Exemption from GST in 2026: What Is Exempt, What Is Nil-Rated and How ITC Reversal Works

"Is this exempt from GST?" is one of the most common questions small businesses ask, and the answer decides whether you charge tax, whether you need to register, and how much input tax credit (ITC) you can keep. This guide explains the four kinds of "no-tax" supply under Indian GST — exempt, nil-rated, zero-rated and non-GST — the exemptions most businesses meet, the registration limit, and how to reverse ITC under Rules 42 and 43 when you make both taxable and exempt supplies, with a worked ₹ example. Everything was checked against the CGST Act, the rules and the rate notifications in October 2026.

Quick answer

An exempt supply under GST is one that carries a nil rate, is wholly exempted by a notification under section 11, or is not taxable under GST at all (section 2(47) of the CGST Act). You charge no GST on it and issue a bill of supply, but you cannot keep ITC on inputs used for it. Exports and SEZ supplies are different: they are zero-rated, so you keep the credit and can claim a refund.

• Services exemptions: Notification 12/2017–CT(Rate) — health care, education, residential rent, agriculture and more

• Nil-rated goods: fresh vegetables, fresh and UHT milk, paneer, Indian breads, 36 lifesaving drugs

• Individual life and health insurance exempt from 22 September 2025

• Registration limit: ₹20 lakh (services) / ₹40 lakh (goods only, most states)

• Mixed suppliers reverse common ITC in the ratio of exempt to total turnover (Rules 42 and 43)

What "exempt from GST" means in law

GST is charged on every supply of goods or services unless the law takes it out. The CGST Act does that in three ways, and the definition of exempt supply in section 2(47) gathers all of them together: a supply that attracts a nil rate, a supply wholly exempt under section 11 (or section 6 of the IGST Act), and a non-taxable supply — one that GST does not levy at all, defined in section 2(78).

Section 11 is the source of most exemptions. It lets the government, on the GST Council's recommendation, exempt goods or services by notification, either absolutely or subject to conditions. The services exemptions sit in Notification 12/2017–Central Tax (Rate), which has been amended dozens of times since 2017; nil-rated goods are listed separately in the goods exemption notification, most recently reshaped by Notification 10/2025–Central Tax (Rate) on 22 September 2025. Each state issues a matching state-tax notification, and the IGST notifications mirror them for inter-state supplies.

One sentence in section 11 trips up many suppliers. Where an exemption is absolute — unconditional — the supplier "shall not collect the tax" above the effective rate. You cannot choose to charge GST on an absolutely exempt supply to let a business customer claim credit. If you do, the tax collected still has to be deposited with the government, the customer is not entitled to ITC on it, and your returns will show an outward supply at the wrong rate.

Exempt vs nil-rated vs zero-rated vs non-GST

Type	Example	GST charged	ITC on inputs	Document	Where reported in GSTR-3B
Nil-rated	Fresh vegetables, fresh milk, paneer, roti	0%	Not available — reverse	Bill of supply	3.1(c)
Exempt	Clinic consultation, school fees, residential rent	None (exempted)	Not available — reverse	Bill of supply	3.1(c)
Zero-rated	Exports, supplies to SEZ units	0% under LUT, or IGST with refund	Fully available	Tax invoice	3.1(b)
Non-GST	Petrol, diesel, ATF, natural gas, liquor for drinking	Outside GST (VAT / excise apply)	Not available — reverse	Invoice under state law	3.1(e)

Nil-rated

Example

Fresh vegetables, fresh milk, paneer, roti

GST charged

0%

ITC on inputs

Not available — reverse

Document

Bill of supply

Where reported in GSTR-3B

3.1(c)

Exempt

Example

Clinic consultation, school fees, residential rent

GST charged

None (exempted)

ITC on inputs

Not available — reverse

Document

Bill of supply

Where reported in GSTR-3B

3.1(c)

Zero-rated

Example

Exports, supplies to SEZ units

GST charged

0% under LUT, or IGST with refund

ITC on inputs

Fully available

Document

Tax invoice

Where reported in GSTR-3B

3.1(b)

Non-GST

Example

Petrol, diesel, ATF, natural gas, liquor for drinking

GST charged

Outside GST (VAT / excise apply)

ITC on inputs

Not available — reverse

Document

Invoice under state law

Where reported in GSTR-3B

3.1(e)

Exempt, nil-rated, zero-rated and non-GST supplies compared

In daily practice, nil-rated and exempt behave the same way. A nil-rated item is listed in the rate schedule with a 0% rate; an exempt item has a positive rate in principle but is freed from it by a notification. For the supplier both mean no tax, a bill of supply instead of a tax invoice, and no credit on the inputs that go into them. The only reason to keep them apart is reporting: GSTR-1 Table 8 asks for nil-rated, exempted and non-GST outward supplies in separate columns.

