What Are the GST ITC Set Off Rules in 2026?

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GST input tax credit is set off in the order Section 49 of the CGST Act, 2017 and Rule 88A of the CGST Rules, 2017 lay down, and integrated tax credit is always used first. Section 49A provides that credit of central tax, State tax or Union territory tax may be used only after the credit available on account of integrated tax has first been utilised fully towards such payment. Section 49B authorises the Government, on the recommendations of the Council, to prescribe the order and manner of utilisation, subject to clauses (e) and (f) of Section 49(5), and Rule 88A is the rule made under that power. Section 49(5)(e) and (f) prohibit the use of central tax credit for State tax and of State tax credit for central tax.

Integrated tax credit utilisation rules

• First priority: Integrated tax credit must be used against integrated tax liability before it is used against anything else. (Section 49(5)(a).)
• Remaining balance: Leftover integrated tax credit may be used against central tax and State tax liability in any order and any proportion. (Section 49(5)(a) for the permission; Rule 88A for the order; Circular No. 98/17/2019-GST for the proportion.)
• Restriction: No central, State or Union territory tax credit may be used until integrated tax credit has been fully utilised. (Section 49A.)

Central tax credit utilisation rules

• First priority: Central tax credit is used first against central tax liability. (Section 49(5)(b).)
• Remaining balance: Whatever central tax credit remains may then be used against integrated tax liability. (Section 49(5)(b).)
• Restriction: Central tax credit can never be used to pay State tax or Union territory tax liability. (Section 49(5)(e).)

State tax and Union territory tax credit utilisation rules

• First priority: State or Union territory tax credit is used first against its own liability. (Section 49(5)(c) and (d).)
• Remaining balance: Whatever State or Union territory tax credit remains may be used against integrated tax liability only where no central tax credit is available for that payment. (Provisos to Section 49(5)(c) and (d).)
• Restriction: State or Union territory tax credit can never be used to pay central tax liability. (Section 49(5)(f).)

Compensation cess credit utilisation rules

• First priority: Compensation cess credit may be used only towards payment of compensation cess. (Proviso to section 11(2) of the Goods and Services Tax (Compensation to States) Act, 2017.)
• Remaining balance: Compensation cess credit in excess of a period's cess liability carries forward as cess credit under its own head.
• Restriction: Compensation cess credit can never be set off against integrated tax, central tax, State tax or Union territory tax liability.
• Rate from 1 February 2026: Notification No. 03/2025-Compensation Cess (Rate) prescribes a nil rate of compensation cess, with effect from 1 February 2026, on the pan masala and tobacco products on which the levy had continued after 22 September 2025.

Section 49(5)(a) provides that leftover integrated tax credit is used against central tax and then State tax "in that order", while Rule 88A reads "in any order". Rule 88A governs, because Section 49B authorises the Government to prescribe the order of utilisation notwithstanding anything else in that Chapter, save clauses (e) and (f) of Section 49(5), which Section 49B expressly preserves. Rule 88A was made under that power by Notification No. 16/2019-Central Tax dated 29 March 2019. CBIC set out the resulting order in Circular No. 98/17/2019-GST dated 23 April 2019, as a table that numbers each step from (I) to (VII).

A trading company registered in one State and filing GSTR-3B monthly has ₹1,03,600 of GST liability and ₹93,200 of credit for the tax period August 2026. The ₹63,400 of IGST credit must be used first against the ₹46,200 IGST liability, leaving ₹17,200 of IGST credit to be used against CGST or SGST liability in any proportion. Splitting that ₹17,200 evenly leaves ₹10,400 payable in cash and no credit unused. Putting all ₹17,200 against CGST, which the law also permits, leaves ₹13,800 payable in cash, ₹3,400 more than the even split, and ₹3,400 of CGST credit unused in the ledger.

1. IGST credit against IGST liability: ₹46,200 of the ₹63,400 IGST credit pays the IGST liability in full, leaving ₹17,200. (Section 49(5)(a).)
2. Leftover IGST credit against CGST and SGST: ₹8,600 against CGST and ₹8,600 against SGST. Rule 88A permits any order, and CBIC has clarified in Circular No. 98/17/2019-GST that any proportion may be used.
3. CGST credit against CGST liability: ₹8,600 of the ₹28,700 CGST liability has already been met by leftover IGST credit, so ₹20,100 remains, of which ₹14,900 is met by CGST credit. (Section 49(5)(b).)
4. SGST credit against SGST liability: ₹8,600 of the ₹28,700 SGST liability has already been met, so ₹20,100 remains, of which ₹14,900 is met by SGST credit. (Section 49(5)(c).)
5. Cash: ₹5,200 under CGST and ₹5,200 under SGST, ₹10,400 in total, paid from the electronic cash ledger.
6. Carry-forward: nil.

