What CBIC has clarified
Banks, financial institutions and NBFCs that take deposits or give loans can claim half their eligible input tax credit instead of working out the exact taxable share bill by bill — but only if every one of their registrations that does that kind of business makes the same choice. That is the core of Circular No. 261/07/2026-GST, dated 26 October 2026, issued by the Central Board of Indirect Taxes and Customs (CBIC) under Section 168(1) of the Central Goods and Services Tax Act, 2017 (CGST Act). The circular is signed by Gaurav Singh, Commissioner (GST), and answers three questions that have troubled the sector's tax teams: who may opt for the Section 17(4) route, how far the relaxation in the second proviso to Section 17(4) reaches, and exactly how the credit is to be reported in GSTR-3B.
In plain business language: if your bank or NBFC mixes exempt income (like interest on loans, which is largely outside GST) with taxable services, working out the precise proportion of input tax credit that belongs to the taxable side is a heavy monthly exercise. Section 17(4) offers a simpler deal — claim 50 percent of the eligible credit and reverse the rest — but only to a defined set of financial businesses, and only on the circular's terms. Circular 261 settles who is inside that set, stops the option being cherry-picked registration by registration, and gives a step-by-step reporting method for both the pre-IMS and post-IMS worlds.
💡 In one line: a banking company, financial institution or NBFC engaged in accepting deposits or extending loans or advances may opt to avail 50 percent of eligible ITC under Section 17(4) instead of proportionate availment under Section 17(2) — and if one of its engaged registrations opts in, all of them must follow.
At a glance
1. Who may opt for the 50 percent route — and who may not
The first clarification draws the boundary of the option with three cases. First, a banking company or a financial institution, including an NBFC, that is engaged in accepting deposits or extending loans or advances may opt for the Section 17(4) route: instead of availing credit proportionately under Section 17(2), it avails 50 percent of the eligible input tax credit. The point of the option is simplicity — the business gives up half the credit rather than proving, input by input, how much of its activity is taxable.
Second, a distinct-person registrant that is not so engaged has neither the option nor the obligation. The circular gives the example of a registration engaged exclusively in bullion trading: that registration cannot elect the 50 percent route, and it is not forced into it either. It stays on the ordinary proportionate-availment rules. This matters for large groups, where one registration may run the lending book while another runs a wholly different line of business under the same PAN.
Third, a distinct-person registrant that is so engaged has the option even if it also supplies other services. The option is not lost because the registration's business is mixed. A bank branch registration that lends and also earns fee income, for instance, is still within the option. The test is engagement in accepting deposits or extending loans or advances, not exclusivity.
2. One choice binds all engaged registrations of the same entity
The circular then closes the door on selective use of the option. If one registrant of an entity that is engaged in accepting deposits or extending loans or advances opts for Section 17(4), then all registrants of that entity so engaged must comply with Section 17(4). A group cannot run the 50 percent route in the States where it helps and the proportionate route in the States where it does not. The choice is entity-wide across the engaged registrations, and tax teams need to check that every State registration of the lending business is on the same footing before the option is exercised.
The old position, before this clarification, left room for argument about whether each registration could decide for itself. The circular's answer is now express, and it is the single most consequential point for compliance heads: the option is exercised at the level of the business, not registration by registration. A mismatch across registrations is not a harmless inconsistency; it is a departure from the clarified position.
3. The second-proviso relaxation is narrow — the supplier must also have opted in
Section 17(4) carries a second proviso that relaxes the 50 percent restriction in a specific situation: supplies received from another registered person with the same PAN. The circular confines that relaxation strictly. It applies only where the supplying registered person, sharing the same PAN, has itself also opted under Section 17(4). A supply from a same-PAN registrant that has not opted does not attract the relaxation.
In practice, this means inter-registration supplies inside a banking group need a second check, not just a PAN match. The recipient must confirm that the supplying registration is itself a Section 17(4) opt-in before treating the supply as relaxed from the 50 percent restriction. A PAN match alone is not enough, and claiming the relaxation on that basis alone would overstate credit.
4. How to report it in GSTR-3B — without IMS
The circular then gives the reporting method, read with Rule 38, starting with the position without the Invoice Management System (IMS). The sequence is mechanical, and it is worth following in order. Start with the eligible ITC shown in the auto-populated GSTR-3B, which flows from GSTR-2B, excluding reverse-charge ITC, and add the reverse-charge ITC actually claimed. From that pool, permanently reverse in Table 4(B)(1) the credit attributable to non-business purposes and the credit blocked under Section 17(5). Next, avail the credit covered by the second proviso. Then avail 50 percent of what remains, permanently reversing the balance in Table 4(B)(1) of the same tax period.
There is a separate track for credit whose eligibility cannot currently be ascertained but which may become eligible later. That credit is temporarily reversed in Table 4(B)(2), and reclaimed in Table 4(A)(5) of a later period, subject to Section 16(4), and shown in Table 4(D)(1), following the same procedure. The distinction between a permanent reversal and a temporary one is the heart of the method: credit that is finally ineligible or that represents the surrendered half under the 50 percent rule is reversed permanently, while credit that is merely unascertainable for now is parked temporarily so it can be reclaimed when its eligibility is established.