Zero-rated supplies are a different animal. Section 16 of the IGST Act treats exports of goods or services and supplies to a Special Economic Zone developer or unit for authorised operations as zero-rated, and it says credit may be availed for them "notwithstanding that such supply may be an exempt supply". In other words, an exporter keeps every rupee of ITC. You either export under a Letter of Undertaking (LUT) without paying IGST and claim a refund of the unused credit, or you pay IGST and claim that back. This is why a software firm billing a foreign client and a clinic billing a local patient both charge no GST, yet only the software firm gets its input tax back.

Non-GST supplies are outside the GST levy. Section 9(1) excludes alcoholic liquor for human consumption, and section 9(2) says tax on petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel starts only from a date the Council recommends — a date that has never been notified. These goods continue to bear state VAT and central excise. A petrol pump that also runs a lubricant counter therefore has a taxable supply (lubricants) and a non-GST supply (fuel), and the fuel turnover counts as exempt for the ITC split.

Last, some transactions are not supplies at all. Schedule III of the CGST Act lists activities treated as neither goods nor services, such as an employee's services to the employer, and section 7 excludes activities that are not in the course of business. These are not "exempt"; there is simply nothing to tax. Their value is generally kept out of exempt turnover for ITC purposes, except for the specific items section 17(3) brings back in.

GST exemption list: the exemptions most businesses meet

Notification 12/2017–CT(Rate) has well over a hundred entries, and the goods notification lists hundreds of nil-rated items. You will rarely need all of them. The table below covers the ones small businesses, landlords, professionals and households ask about most. Entry numbers refer to the 2017 notification; many have been amended since, so always read the current consolidated text before relying on one.

The 56th GST Council, which met on 3 September 2025, added several exemptions as part of GST 2.0. It exempted all individual life insurance policies (term, ULIP and endowment) and all individual health insurance policies, with their reinsurance; it moved ultra-high-temperature milk, pre-packaged and labelled chena or paneer, and all Indian breads such as chapati, roti and paratha from 5% to nil; and it cut 33 lifesaving drugs from 12% and three more from 5% to nil. These took effect on 22 September 2025. Our guides to GST on health insurance and GST on milk products cover the detail.

How to check whether your supply is exempt

Exemption entries are written narrowly, and courts read them strictly against the person claiming them. The burden is on you to show that your supply fits every word. Work through the steps below before you stop charging GST, and keep a short note on file explaining which entry you rely on.

Checking an exemption in five steps

1. 1

   Classify the supply

   Find the HSN code for goods or the SAC (heading 99xx) for services. The exemption tables are keyed to these codes.

   Find an HSN or SAC code
2. 2

   Find the entry in the current notification

   Services: Notification 12/2017–CT(Rate) as amended. Goods: the nil-rate list as amended by Notification 10/2025–CT(Rate). Read the consolidated text, not a 2017 copy.

   CGST rate notifications
3. 3

   Match the supplier and the recipient

   Many entries apply only when a specific person supplies (a clinical establishment, an educational institution) or a specific person receives (a government, a school up to higher secondary).

4. 4

   Check the conditions column

   Some exemptions carry conditions — a value cap, a registration under the Income-tax Act, a type of contract. Miss one and the whole supply is taxable.

5. 5

   Check reverse charge separately

   An exemption for the supplier does not always mean no tax for the recipient. Residential rent to a registered business is the classic case.

   Tip: If an entry is unclear, an advance ruling from your state's Authority for Advance Ruling binds you and your jurisdictional officer.

Exemption limit in GST: when you need to register

People often say "GST exemption" when they mean the turnover limit below which you do not need to register. These are separate ideas. A supply can be exempt whatever your size, while the registration limit simply lets small suppliers stay out of the system.