Any split that gives between ₹3,400 and ₹13,800 of the leftover IGST credit to CGST leaves the same ₹10,400 payable in cash. Outside that range the cash payable rises rupee for rupee, by up to ₹3,400 in the month, and the same amount of credit is left unused in the ledger. No head should be given more leftover IGST credit than its own shortfall.

Where integrated tax credit falls short of integrated tax liability

The condition in the provisos to Section 49(5)(c) and (d) is not tested where integrated tax credit pays the whole integrated tax liability at the first step, because no integrated tax liability is then left for central or State tax credit to pay.

1. Integrated tax credit against integrated tax liability: ₹6,100 of credit is used in full against ₹31,000 of liability, leaving ₹24,900 of integrated tax still to pay. (Section 49(5)(a).)
2. Central tax credit to its own head first: ₹9,100 of the ₹18,400 meets the central tax liability, leaving a surplus of ₹9,300. (Section 49(5)(b).)
3. That surplus is used against the integrated tax liability: ₹9,300 against ₹24,900 leaves ₹15,600. The central tax credit is now exhausted.
4. State tax credit to its own head first: ₹9,100 of the ₹28,200 meets the State tax liability, leaving a surplus of ₹19,100. (Section 49(5)(c).)
5. That surplus may now be used against the integrated tax liability, because no central tax balance remains available for that payment. ₹15,600 of it pays the rest, and ₹3,500 of State tax credit carries forward. (Provisos to Section 49(5)(c) and (d).)

Nothing is payable in cash. Using the ₹19,100 of State tax credit against the integrated tax liability ahead of the central tax surplus gives the same cash, but leaves the ₹3,500 as central tax credit instead of State tax credit. That order is not open to the business: the proviso to Section 49(5)(c) permits State tax credit to meet an integrated tax liability "only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax", and here ₹9,300 of central tax credit is available against a ₹24,900 integrated tax liability.

The calculator works out the GST payable in cash after input tax credit (ITC) is set off in the order Section 49A and Rule 88A require, online and without an account. Enter the output tax liability for the tax period under each of IGST, CGST and SGST/UTGST, then the credit available under each head. It returns the cash payable under each head, the credit used, and the balance carried forward.

A liability figure and a credit figure are required for each of the three heads; a cess liability and a cess credit figure are optional and default to nil. A collapsible helper takes the Rule 42 inputs and works out the eligible credit in the calculator, in place of a figure worked out elsewhere. A radio button sets the use of leftover integrated tax credit: the proportional default, all to CGST, all to SGST, or a manual split. A checkbox applies the Rule 86B cap, where taxable supply other than exempt and zero-rated supply exceeded ₹50 lakh in the month and none of that rule's exclusions applies.

The calculator applies the statutory order in nine steps, with one house convention where the law permits a choice:

1. Integrated tax credit against integrated tax liability, up to the lesser of the two. (Section 49(5)(a).)
2. Each of the central tax and State tax heads is tested for a shortfall, being the liability less that head's own credit.
3. Remaining integrated tax credit is allocated against those shortfalls first, capped at each shortfall. Rule 88A permits any order, and CBIC has clarified in Circular No. 98/17/2019-GST that any proportion may be used, so the default divides it between the two heads in proportion to their shortfalls, which is a house convention and not a requirement of law. (Rule 88A; Circular No. 98/17/2019-GST.)
4. Any integrated tax credit still left is used against whichever liability remains, and leaves an equal amount of that head's own credit unused, which the output states.
5. Central tax credit against central tax liability first, and the remainder against integrated tax liability. (Section 49(5)(b).)
6. State or Union territory tax credit against its own liability first, and the remainder against integrated tax liability only where no central tax credit balance is available for that payment. (Provisos to Section 49(5)(c) and (d).)
7. Never central tax credit against State tax liability, and never State tax credit against central tax liability. (Section 49(5)(e) and (f).)
8. Whatever the credit cannot cover is paid in cash, and where the Rule 86B checkbox is ticked the cash cannot fall below one per cent of the total liability.
9. Compensation cess is computed separately, after and apart from the first eight steps. Cess credit meets cess liability up to the lesser of the two, any cess shortfall is paid in cash, and any cess credit left carries forward as cess credit.

No, the order of utilisation did not change in January 2026. With its advisory dated 30 January 2026, the Advisory on Interest Collection and Related Enhancements in GSTR-3B, GSTN made three changes with effect from the January 2026 tax period, two to the return itself and one to the final return. It changed the interest computation in Table 5.1, in line with the proviso to Rule 88B(1), and the computation gives the benefit of the minimum cash balance held in the electronic cash ledger between the due date and the date of payment. It provided for the tax liability breakup table to be auto-populated from the dates of the documents reported in GSTR-1, GSTR-1A or the Invoice Furnishing Facility, viewable under Table 6.1 of Form GSTR-3B, the table in which the payment of tax is set out. It also provided for interest on a late final GSTR-3B to be collected through Form GSTR-10 where the registration has been cancelled. Section 49(5), Section 49A, Section 49B and Rule 88A read today exactly as they read before that advisory was issued.

