Banks and NBFCs: 50% Input Tax Credit Option Clarified (2026): Circular No. 261/07/2026-GST
CA Meet Dhrangadhariya 
October 26, 2026
CA Meet Dhrangadhariya October 26, 2026
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Last updated: 26 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
Banking companies, financial institutions and NBFCs have long had a simpler alternative to the usual common-credit apportionment exercise – a flat 50% input tax credit option under section 17(4) of the CGST Act. Circular No. 261/07/2026-GST, dated 26 October 2026, clarifies which registrations can use it, what happens once one branch opts in, and exactly how to report it.
New to terms such as “distinct person” or “second proviso”? See the technical terms explained in simple words further down.
Section 17(4) lets a banking company or a financial institution, including an NBFC, that is engaged in supplying services by way of accepting deposits, extending loans or advances, avail a flat 50% of eligible input tax credit instead of doing the usual proportionate apportionment under section 17(2).
The circular draws a sharp line on eligibility:
This is the key practical clarification: section 17(4) is not a registration-by-registration pick-and-choose. If one registration of a banking company, financial institution or NBFC that is engaged in deposits/loans business opts to comply with section 17(4), then every other registration of the same entity that is also engaged in deposits/loans business must follow the same treatment. A group cannot run some branches under the 50% option and others under the ordinary section 17(2) apportionment.
The second proviso to section 17(4) relieves the person from the 50% cap on tax paid on supplies received from another registered person sharing the same PAN. The circular clarifies this relaxation applies only where that other same-PAN registration has also opted to comply with section 17(4). Supplies received from a same-PAN registration that has not opted in do not get this relaxation.
The circular restates the Circular No. 170/02/2022-GST framework and the Invoice Management System (IMS), and lays down the step-by-step sequence:
Under the IMS regime, invoices whose credit is not presently eligible should be kept pending on IMS rather than accepted, so they do not get auto-populated into FORM GSTR-2B/GSTR-3B before eligibility is confirmed.
Past-period relief: the circular explicitly tells field officers not to take an adverse view of a different reporting methodology followed in earlier tax periods, as long as the actual amount of credit availed under section 17(4) matches the principles above.
Getting the opt-in scope right across a banking or NBFC group – and keeping FORM GSTR-3B reporting consistent with this sequence – avoids both excess-credit disputes and avoidable scrutiny of past filings; please reach out to our team and we will be happy to assist.
| Term | What it means |
|---|---|
| Distinct person | Each separate GST registration of the same legal entity, treated as a separate person for tax purposes. |
| Section 17(4) option | A simplified rule letting a bank, financial institution or NBFC avail a flat 50% of eligible input tax credit, instead of the usual exempt/taxable apportionment. |
| Second proviso (to section 17(4)) | The part of section 17(4) that relaxes the 50% cap for credit on supplies received from another registration sharing the same PAN, where both have opted into section 17(4). |
| FORM GSTR-3B | The monthly summary GST return in which a taxpayer reports its tax liability and input tax credit. |
| Invoice Management System (IMS) | The GST portal facility, live since October 2024, letting a recipient accept, reject or keep pending each inward-supply invoice before it affects their ITC. |
Only a registration (distinct person) of a banking company, financial institution or non-banking financial company that is actually engaged in supplying services by way of accepting deposits, extending loans or advances. A registration of the same entity that does something else entirely – for example, one dealing exclusively in bullion trading – cannot opt in, and is not required to either.
Yes, for branches that are also engaged in deposit/loan business. Once one such registration opts to comply with section 17(4), every other registration of the same banking company, financial institution or NBFC that is engaged in accepting deposits or extending loans must also comply with section 17(4) – it cannot be chosen separately registration by registration.
It relaxes the 50% cap for tax paid on supplies received from another registered person sharing the same PAN. Circular 261 clarifies this relaxation only applies where that other same-PAN registration has also opted to comply with section 17(4) – it does not apply to supplies from a same-PAN registration that has not opted in.
The circular sets out the exact Table references: permanently reverse credit on inputs used for non-business purposes or exempt supplies under section 17(5) in Table 4(B)(1), avail credit covered by the same-PAN relaxation in full, then avail only 50% of what remains and permanently reverse the balance also in Table 4(B)(1). Credit that is only temporarily ineligible under section 16 goes in Table 4(B)(2) and can be reclaimed later in Table 4(A)(5).
No. The circular explicitly tells field formations not to take an adverse view of a different FORM GSTR-3B reporting methodology followed in the past, as long as the actual amount of credit availed is consistent with the principles the circular lays down.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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