Under section 22 of the CGST Act, you must register once your aggregate turnover in a financial year crosses ₹20 lakh if you supply services or both goods and services. If you supply only goods, the limit is ₹40 lakh in states that adopted the higher figure. In the special category States of Manipur, Mizoram, Nagaland and Tripura the limit is ₹10 lakh. Some suppliers must register regardless of turnover — inter-state sellers of goods, most e-commerce sellers of goods, persons liable under reverse charge, and casual taxable persons among them. Our GST registration guide lists every category.

Two points cause mistakes. First, aggregate turnover includes exempt supplies. A physiotherapist who earns ₹19 lakh of exempt clinical fees and ₹3 lakh from taxable fitness classes has an aggregate turnover of ₹22 lakh and must register, even though the taxable part is small. Second, section 23(1)(a) says a person engaged exclusively in supplying goods or services that are wholly exempt or not taxable need not register at all, however large the turnover. A school with ₹5 crore of fees and nothing else is outside registration; the same school that starts renting its hall for weddings is not. Agriculturists supplying produce from their own cultivation are also outside registration.

Once registered, you charge GST only on taxable supplies, show exempt supplies in your returns and issue a bill of supply for them. The composition scheme is a separate option for smaller taxable businesses; it lowers the rate but does not make supplies exempt.

Why exemption is not always a benefit: the ITC cost

An exemption saves the customer GST, but it costs the supplier something. Section 17(2) of the CGST Act limits credit to the part of inputs, input services and capital goods used for taxable supplies, including zero-rated ones. GST you pay on rent, equipment, software, repairs and professional fees for an exempt activity becomes a cost that you can only recover through your price.

This is why exemption can be a mixed blessing for business-facing suppliers. When individual health insurance was exempted from 22 September 2025, policyholders saved 18% on premiums, but insurers lost the ITC on commissions, technology and office costs that they had been setting off against output tax. For a hospital, the GST on medical equipment, lab consumables and housekeeping contracts is a permanent cost for the same reason.

Section 17(3) also widens what counts as exempt for this calculation. The value of exempt supply includes supplies on which the recipient pays tax under reverse charge, transactions in securities, sale of land, and sale of a completed building. Activities in Schedule III are left out, except the items it specifically brings back. Rule 43's Explanation adds that interest earned on deposits and loans is excluded from the exempt value for businesses other than banks and NBFCs, so a trader's bank interest does not force an ITC reversal.

ITC reversal under Rules 42 and 43: worked example

If every input is used only for taxable supplies, or only for exempt supplies, the answer is simple: claim the first, don't claim the second. The difficulty is common costs — rent, electricity, security, accounting — that serve both. Rule 42 splits these for inputs and input services, and Rule 43 does the same for capital goods. The calculation is monthly in GSTR-3B, with a final true-up for the year.

Take a landlord in Pune who rents out commercial floors (taxable at 18%) and residential flats (exempt) in the same building. In one month the commercial rent is ₹14 lakh and the residential rent is ₹6 lakh, so total turnover in the state is ₹20 lakh and exempt turnover is ₹6 lakh.

The landlord keeps ₹40,000 (T4) plus ₹42,000 (C3), or ₹82,000 of the ₹1,20,000. The ₹18,000 in D1 is reversed in Table 4(B)(1) of GSTR-3B, and T2 and T3 are never claimed. If the owner also used the building's generator for a personal flat, D2 would add another 5% of C2 — ₹3,000 here — to the reversal.

Capital goods follow Rule 43. Suppose the landlord replaces the lifts serving both floors and pays ₹3,60,000 in GST. That credit goes to the ledger in full, but it is treated as earned over a useful life of 60 months (5 years): ₹6,000 a month (Tm = Tc ÷ 60). Each month the exempt share, (E ÷ F) × ₹6,000, is added to output tax — ₹1,800 in a month with the same 30% exempt ratio. Capital goods used only for exempt supplies are never credited, and those used only for taxable supplies are credited in full.

Because monthly ratios swing, Rule 42(2) requires a final calculation for the whole year using the year's exempt and total turnover. If the annual reversal works out higher than the sum of the monthly reversals, you pay the difference by the return for September after the financial year, with interest under section 50(1) from 1 April of the following year. If it works out lower, you reclaim the excess in the same window. Many businesses do this alongside the GSTR-9 annual return review.

