Rule 42 - Manner of determination of input tax credit in respect of inputs or input services and reversal thereof

Rule 42: How to apportion and reverse ITC for partly taxable, exempt, and non-business use, including computations and interest

Rule 42 prescribes allocation and reversal of input tax credit (ITC) where inputs or input services are used partly for business/taxable supplies and partly for non-business or exempt supplies. It defines totals (T, T1-T4), computes credited ITC (C1), common credit (C2), credit attributable to exempt supplies (D1 = (E/F)×C2) and to non-business use (D2 = 5% of C2), and eligible credit (C3 = C2 - (D1+D2)). Values E and F determine apportionment, with specific rules for real estate projects and transitional/completion adjustments, final annual computations, reversals or claims, interest on short reversals, and allocation across projects and tax heads.