Updated 30 October 2026
A GST refund of unutilised input tax credit is allowed in only two situations: zero-rated supplies made without payment of tax, and an inverted duty structure. New refund rules take effect from 1 November 2026 and widen both.
The short answer: when can you claim a refund of unutilised ITC?
Input tax credit (ITC) is normally used up against your output tax. Section 54(3) of the CGST Act lets you take the unused balance back as cash in just two cases. Having a large credit balance is not, on its own, a reason for a refund.
| Situation | Legal basis | Who it covers | Formula |
|---|---|---|---|
| Zero-rated supply without payment of tax | Section 54(3)(i) of the CGST Act; Section 16 of the IGST Act | Exporters of goods or services under a Letter of Undertaking (LUT) or bond; suppliers to SEZ units and developers | Rule 89(4) |
| Inverted duty structure | Section 54(3)(ii) of the CGST Act | Businesses whose input tax rate is higher than the rate on their output supplies | Rule 89(5) |
⚠️ Not refundable: credit that has piled up because you make exempt or non-taxable supplies, credit that is blocked under Section 17(5), or credit that must be reversed under Rules 42 and 43. These are left out of the refund calculation.
General Accumulation: If your ITC is accumulating simply because your sales are low or your output tax liability is smaller than your credit for regular domestic sales (outside the two scenarios above), you cannot cash-out the balance. You must carry it forward to offset against future output tax liability
Case 1: Refund on exports and other zero-rated supplies
An exporter has two routes under Section 16 of the IGST Act. Pay IGST on the export and claim a refund of that tax, or export under an LUT without paying tax and claim a refund of the unutilised ITC. This article covers the second route.
Formula (Rule 89(4)): Refund = Turnover of zero-rated supply of goods and services × Net ITC ÷ Adjusted Total Turnover.
Net ITC here is the credit availed on inputs and input services during the period, less any credit that is being refunded or used in another way.
- You must have a valid LUT or bond for the relevant period.
- For goods, the shipping bill details must match your GSTR-1; for services, you need proof of payment received in convertible foreign exchange (or in Indian rupees where RBI permits).
- No refund is allowed if you also claim drawback of central tax or a refund of IGST on the same supplies, or if the goods exported are subject to export duty (first proviso to Section 54(3)).
Case 2: Refund on inverted duty structure
A duty structure is inverted when the GST rate on what you buy is higher than the rate on what you sell, so credit keeps accumulating. For example, a manufacturer may buy inputs taxed at 18% and sell the finished goods at 5%. Whether your structure qualifies is tested by comparing the tax rates on inputs and outputs. The Government can also notify certain goods or services as not eligible for this refund (second proviso to Section 54(3)).
Formula (Rule 89(5)): Maximum Refund = [Turnover of inverted rated supply of goods and services × Net ITC ÷ Adjusted Total Turnover] − Tax payable on such inverted rated supply.
💡 Illustration (numbers are for explanation only): A manufacturer has inverted-rated turnover of ₹50 lakh, which is also its adjusted total turnover. Net ITC on inputs is ₹6 lakh and tax payable on the outputs is ₹2.5 lakh. Maximum refund = (50 × 6 ÷ 50) − 2.5 = ₹3.5 lakh. If ₹1 lakh of eligible input service credit is availed after 1 November 2026, Net ITC becomes ₹7 lakh and the maximum refund becomes ₹4.5 lakh.
Until now, Net ITC in this formula counted only inputs, meaning goods, and left out input services and capital goods. That is the restriction the Supreme Court upheld in VKC Footsteps (see the case laws below), and the one the 2026 amendments now relax.
Refund of unutilised ITC- What changes from 1 November 2026
The 57th GST Council meeting in October 2026 recommended widening these refunds. The changes were notified through Notification Nos. 03/2026-Central Tax and 05/2026-Central Tax, both dated 26 October 2026.
| Area | Until 31 Oct 2026 | From the new date |
|---|---|---|
| Input services in the inverted duty refund | Left out of Net ITC | Included, for eligible credit availed on or after 1 Nov 2026 |
| Capital goods credit in refunds | Left out | Included from 1 Apr 2027, spread at 1/60 per month over 60 months |
| Cap on zero-rated goods turnover | Limited by a 1.5 times “like goods” test in Rule 89(4)(C) | Cap removed from 1 Nov 2026 |
| 90% provisional refund | Written into law for zero-rated supplies only; for inverted duty it was given under CBIC instructions from 1 Oct 2025 | Section 54(6) extended to inverted duty |
| Acknowledgement or deficiency memo | 15 days | 10 days, with deemed acknowledgement if the officer does not act |
| Provisional refund order (RFD-04) | Issued by the officer | System-generated within 3 working days of acknowledgement |
| Minimum refund of ₹1,000 (Section 54(14)) | Applied to all refunds | Not applied to refund of tax on goods exported with payment of tax |
| Refund application form | Existing RFD-01 | New RFD-01 with invoice-level details from 1 Dec 2026 |
⚠️ Verify before relying: the details above come from published summaries of the notifications. Check the final text on the CBIC website, because some parts apply from different dates (1 November 2026, 1 December 2026 and 1 April 2027).