No part of the statutory order of utilisation has changed for 2026. The rules in force are Section 49(5), Section 49A and Section 49B of the CGST Act, 2017 with Rule 88A of the CGST Rules, 2017. The last substantive change to them was the insertion in 2019 of Rule 88A, which prevails over the central-tax-then-State-tax sequence in Section 49(5)(a) without amending it. The September 2025 rate revision changed rates and the taxable and exempt status of some supplies; it did not change the order in which credit is used.

Central tax credit cannot pay State tax liability because Section 49(5)(e) of the CGST Act, 2017 prohibits it in terms, and Section 49(5)(f) prohibits the reverse. The reason for the prohibition is that CGST is the Centre's revenue and SGST is the State's: using one head's credit for the other head's liability would transfer money from one government to the other with no settlement mechanism for the transfer. IGST credit may be used against both CGST and SGST liability under Section 49(5)(a), in any order under Rule 88A, because IGST is a single levy that the Centre later apportions between itself and the destination State. A business with surplus central tax credit and a State tax liability pays that State tax in cash, because no adjustment between the two heads is available to it, and the central tax credit carries forward in its electronic credit ledger indefinitely.

State or Union territory tax credit may be used against integrated tax liability only where no central tax credit is available for that payment. Under the provisos to Section 49(5)(c) and (d) of the CGST Act, 2017, State tax credit is utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax. Both provisos were inserted by section 20 of the CGST (Amendment) Act, 2018 and took effect on 1 February 2019, the same day as Sections 49A and 49B.

The condition is that central tax credit is not available, which is not the same as central tax credit being exhausted. Central tax credit needed for the business's own central tax liability is not available for the integrated tax payment, so State tax credit may then be used for that payment.

The provisos are in the Act, unamended. Rule 88A is the only rule made under Section 49B, and it prescribes that integrated tax credit is used first and that the remainder may meet central tax and State tax liability in any order. Rule 88A does not provide which of central tax credit or State tax credit pays a residual integrated tax liability, so it does not affect the provisos. The table in Circular No. 98/17/2019-GST lists central tax credit against integrated tax liability at step (V), and State tax credit against integrated tax liability at step (VII).

Where integrated tax credit falls short of integrated tax liability, which head's surplus pays the balance depends on the condition in the provisos, and the calculator applies that condition. Whether a head's balance is available for the payment depends in turn on that head's own liability for the period, so a business holding both a large central tax balance and a large State tax balance in its electronic credit ledger does not choose freely which one pays its integrated tax liability.

Input tax credit is not a percentage of anything: a registered business claims 100% of the GST charged on its eligible business purchases, and nothing on the rest. The credit for a tax period starts from the total input tax on inward supplies. From that total are deducted tax on anything used exclusively for non-business purposes, tax on anything used exclusively for exempt supplies, credit blocked by Section 17(5), and any reversal required for that period. Rule 42 of the CGST Rules, 2017 sets out that subtraction in statutory notation, T, T1, T2, T3 and C1, and apportions whatever is left in common use between taxable and exempt supplies.

Credit on an invoice counts in the Rule 42 computation only where the conditions in Section 16 are met on that invoice and the invoice is within the time limit that Section 16(4) sets. Rule 42 apportions credit on inputs and input services; credit on capital goods in common use is apportioned separately under Rule 43, one of the reversal rules.

Of the ₹87,500 of GST charged on the period's purchases, ₹64,634 is claimable: ₹19,750 was excluded before the ledger was credited, being ₹4,100 personal, ₹9,200 exempt-only and ₹6,450 blocked under Section 17(5), and a further ₹3,116 of the common credit was attributable to exempt supplies and non-business use under Rule 42.

• Composition purchases: A supplier under the composition scheme charges no tax, and the definition of input tax excludes tax paid under the composition levy, so nothing is included in T. (Section 10(4) with Section 2(62).)
• Personal use: Tax on inputs used exclusively for non-business purposes is removed as T1 before the ledger is credited, not reversed afterwards.
• Exempt supplies: Tax on anything used exclusively for exempt supplies is removed as T2, while tax on anything used for both is apportioned as D1.
• Blocked credits: Tax on anything listed in Section 17(5) is removed as T3 regardless of how business-critical the expense is.

Yes, our GST set-off calculator downloads as an Excel workbook, free and without giving an email address. The workbook takes the same inputs as the online calculator, applies the same nine-step order of utilisation in visible formulas, and returns cash payable, credit utilised by head, compensation cess separately and the balance carried forward. Every formula is left unlocked and readable, so that a user can check the logic or adapt it to their own working papers. The workbook contains no macros, so it opens without a security warning and passes corporate mail filters.