5. How to report it in GSTR-3B — with IMS
The post-IMS-amendment position follows the same principles but runs through the IMS workflow. Invoices and documents are accepted, rejected or kept pending on IMS. Critically, documents for ITC that is not currently eligible must be kept pending, so that they do not enter GSTR-2B or the auto-populated GSTR-3B at all. Credit on documents that are accepted, or deemed accepted, flows into GSTR-2B and then into the auto-populated GSTR-3B, where the same procedure — permanent reversals, second-proviso availment, 50 percent availment with the balance permanently reversed — is applied.
The IMS instruction is easy to get wrong by habit: accepting everything and sorting it out in the return. The circular's method requires the pending route for not-currently-eligible documents precisely so that doubtful credit never enters the auto-populated return in the first place. The same discipline applies to IMS used before the amendment. Businesses that have been bulk-accepting IMS documents will need to change that step in their monthly process.
6. Past periods get a measure of protection
The circular closes with a direction to field formations: they are advised not to take an adverse view of a different reporting methodology adopted in past periods, if the ITC availed under Section 17(4) matches the principles the circular lays down. That is not a blanket amnesty for wrong credit — the amount availed must still match the circular's principles — but it does protect a business whose past returns reached the right credit figure through a different table-wise route. For banks and NBFCs that have been reporting the 50 percent option through varied workings, this is the paragraph to cite first in any enquiry about earlier periods.
Who is affected
The direct audience is every banking company, financial institution and NBFC that accepts deposits or extends loans or advances and either uses or is considering the Section 17(4) option, together with their tax and finance teams and their auditors. Indirectly, the clarification also affects the distinct-person registrations of those groups — including registrations in non-lending lines, which the circular expressly keeps outside the option — and the field officers who assess their returns. Businesses outside the financial sector are not affected: the option was never theirs, and Circular 261 does not extend it.
What to do next
First, map every registration under the PAN and mark which ones are engaged in accepting deposits or extending loans or advances. If any engaged registration has opted under Section 17(4), confirm that all engaged registrations are complying with it — a single outlier registration is now a clear exposure. Second, rebuild the GSTR-3B working to the circular's sequence: auto-populated credit plus reverse-charge credit claimed, less permanent reversals for non-business and Section 17(5) credit, then second-proviso credit, then 50 percent of the remainder with the balance permanently reversed in the same period. Third, for IMS, set the default for not-currently-eligible documents to pending, not accepted. Fourth, review past periods: if the credit figure matches the circular's principles, keep the circular's no-adverse-view direction ready for any enquiry, even if the table-wise route differed.
What this circular does NOT do
Circular 261 does not change the 50 percent rate, does not extend the Section 17(4) option to businesses outside banking and financial services, and does not alter the underlying eligibility conditions in Section 16 or the blocking rules in Section 17(5). It is a clarification of how an existing option works, not a new concession. Readers should also note that this article is based on the circular's text as published on the CBIC Tax Information Portal; the treatment of any specific transaction still depends on its own facts, and businesses should take professional advice before changing a filing position.
Frequently asked questions
Can a bank claim 100 percent ITC and reverse the exempt share later? Under the Section 17(4) option, no — the deal is 50 percent of eligible ITC, with the balance permanently reversed in the same period. A business that wants a precise proportion must stay on the Section 17(2) route instead of opting in.
Does a registration that only trades in bullion have to follow Section 17(4)? No. The circular says a distinct-person registrant not engaged in accepting deposits or extending loans or advances — its example is exclusively bullion trading — has neither the option nor the obligation.
If one State registration of a bank opts in, must the others? Yes, if they are also engaged in accepting deposits or extending loans or advances. The circular requires all so-engaged registrants of the entity to comply with Section 17(4) once one of them opts in.
Does the second-proviso relaxation apply to any same-PAN supplier? No. It applies only where the same-PAN supplying registrant has also opted under Section 17(4). A same-PAN supplier that has not opted does not trigger the relaxation.
What happens to ITC that may become eligible later? It is temporarily reversed in Table 4(B)(2) of GSTR-3B and reclaimed in Table 4(A)(5) of a later period, subject to Section 16(4), and shown in Table 4(D)(1). On IMS, such documents must be kept pending so they do not enter GSTR-2B.
Will past returns be reopened just because the table-wise method differed? The circular advises field formations not to take an adverse view of a different past-period reporting methodology, provided the ITC actually availed matches the circular's principles. The credit figure must still be right.
Sources
Primary source: CBIC Circular No. 261/07/2026-GST dated 26.10.2026, CBIC Tax Information Portal — https://taxinformation.cbic.gov.in/view-pdf/1003352/ENG/Circulars. Statutory references are to the Central Goods and Services Tax Act, 2017 and the CGST Rules, 2017, as cited in the circular.