Key rules and restrictions you must know
1. The two-year time limit
Under Section 54(1), the application must be made before two years from the “relevant date” (Explanation 2 to Section 54).
| Type of refund | Relevant date |
|---|---|
| Export of goods by sea or air | Date the ship or aircraft leaves India |
| Export of services | Date of receipt of payment in convertible foreign exchange, or date of invoice if payment came earlier |
| Unutilised ITC (inverted duty) | End of the financial year in which the claim arises |
For inverted duty, a claim for a month in FY 2025-26 therefore has to be filed by 31 March 2028.
2. Credit is blocked in the ledger and debited on sanction
The refund amount is debited from your electronic credit ledger on filing. The 2026 amendment fixes the order: IGST first, then CGST and SGST in equal parts.
3. No double benefit
You cannot claim a refund of unutilised ITC and also take drawback or an IGST refund on the same supplies.
4. Returns must be filed and dues cleared
Under Section 54(10) the officer can withhold a refund if you have not filed a return or have unpaid tax, interest or penalty that is not stayed. Match your GSTR-1, GSTR-3B and shipping bill data before applying.
5. No unjust enrichment bar for these refunds
Section 54(8) applies the unjust enrichment test, which sends the amount to the Consumer Welfare Fund if the tax burden was passed on. Refund of unutilised ITC under Section 54(3) is one of the cases exempted from that test.
6. Interest for delay
Section 56 gives interest on delay beyond 60 days from receipt of a complete application. The rate under the main provision is 6% a year, and a higher rate of 9% applies where the refund follows an order of an appellate authority, Tribunal or court.
7. Documents
Rule 89(2) lists the attachments: an invoice-wise statement, LUT or bond details, proof of export or payment, and declarations. From 1 December 2026, the new RFD-01 asks for invoice details in a system-readable format and adds a declaration that no prosecution is pending for tax evaded above ₹2.5 crore in the last five years.
Relevant sections and rules at a glance
| Provision | What it deals with |
|---|---|
| Section 54(1), CGST Act | Refund application and the two-year limit |
| Section 54(3)(i) and (ii) | Refund of unutilised ITC on zero-rated supplies and on inverted duty |
| Section 54(6) | 90% provisional refund |
| Section 54(7) | Order within 60 days of a complete application |
| Section 54(8) | Unjust enrichment and its exceptions |
| Section 54(10) | Withholding of refund where returns or dues are pending |
| Section 54(14) | No refund below ₹1,000 |
| Section 56 | Interest on delayed refunds |
| Section 16, IGST Act | Zero-rated supply and the two export routes |
| Rule 89 | Application form, documents and the formulas |
| Rules 90, 91 and 92 | Acknowledgement, provisional refund and final order |
Refund of unutilised ITC-Case laws every refund claimant should know
Issue: whether Rule 89(5), which leaves input services out of Net ITC, goes beyond Section 54(3).
Held: the Court upheld the rule and set aside the Gujarat High Court’s contrary view, agreeing with the Madras High Court in Tvl. Transtonnelstroy Afcons (JV). It reasoned that refund is a statutory right, and that “input” in Section 54(3)(ii) means goods. It also acknowledged the formula was inequitable and urged the GST Council to reconsider it.
Why it matters now: the 2026 amendment relaxes this restriction for input services availed from 1 November 2026. Credit availed before that date still falls outside the formula.
Issue: the cap in Rule 89(4)(C) that limited zero-rated goods turnover to 1.5 times the value of like goods supplied domestically.
Held: the High Court declared the cap ultra vires the CGST and IGST Acts and violative of Articles 14 and 19 of the Constitution, and allowed the writ petition.
Why it matters now: the cap is omitted from the rule from 1 November 2026. For earlier periods, exporters affected by the cap should take advice on the position in their own state.
Issue: whether a refund claim can be rejected as beyond the two years in Section 54(1) when the COVID period is ignored.
Held: the Supreme Court excluded 15 March 2020 to 28 February 2022 from limitation, with a minimum 90 days from 1 March 2022 for periods that would otherwise have expired in that window. In Arvind Kumar Agarwal, the Allahabad High Court quashed rejection of refund applications for FY 2018-19 and 2019-20 that had been treated as time-barred without considering this order, and sent the matter back for a reasoned decision.
