1. Title of the Document
| Document Title | Clarification on issues related to provisions of section 17(4) of the Central Goods and Services Tax Act, 2017 |
| Document Number | Circular No. 261/07/2026-GST (F. No. CBIC-20001/2/2026-GST) |
| Issuing Authority | Central Board of Indirect Taxes and Customs (GST Policy Wing), Department of Revenue, Ministry of Finance, Government of India; signed by the Commissioner (GST) |
| Date of Document | 26.10.2026 |
| Relevant Provisions | Sections 16, 16(4), 17(2), 17(4) (including the second proviso), 17(5) and 168(1) of the CGST Act, 2017; Rule 38 of the CGST Rules, 2017; Circular No. 170/02/2022-GST dated 06.07.2022; FORM GSTR-2B; FORM GSTR-3B Tables 4(A)(5), 4(B)(1), 4(B)(2) and 4(D)(1); Invoice Management System (IMS) |
2. Summary of the Document
The Central Board of Indirect Taxes and Customs (CBIC), by Circular No. 261/07/2026-GST dated 26.10.2026, has clarified under section 168(1) of the CGST Act, 2017 how section 17(4) applies to banking companies and financial institutions, including non-banking financial companies (NBFCs), engaged in accepting deposits and extending loans or advances. The Circular responds to varying practices in apportioning input tax credit (ITC) towards taxable supplies, including zero-rated supplies, and seeks uniformity across field formations.
Section 17(4) allows such entities to avail fifty per cent of eligible ITC instead of proportionate availment under section 17(2). A registration (a “distinct person”) not engaged in accepting deposits or extending loans and advances, such as one engaged exclusively in bullion trading, neither has the option nor is required to comply with section 17(4). A registration engaged in those services, even if it also supplies other services, has the option. However, once any one such registration opts, every registration of that entity engaged in those services must necessarily comply.
The second proviso to section 17(4), which relaxes the fifty per cent restriction, is to be read in the context of registrations that have opted for the scheme. The relaxation is therefore available only for supplies received from another registered person with the same PAN who has also opted to comply with section 17(4).
On reporting in FORM GSTR-3B, the Circular builds upon Circular No. 170/02/2022-GST dated 06.07.2022 and the IMS facility introduced from October 2024. Where IMS was not used, eligibility of ITC auto-populated from FORM GSTR-2B and of reverse charge ITC is first ascertained. Credit for non-business use and section 17(5) supplies is permanently reversed in Table 4(B)(1); credit covered by the second proviso is availed; and fifty per cent of the remainder is availed, the balance being permanently reversed in Table 4(B)(1). ITC not presently eligible under section 16 is temporarily reversed in Table 4(B)(2) and may be reclaimed in Table 4(A)(5), subject to section 16(4), and shown in Table 4(D)(1).
After the IMS-related amendments to the CGST Rules are notified, including where IMS was used earlier, documents on which ITC is not presently eligible are kept pending on IMS, so they do not flow into FORM GSTR-2B. The same procedure then applies to auto-populated and reverse charge ITC. Field formations are advised not to take an adverse view of a different reporting methodology for past periods, so long as the ITC availed is in congruence with these principles.
Legal Takeaway: The section 17(4) election operates effectively entity-wide across lending and deposit-taking registrations, and the same-PAN relaxation is confined to registrations that have also opted. Banks and NBFCs should review registration-wise elections and inter-branch ITC claims. In audits and show cause proceedings, the past-period protection is a useful ground against demands founded only on presentation differences in FORM GSTR-3B, provided the quantum of ITC availed is consistent with the Circular.
3. Tabular Summary
| S. No. | Issue | Provision | Applies To | Clarification | GSTR-3B / Compliance Action | Effect | Practical Takeaway |
|---|---|---|---|---|---|---|---|
| 1 | Option for registrations not engaged in deposits, loans or advances | Section 17(4) | Registrations such as those exclusively in bullion trading | Neither have the option nor are required to comply with section 17(4) | Apply normal ITC rules, including section 17(2), as applicable | Excluded from the section 17(4) scheme | Identify non-lending registrations and keep them outside the election |
| 2 | Option for registrations engaged in deposits, loans or advances | Section 17(4) | Registrations engaged in such services, even if also supplying other services | Have the option to comply with section 17(4) | Avail fifty per cent of eligible ITC if opted | Option available | Evaluate the fifty per cent route against proportionate reversal |
| 3 | Uniformity of election across registrations | Section 17(4) | All lending and deposit-taking registrations of the same entity | If one registration opts, all such registrations must comply | Ensure consistent treatment in every such GSTIN | Entity-wide election | Reconcile elections across all States |
| 4 | Same-PAN supplies under the second proviso | Second proviso to section 17(4) | Supplies between registrations having the same PAN | Relaxation only where the supplier registration has also opted for section 17(4) | Avail such credit only when both registrations have opted | Narrower relaxation | Verify the supplier GSTIN’s election before full availment |
| 5 | Reporting where IMS was not used | Sections 16, 17(4), 17(5); Rule 38 | Registrations opting for section 17(4) | Ascertain eligibility, reverse ineligible credit, avail second-proviso credit, then fifty per cent of the remainder | Permanent reversals in Table 4(B)(1) | Prescribed sequence of computation | Align return working papers to the prescribed sequence |
| 6 | Credit not presently eligible | Sections 16 and 16(4) | ITC pending fulfilment of section 16 conditions | Temporarily reverse; reclaim later subject to section 16(4) and the same procedure | Tables 4(B)(2), 4(A)(5) and 4(D)(1) | Credit preserved within time limit | Track reclaims against the section 16(4) deadline |
| 7 | Reporting with IMS | CGST Rules (IMS amendments); Section 16 | Cases after IMS amendments, and earlier IMS users | Keep ineligible documents pending on IMS; apply the same procedure to auto-populated and reverse charge ITC | Accept, reject or keep pending on IMS; then FORM GSTR-3B | IMS-driven auto-population | Use the pending option for documents not yet eligible |
| 8 | Past periods with differing methods | Section 17(4); Section 168(1) | Field formations and taxpayers opting for section 17(4) | No adverse view on reporting methodology if ITC availed is in congruence with the principles | No re-reporting merely for methodology | Relief from presentation-based disputes | Cite in replies to SCNs and appeals on past periods |
Download the Document: Circular No. 261/07/2026-GST dated 26.10.2026 (PDF)
Disclaimer: Prepared by Team GSTIndiaguide.com. This summary is for information and does not constitute legal advice. Refer to original notification, judgement, circular or other documents for reference.
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 50% ITC option for banks and NBFCs, the same-PAN relaxation and GSTR-3B reporting of ITC reversal.){kind=link}