GST 50% ITC for Banks and NBFCs: What Circular 261 Changes

A bank's income is split down the middle. The interest it earns on loans is largely exempt from GST. The fees, charges and commissions it collects are taxable. So every month, the bank's tax team faces the same question: of the GST paid on its inputs — software, rent, security, professional services — how much credit belongs to the taxable side?

For most businesses, the answer is Section 17(2) of the CGST Act: work out the proportion, reverse the rest. Banks and NBFCs get a shortcut. Section 17(4) lets them claim a flat 50% of their eligible input tax credit each month and let the balance lapse. No monthly proportion maths. The trade is simple, but the conditions around it were anything but — different branches followed different practices, and officers questioned them.

On 26 October 2026, the CBIC issued eight GST circulars in one batch. Circular 261/07/2026-GST is the one that settles the bank and NBFC question, and it is the last of the eight that this blog had not yet covered. It answers three questions: which registrations can use the 50% option, what happens when one branch opts and another does not, and exactly how the credit must appear in Form GSTR-3B.

Short answer: Circular 261/07/2026-GST says a bank or NBFC registration that accepts deposits or lends money may claim 50% of its eligible input tax credit each month instead of working out the taxable share. If one such registration opts in, all its lending registrations must follow. Full credit on same-PAN supplies needs the supplier registration to have opted too.

Why banks apportion credit at all

Input tax credit follows the output it supports. Credit on inputs used for taxable supplies is available. Credit linked to exempt supplies is not. A bank uses the same branch premises, the same core banking software and the same auditors for both its exempt lending income and its taxable fee income. Splitting that shared credit every month, invoice by invoice, is slow work and easy to get wrong. That is the problem Section 17(4) exists to remove — for one class of taxpayer only.

What the 50% option actually is

Section 17(4) gives a banking company or a financial institution, including an NBFC, that supplies services by accepting deposits or extending loans and advances, a choice. It can follow Section 17(2) and apportion credit in proportion to taxable supplies, including zero-rated supplies. Or it can claim, every month, 50% of its eligible input tax credit on inputs, capital goods and input services, and let the rest lapse.

Two limits sit inside the section itself. Once the option is exercised, it cannot be withdrawn during the remaining part of the financial year. And the 50% restriction does not apply to tax paid on supplies made by one registered person to another registered person with the same PAN — the second proviso, which Circular 261 now reads narrowly. Rule 38 of the CGST Rules prescribes how the option is worked out in the return.

Think of it like a power connection. Section 17(2) is a metered connection: you count every unit and pay for what you used. Section 17(4) is a flat-rate connection: you take half, you stop counting, and you accept that some months the flat rate costs you more than metering would have. The appeal is not that half is generous. The appeal is that you stop metering.

Who can opt? The test is registration by registration

Circular 261's first answer is the one most summaries skip. The option does not belong to the bank as a company. It belongs to each registration — each GSTIN, each distinct person — and only if that registration itself accepts deposits or extends loans and advances.

A registration that does only something else cannot opt, and is not required to. The circular's own example is a registration engaged exclusively in bullion trading. That GSTIN stays on the normal apportionment rules. A registration that lends money keeps the option even if it also supplies other services alongside lending. The test is the activity of that registration, not the brand on the door.

This matters when a group grows. A new lending branch takes GST registration in its own state and becomes its own distinct person for this test. Map the activity of every GSTIN before anyone signs off on the election, because the next answer makes the choice hard to contain.

If one lending branch opts, must all of them follow?

Yes. This is the circular's sharpest point, and the one with the largest money consequence. If one registration of a bank or NBFC that accepts deposits or lends money opts to comply with Section 17(4), then every registration of that entity engaged in the same lending or deposit-taking activity must necessarily comply too.

There is no picking the branches where 50% beats proportionate apportionment and leaving the rest on Section 17(2). The election is entity-wide across lending registrations. A finance head who models the option on one state's numbers and finds it attractive should re-run the model for every lending GSTIN, because the circular will apply the answer to all of them together.

The same-PAN trap: full credit needs both sides to have opted

The second proviso looks generous at first reading. Tax paid on supplies between two registrations with the same PAN escapes the 50% cut — full credit, not half. Head office charges a branch for shared services, the branch claims the whole amount. Circular 261 reads that proviso inside the option, not outside it.

The relaxation is available only for supplies received from another registered person with the same PAN who has also opted to comply with Section 17(4). If the supplying registration is on Section 17(2), or is a non-lending registration outside the option altogether, the relaxation does not apply, and the receiving registration takes only 50% of that credit like any other.

In practice, that means checking the supplier GSTIN's election before claiming full credit on an inter-branch invoice. The PAN match alone is not enough. Both sides of the transaction must be inside the 17(4) tent.

A worked example: ₹20 lakh of credit in one month

Take a lending branch with ₹20,00,000 of input tax credit in a month, from its GSTR-2B auto-population plus reverse-charge credit it claims in the return. This is an illustration, not a real case — the arithmetic is the point.

The order matters. Blocked credit comes out first. Same-PAN credit from an opted supplier comes out next, in full. Only the remainder is halved. A team that halves the whole ₹20 lakh first and then adds the same-PAN credit on top will over-claim by ₹1,50,000 in this example — and that is exactly the kind of sequencing error officers pick up in scrutiny.

