. It is meant for banks, financial institutions and NBFCs that accept deposits or give loans and advances, and that choose the special option in Section 17(4) of the CGST Act to claim 50% of eligible input tax credit (ITC). The Board notes that such entities were following different practices, and clarifies three issues.

What Is the Section 17(4) Option?

Most of the income of a bank or NBFC, such as interest on loans and deposits, is exempt from GST. Normally such a business has to split its ITC between taxable and exempt supplies under Section 17(2), using Rules 42 and 43. Section 17(4) gives a simpler alternative: claim 50% of the eligible ITC every month and reverse the other 50%, instead of the proportionate calculation. Once chosen, the option cannot be withdrawn during the remaining part of the financial year (proviso to Section 17(4)). Rule 38 of the CGST Rules lays down the procedure.

Clarification 1: Who Can Choose Section 17(4)

In short, the option is entity-wide for all lending or deposit-taking registrations. A bank cannot use the 50% method in one State and the proportionate method in another for such registrations.

Clarification 2: Supplies Between Registrations with the Same PAN

The second proviso to Section 17(4) says the 50% limit does not apply to tax paid on supplies received from another registration with the same PAN. The circular clarifies that this relief is available only if the supplying registration has also chosen Section 17(4). If the supplying registration has not chosen it (for example, a bullion-trading registration of the same bank), the 50% limit applies to that ITC as well.

Clarification 3: How to Report in GSTR-3B

This builds on Circular 170/02/2022-GST and takes the Invoice Management System (IMS), introduced from October 2024, into account.

A. Where IMS was not used

1. Find the eligible ITC out of (i) the ITC auto-populated in GSTR-3B from GSTR-2B (other than reverse charge) and (ii) the ITC on reverse-charge supplies.
2. From the eligible ITC:
   • reverse permanently the ITC for non-business use and blocked credits under Section 17(5), in Table 4(B)(1);
   • claim in full the ITC covered by the second proviso, i.e. supplies from same-PAN registrations that have also chosen Section 17(4);
   • on the remaining ITC, claim 50% and reverse the other 50% permanently in Table 4(B)(1) of the same return.
3. ITC that is not yet eligible because a Section 16 condition is not met, but may become eligible later, is reversed temporarily in Table 4(B)(2).
4. When the condition is met, reclaim it in Table 4(A)(5) of a later return, within the Section 16(4) time limit, applying step 2 again. Also show the reclaimed amount in Table 4(D)(1).

B. Under IMS

This applies once the IMS amendments to the CGST Rules are notified, and also where IMS has already been used.

• Invoices whose ITC is not eligible yet because of a Section 16 condition, but may become eligible later, should be kept “Pending” on IMS. They will not appear in GSTR-2B or GSTR-3B.
• Invoices accepted or deemed accepted on IMS flow into GSTR-2B and are auto-populated in GSTR-3B.
• On that auto-populated ITC (other than reverse charge) plus the reverse-charge ITC, follow step 2 of Part A: permanent reversal of Section 17(5) and non-business credit, full claim of second-proviso credit, and 50% of the balance.

Example (illustrative, one month)

When the ₹60,000 becomes eligible, it is reclaimed in 4(A)(5) and shown in 4(D)(1). Step 2 is applied to it again, so only 50% of it, subject to any Section 17(5) portion, is finally claimed.

Relief for Past Periods

Taxpayers may have used different methods of reporting in GSTR-3B in earlier periods. Officers are told not to take an adverse view of a different reporting method for the past, as long as the amount of ITC claimed under Section 17(4) matches the principles in this circular. The amount matters, not the table in which it was shown.

Checklist for Banks, FIs and NBFCs

• List all GSTINs and mark which ones deal in deposits, loans and advances. If any one of them uses Section 17(4), all such GSTINs must use it.
• Registrations that do not deal in deposits or loans (e.g. bullion trading) cannot use Section 17(4). Apply Section 17(2) and Rules 42/43 there.
• Claim full ITC on same-PAN supplies only where the supplying GSTIN has also chosen Section 17(4).
• Each month: temporary reversal of not-yet-eligible ITC in 4(B)(2); then 17(5) and non-business reversal in 4(B)(1); then 50% of the balance reversed in 4(B)(1).
• On IMS, keep not-yet-eligible invoices “Pending”, not “Accepted”.
• For past periods, reconcile the net ITC claimed with this method. If the amount matches, a different reporting format should not lead to a demand.

Related

• GSTR-3B Hard Validations: ITC Reclaim Ledger and Table 4(D)(1)
• IMS: No Change in ITC Auto-Population
• Circular 240/34/2024-GST: ITC Reversal by E-Commerce Operators

Reference: Circular No. 261/07/2026-GST dated 26.10.2026, CBIC; Section 17(4), CGST Act, 2017; Rule 38, CGST Rules, 2017. The example is for illustration only. This page is for general information only.