Note: the High Court did not decide that each claim was in time; it required the authority to apply the exclusion.
Held: the landmark decision on the doctrine of unjust enrichment in indirect tax refunds. Section 54(8) of the CGST Act reflects this principle, with specific exceptions, including refund of unutilised ITC under Section 54(3).
💡 Courts decide on facts. Always read the full judgment and check whether it has been followed or distinguished before you rely on it in a reply or an appeal.
Refund of unutilised ITC-Mistakes that get refunds rejected
- Missing the relevant date. A claim filed one day after the two-year window is treated as time-barred.
- Wrong Net ITC. Including blocked credit under Section 17(5), or credit that needs reversal, inflates the claim and invites a deficiency memo.
- Data mismatch. Shipping bills, GSTR-1, GSTR-3B and the RFD-01 statements must tell the same story.
- No valid LUT or bond for the period of the exports.
- Claiming drawback or an IGST refund on the same supplies.
- Ignoring a deficiency memo. Fix it and file a fresh application, and track the limitation date, because the old application does not extend it.
Refund of unutilised ITC Refund filing checklist
- 1Decide the category: zero-rated supply, or inverted duty.
- 2Note the relevant date and the last day to apply.
- 3File all returns up to date and clear any pending dues.
- 4Reconcile GSTR-1, GSTR-3B, GSTR-2B and your books for the refund period.
- 5Work out Net ITC, leaving out blocked and reversible credit.
- 6For inverted duty, separate input service credit availed on or after 1 November 2026.
- 7Prepare the invoice-wise statements, LUT details and proof of export or payment.
- 8File RFD-01, track the acknowledgement date and respond to any deficiency memo within time.
Refund of unutilised ITC-FAQs
Can I claim a refund of unutilised ITC on exempt supplies?
No. Section 54(3) covers only zero-rated supplies without payment of tax and inverted duty structures.
Can input services be included in an inverted duty refund?
From 1 November 2026, eligible input service credit availed on or after that date can be included. Before that, only inputs (goods) counted, as the Supreme Court upheld in VKC Footsteps.
What is the time limit to claim a GST refund?
Two years from the relevant date. For inverted duty, the relevant date is the end of the financial year in which the claim arises.
Is a refund below ₹1,000 allowed?
Section 54(14) bars refunds below ₹1,000, with a relaxation from 1 November 2026 for refund of tax on goods exported with payment of tax.
Will I get interest if the refund is delayed?
Yes. Under Section 56, interest is payable if the refund is not paid within 60 days of receiving a complete application.
Is a refund of IGST paid on exports the same as a refund of unutilised ITC?
No. They are two separate routes under Section 16 of the IGST Act. The first refunds tax you paid; the second refunds unused credit when you export under an LUT.
- Unutilised ITC is refundable in only two cases: zero-rated supplies without payment of tax, and inverted duty.
- File within two years of the relevant date. For inverted duty that is the end of the financial year of the claim.
- From 1 November 2026, input service credit enters the inverted duty formula and the 1.5 times cap goes.
- Keep your returns, shipping bills and ledger balances in agreement before you file.
Need help claiming your GST refund?
We have helped businesses with GST and income tax compliance since 2017. For refund claims we can:
- Check whether your claim falls under Rule 89(4) or Rule 89(5), and work out the correct refund.
- Reconcile your returns, ITC and shipping bills before you apply.
- Prepare the RFD-01 application, track it, and reply to deficiency memos and notices.
Discuss your refund on WhatsApp
or email [your email]. Share your GSTIN, the refund type and the tax periods involved.
Disclaimer: This article is general information as of 30 October 2026 and is not legal advice. The 2026 amendments are summarised from published reports of the notifications, and effective dates differ by provision. Check the notified text and current case law, or speak to a tax professional, before you file or reply to a notice.
Sources:
- Supreme Court judgment, Union of India v. VKC Footsteps India Pvt. Ltd.
- Case analysis of VKC Footsteps (iPleaders)
- KPMG Flash News on Tonbo Imaging (Karnataka High Court)
- Allahabad High Court, Arvind Kumar Agarwal v. State of U.P. (TaxHeal)
- Notifications 03/2026, 04/2026 and 05/2026-Central Tax: key changes (Taxonation)
- System-based refund processing, Rules 86, 89 to 92 (A2Z Taxcorp)
- GST Council allows ITC refunds on capital goods and services (Business Standard)
- Provisional refunds for inverted duty structure (TaxGuru)
- Interest on late GST refunds, Section 56 (Taxscan)