How to report it in GSTR-3B

Circular 261 builds on Circular 170/02/2022-GST, which first set out GSTR-3B reporting, and adds the Invoice Management System, live since October 2024. The sequence for a month where IMS was not used runs like this:

First, ascertain eligibility from the credit auto-populated in GSTR-3B from GSTR-2B, plus reverse-charge credit claimed in the return. Second, permanently reverse in Table 4(B)(1) the credit on inputs and input services used for non-business purposes and the credit blocked under Section 17(5). Third, avail the second-proviso credit in full. Fourth, avail 50% of what remains, and permanently reverse the balance in Table 4(B)(1) of the same month's return.

Where IMS is used, the mechanics shift but the maths does not. A document whose credit is not eligible yet — because a Section 16 condition is unmet — is kept pending on IMS. Pending documents never reach GSTR-2B, so they never auto-populate into GSTR-3B. Only accepted and deemed-accepted documents flow through, and the same four-step sequence applies to them. If head-office credit reaches branches through an Input Service Distributor instead, the ISD rules in Circular 260's ISD guide sit alongside this one — distribution first, then the 17(4) treatment at the receiving registration.

Credit that is not eligible yet is parked, not lost

Not every doubtful credit is dead credit. Credit that cannot yet be shown eligible because a Section 16 condition is unfulfilled — the kind of timing gap that resolves itself when a document arrives or a condition is met — is temporarily reversed in Table 4(B)(2) of the same month's return, not permanently reversed.

When the condition is fulfilled, that credit is reclaimed in Table 4(A)(5) of a later month's return, subject to the Section 16(4) time limit, and shown again in Table 4(D)(1) of that later return. The reclaim then goes through the same 17(4) sequence: blocked portion out, same-PAN portion in full, half of the rest. On IMS, the equivalent move is simpler — leave the document pending until it becomes eligible, and it enters the chain cleanly. The trap is treating a temporary problem as a permanent reversal, or the reverse: parking credit that is genuinely blocked and reclaiming it later.

What about past periods filed differently?

Here the circular is kind, within a limit. Field formations are advised not to take an adverse view of a different reporting methodology followed in past periods, as long as the credit actually availed matches the principles the circular sets out. A return that showed the same final credit through a different arrangement of tables is a presentation difference, not a tax difference.

That protection covers methodology, not quantum. If the credit claimed was simply too high — the 50% cut skipped, or same-PAN full credit taken from a supplier that had never opted — the circular does not forgive the excess. Keep the working papers that prove the quantum: the GSTR-2B break-up, the blocked-credit workings, the supplier-GSTIN election check. If a notice does arrive on an old period, the reply framework in our ASMT-10 scrutiny reply guide applies the same discipline — answer the quantum first, the presentation second. Where the quantum itself was wrong, the GST refund and correction route is the honest conversation to have with your adviser, not a hope that the circular covers it.

What Circular 261 does not change

Three things stay exactly as they were. The rate is still 50% — the circular clarifies who and how, it does not raise the percentage. The option, once exercised, still cannot be withdrawn during the remaining part of the financial year. And registrations that do not lend or take deposits are still outside the option entirely. A circular under Section 168(1) binds departmental officers; it does not bind courts, and it does not rewrite the section. Read it as the department's own instruction manual to its officers, which is why it helps in an audit even though it creates no new right.

Five mistakes to avoid

• Opting branch by branch, assuming each GSTIN chooses freely — one lending registration's choice binds them all.
• Claiming full credit on a same-PAN invoice without checking whether the supplier registration opted for Section 17(4).
• Halving the whole month's credit before removing blocked credit and same-PAN credit — the sequence changes the answer.
• Permanently reversing credit in Table 4(B)(1) that is only temporarily ineligible — park it in 4(B)(2) and reclaim it in 4(A)(5).
• Treating the past-period protection as an amnesty — it forgives a different presentation, not a wrong amount.

Questions banks and NBFCs ask next

Does the option cover a housing finance NBFC?

Yes, if it is engaged in extending loans or advances. The section names NBFCs expressly, and the circular's test is the activity — lending — not the licence category. A housing finance company lending against property passes the test; a group registration doing only something else does not.

Does the 50% cut apply to capital goods credit too?

Yes. The section covers eligible credit on inputs, capital goods and input services for the month. A branch's new servers and its monthly software bill go through the same halving, after blocked credit and same-PAN credit are removed.

Can we drop the option halfway through the year?

No. The first proviso to Section 17(4) locks the choice for the remaining part of the financial year once exercised. Model the full year before opting, not one good month.

What if our head office has not opted, but a branch has?

Then the branch cannot take full credit on supplies from head office under the second proviso. The relaxation needs the supplier registration to have opted as well. The branch takes 50% of that credit, like any other, until the supplier's position changes.

Do old GSTR-3B filings need to be corrected just because the tables were arranged differently?

Not for methodology alone, where the credit availed matches the circular's principles — that is the circular's own instruction to officers. Correct the filing where the quantum was wrong. A presentation difference and a tax difference are two different problems, and only the second one costs money.

If your bank or NBFC is reviewing its Section 17(4) position, start with a GSTIN-wise map: which registrations lend, which have opted, and which supply each other across states. That map answers all three of the circular's questions before a single return is touched — and it is the document an officer will ask for first. The compliance fee calculator can help scope what getting the filings right costs across those registrations.