Compliance checklist for businesses with exempt supplies

0/8

• Note the notification and entry number you rely on for each exempt supply
• Issue a bill of supply (not a tax invoice) for exempt and nil-rated supplies
• Report nil-rated, exempt and non-GST sales separately in GSTR-1 Table 8
• Show exempt and nil-rated sales in GSTR-3B Table 3.1(c) and non-GST sales in 3.1(e)
• Report exempt, nil-rated and non-GST purchases in GSTR-3B Table 5
• Split ITC into T1–T4 every month and reverse D1 and D2 in Table 4(B)(1)
• Run the Rule 42/43 annual true-up before the September return
• Re-check entries after every GST Council meeting — exemptions are added and withdrawn

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Common mistakes with GST exemptions and how to fix them

Charging GST on an exempt supply. A consultant who adds 18% to a bill for an exempt service, perhaps to help a corporate client claim credit, creates a problem for both. The client's credit is open to challenge, and the consultant must pay the tax collected anyway. Fix it with a credit note reversing the tax, refund the customer, and issue a bill of supply.

Assuming "exempt for me" means "exempt for everyone". Residential rent is the most frequent trap. Since 18 July 2022 a registered tenant renting a residential dwelling pays tax under reverse charge, unless it is a proprietor renting the flat in a personal capacity as their own residence. A company leasing a flat for a director therefore owes GST even though the landlord charges none. Our guide to GST on rent walks through each case.

Leaving exempt turnover out of the registration test. As explained above, exempt turnover counts towards aggregate turnover. Doctors, landlords and schools that add a small taxable sideline often cross the threshold without noticing, and late registration brings tax, interest and penalties on the taxable part from the date it became due.

Not reversing ITC, or reversing the wrong amount. The most common audit finding for mixed suppliers is a missing Rule 42 reversal, often because the accountant books exempt income below the GST system. Another is reversing on gross income that includes items section 17(3) or Rule 43's Explanation tell you to leave out, such as bank interest earned by a trader. Rebuild the ratio from the books every month, and correct past months in the annual true-up or through DRC-03 with interest.

Using an out-of-date exemption list. Exemptions change after almost every Council meeting. Hotel rooms up to ₹1,000 a night were exempt until July 2022; individual insurance became exempt only in September 2025. A supplier still working from a 2017 PDF can be wrong in either direction, so read the consolidated notification on the GST Council's website or CBIC's tax information portal.

Treating zero-rated exports as exempt. Exporters sometimes stop claiming ITC because their sales carry no GST. That gives away money: zero-rated supplies keep full credit, and the unused balance is refundable. Make sure an LUT for one financial year (1 April – 31 March) is filed before the first export of the year.

Recent changes to GST exemptions (2025–2026)

Exemption changes since 2025

3 Sep 2025

56th GST Council recommends exempting individual life and health insurance and moving UHT milk, paneer, Indian breads and 36 lifesaving drugs to nil

22 Sep 2025

GST 2.0 rates and the new exemptions take effect (Notifications 9, 10 and 16/2025–CT(Rate))

1 Feb 2026

Compensation cess ends on all goods and services

Oct 2026

57th GST Council meets; reported outcomes are procedural, nothing notified yet

The big shift came with GST 2.0 on 22 September 2025, which added the insurance and food exemptions described above and moved most remaining 12% items to 5%. It did not change the registration limits, and the GST Council's own FAQs at the time confirmed that suppliers whose goods or services became exempt must reverse credit relating to them from that date.

On 1 February 2026 compensation cess ended on all goods and services. That did not create any new exemption, but it removed a second tax line from sin goods and coal. The 57th GST Council met in the first week of October 2026; news reports of its outcome describe procedural relief rather than new exemptions, and nothing from it had been notified when this page was checked. Treat any report of a new exemption as unconfirmed until the notification appears on the CBIC or GST Council website.