The workbook has four sheets, in the input, output and adjustment format of a monthly close. The first holds the set-off, with the nine steps of the order in nine labelled rows that correspond to the statute row by row, the allocation dropdown, the Rule 86B toggle and the cess pair. The second holds the T, T1, T2, T3, C1, T4, C2, D1, D2 and C3 computation under Rule 42's own labels. The third maps each computed cell to its GSTR-3B table, so the file can be used as a GSTR-3B calculator in Excel as well as a set-off worksheet. The fourth holds the text of Section 49(5), Section 49A, Section 49B and Rule 88A.

For a monthly close, an accounts team collects the figures from several places and rarely has all of them at once. A spreadsheet keeps the working on the file, next to the number, where a reviewer can see what was assumed; a web form leaves no such audit trail. The ITC journal entries record the set-off figures the workbook produces.

No. Section 49(4) of the CGST Act, 2017 permits the balance in the electronic credit ledger to be used only for payment towards output tax. Interest, penalty, late fee and any other amount must therefore be paid in cash from the electronic cash ledger. Tax payable under reverse charge is also excluded, because Section 2(82) defines "output tax" as excluding tax payable on a reverse charge basis; that tax is paid in cash. Input tax credit also cannot be used to pay tax deducted at source or tax collected at source.

Tax paid in cash under reverse charge is itself creditable, in the same period or a later one, provided the Section 16 conditions are met on it, but that credit cannot be used to pay the reverse-charge liability on which it arose.

Yes, for some businesses: Rule 86B of the CGST Rules, 2017 caps credit utilisation at 99% of the output tax liability, so at least 1% of the tax must be paid in cash. The cap applies in any month in which the value of taxable supply other than exempt and zero-rated supply exceeds ₹50 lakh. Under the first proviso to the rule, the restriction shall not apply where:

• the registered person, or its proprietor, karta or managing director, or any two of its partners, whole-time directors, members of its managing committee or trustees, have paid more than ₹1 lakh as income tax under the Income-tax Act, 1961 in each of the last two financial years for which the time limit to file the return of income under section 139(1) of that Act has expired;
• the registered person received a refund of more than ₹1 lakh in the preceding financial year on account of unutilised input tax credit under clause (i) of the first proviso to section 54(3);
• the registered person received a refund of more than ₹1 lakh in the preceding financial year on account of unutilised input tax credit under clause (ii) of the first proviso to section 54(3);
• the registered person has discharged its output tax liability through the electronic cash ledger for an amount in excess of 1% of the total output tax liability, applied cumulatively, up to that month in the current financial year; or
• the registered person is a Government Department, a Public Sector Undertaking, a local authority or a statutory body.

A registered person other than a manufacturer is exempted from the rule only in respect of goods specified under Rule 31D, on which the supplier paid tax on the retail sale price, and the Commissioner or an officer authorised by him may remove the restriction in an individual case.

The set-off order is identical under QRMP, and only the timing of the cash payment changes. A quarterly filer deposits the tax due for each of the first two months of the quarter in FORM GST PMT-06, unless the balance in its electronic cash or credit ledger already covers it, and those deposits are debited only in the quarterly GSTR-3B, in which the whole quarter's credit is set off against the whole quarter's liability. The calculator therefore gives the QRMP result if the quarter's figures are entered rather than the month's, except for the Rule 86B checkbox, because that rule's ₹50 lakh test is applied to the value of supplies in a month.

The credit figure entered is the closing balance in the electronic credit ledger plus the eligible credit for the tax period, and the liability figure is the output tax shown in the business's own outward-supply records for that period, head by head. The ledger closing balance and the period's eligible credit are two different numbers, and entering only one of them understates the credit and overstates the cash.

• Credit balance: The closing balance in the electronic credit ledger for the previous period, read head by head, which is the credit already in the ledger before this period's credit is added.
• Eligible credit for the period: The credit that Form GSTR-2B records for the period, net of anything blocked by Section 17(5), net of anything used exclusively for non-business or exempt purposes, and net of any reversal falling due in that period.
• Output tax liability: The gross tax on outward supplies for the period, before any credit is set off, under each of integrated tax, central tax and State or Union territory tax.

Credit in excess of the period's liability stays in the electronic credit ledger and carries forward; it does not lapse at the year end. It carries forward under the head it was credited to, so a central tax surplus stays central tax credit and can never be converted into State tax credit to pay a State tax liability. A surplus arises most often where the credit is under one head and the liability under another, and giving a head more leftover integrated tax credit than its own shortfall leaves such a surplus. Rule 86B results in a cash payment even where the credit is under the head of the liability, by capping utilisation at 99% of the liability for the month.