Official links

• CGST rate notifications (exemptions included)Notifications 2/2017, 12/2017, 10/2025, 16/2025 and amendments
• Notification 12/2017–CT(Rate) — original textServices exemptions as issued in 2017
• Section 2, CGST Act — definitionsExempt supply 2(47), non-taxable supply 2(78)
• Section 17, CGST ActApportionment of credit; value of exempt supply
• Rule 42, CGST RulesReversal for inputs and input services
• Rule 43, CGST RulesReversal for capital goods
• Section 16, IGST Act — zero-rated supplyExports and SEZ supplies

What to do next

List every type of income your business earns and mark each one taxable, exempt, nil-rated, zero-rated or non-GST, with the notification entry for anything you treat as tax-free. If you have even one exempt line, set up the Rule 42 split in your accounting software now rather than at year-end. Then read our guide to input tax credit for the conditions that apply to the credit you keep, and use the GST calculator to price taxable lines correctly.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is the difference between exempt, nil-rated and zero-rated supplies?

An exempt supply is taxable in law but freed from tax by a notification, and a nil-rated supply carries a 0% rate in the rate schedule. Both are 'exempt supplies' under section 2(47) of the CGST Act, and input tax credit linked to them must be reversed. Zero-rated supplies — exports and supplies to SEZ units — also carry no tax, but the supplier keeps full ITC and can claim a refund.

What is the exemption limit in GST for small businesses?

You need GST registration once aggregate turnover crosses ₹20 lakh a year for services, or ₹40 lakh if you supply only goods in a state that adopted the higher limit. In Manipur, Mizoram, Nagaland and Tripura the limit is ₹10 lakh. Exempt turnover counts towards these limits, but a person supplying only exempt goods or services need not register at all.

Can I charge GST on an exempt supply if my customer wants an invoice with tax?

No. Section 11 of the CGST Act says that where an exemption is absolute, the supplier must not collect tax above the effective rate. A registered person supplying exempt goods or services issues a bill of supply, not a tax invoice. Tax wrongly collected still has to be paid to the government under section 76, and the buyer cannot claim it as credit.

Do I need to reverse ITC if I make both taxable and exempt supplies?

Yes. Credit used only for exempt supplies is not claimable at all, and credit on common inputs, input services and capital goods is split under Rules 42 and 43 in the ratio of exempt turnover to total turnover in the state. You reverse the exempt share every month in GSTR-3B, then finalise the year's figure by the return for September after the financial year.

Are petrol, diesel and liquor exempt from GST?

They are outside GST rather than exempt. Alcoholic liquor for human consumption is excluded from the GST levy by section 9(1). Petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel are within GST in law, but tax on them starts only from a date the Council recommends, which has not been notified. They continue to bear state VAT and central excise and are reported as non-GST supplies.

Is health insurance exempt from GST now?

Yes, for individual policies. From 22 September 2025, all individual health insurance policies, including family floater and senior citizen plans, and all individual life insurance policies are exempt, so GST on them is Nil (exempt). Group and employer-paid policies still attract 18%.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Section 2 – CGST Act, 2017 (definitions: 'exempt supply', 'non-taxable supply') — CBIC · accessed 9 October 2026
2. 2.Section 11 – CGST Act, 2017 (power to grant exemption) — CBIC · accessed 9 October 2026
3. 3.Section 9 – CGST Act, 2017 (levy and collection) — CBIC · accessed 9 October 2026
4. 4.Section 17 – CGST Act, 2017 (apportionment of credit and blocked credits) — CBIC · accessed 9 October 2026
5. 5.Section 23 – CGST Act, 2017 (persons not liable for registration) — CBIC · accessed 9 October 2026
6. 6.Section 16 – IGST Act, 2017 (zero-rated supply) — CBIC · accessed 9 October 2026
7. 7.Rule 42 – CGST Rules, 2017 (ITC on inputs and input services, reversal) — CBIC · accessed 9 October 2026
8. 8.Rule 43 – CGST Rules, 2017 (ITC on capital goods, reversal) — CBIC · accessed 9 October 2026
9. 9.Notification No. 12/2017 – Central Tax (Rate), 28 June 2017 (services exemptions) — CBIC · accessed 9 October 2026
10. 10.Recommendations of the 56th GST Council meeting (press release with annexures) — GST Council / PIB · accessed 9 October 2026
11. 11.CGST (Rate) notifications — Notifications 2/2017, 12/2017, 10/2025, 16/2025 as amended — GST Council · accessed 9 October 2026
12. 12.FAQs on the decisions of the 56th GST Council — PIB, Ministry of Finance · accessed 9 October 2026