Inventory Shrinkage: Calculate, Benchmark and Book It in India

Inventory shrinkage is the value, at cost, of stock your records say you hold but your count cannot find. For each item, subtract the counted quantity from the system quantity, multiply any shortage by unit cost, and add the shortages up.

Four terms are used throughout this page:

• Variance: counted quantity minus system quantity. A negative variance is a shortage.
• Book value: system quantity multiplied by unit cost.
• Shrinkage rate on stock: shrinkage ÷ book value (stock value at cost).
• Shrinkage rate on sales: shrinkage ÷ sales.

Worked example (illustrative numbers): the system shows 1,000 units at ₹200 each, and the count finds 960. The variance is minus 40 units, the shrinkage is 40 × ₹200 = ₹8,000, and the book value is 1,000 × ₹200 = ₹2,00,000. The shrinkage rate on stock is ₹8,000 ÷ ₹2,00,000 = 4%.

Always value at cost. Valuing at selling price overstates the loss, and you cannot compare one month's figure with another's if the basis changes.

No single rate is normal. The two benchmarks below are quoted against sales, while many stock-count formulas use stock value, and the same loss gives very different percentages on each basis. Compare like with like, or the benchmark misleads you.

As of October 2026, V-Mart's disclosures are the one Indian benchmark on this page. It is a single apparel retailer, so manufacturers and distributors should treat it as a rough guide only. V-Mart reports shrinkage as a single percentage; we treat it as a share of sales (our assumption, as the note gives no denominator). The quarterly figures come from the Dalal & Broacha research note of 23 January 2026. FY26 means financial year 2025-26, April 2025 to March 2026.

That is a fall from 1.4% to 0.6% in five quarters, with one uptick in Q2 FY26.

For a United States comparison, the National Retail Federation (NRF) 2023 survey puts average retail shrink at 1.6% of sales in fiscal year 2022, the latest NRF figure we reference as of October 2026. The survey report attributes 36% of the loss to external theft, 29% to employee theft and 27% to process and control failures and errors. The mix will differ for a wholesale distributor or a manufacturer.

How do you convert a shrinkage rate on sales into a shrinkage rate on stock?

Multiply the shrinkage rate on sales by your sales-to-stock ratio: annual sales divided by average stock at cost. This is our model, not an official formula. It assumes shrinkage is valued at cost. If a published figure is at selling price, the result on stock is lower, so read the table as an upper end.

Example: sales of ₹2 crore and average stock at cost of ₹25 lakh give a ratio of 8. Shrinkage of ₹2.2 lakh is 1.1% on sales (₹2.2 lakh ÷ ₹2 crore) and 8.8% on stock (₹2.2 lakh ÷ ₹25 lakh).

Our recommendation: use the shrinkage rate on sales to compare yourself with others, the shrinkage rate on stock to run your own control, and watch your own trend more than any outside number. To get your average stock, see how to calculate inventory turnover days from cost of goods sold.

Clear timing items before you treat any variance as loss. A transfer sent but not received in the system, a receipt not posted or a return not restocked each creates a shortage in one place and a surplus in another. Both vanish when the missing entry is posted.

Report shortages and surpluses separately. Netting them hides the errors that cause both.

How deep should the count go? Counting every carton is rarely practical. Auditors themselves attend counts and perform test counts rather than recounting everything, as SA 501, the Institute of Chartered Accountants of India (ICAI) auditing standard on inventory, requires. Our recommendation is to rank items by value (the "ABC" method: A items are the few that carry most of the value, C items the many that carry little). Count every unit of A items and all serial-numbered items on a short cycle, B items less often, and sample sealed cartons of C items, recording the method each time.

Use one row per item and location, with columns for system quantity, counted quantity, variance, cost, variance value, cause and timing status. The sample below is a separate illustration from the 4% example above.

The matching ₹1,000 transfer-out (20 units × ₹50) sits in another warehouse's sheet, where it shows as a shortage until it is posted. Real shrinkage here is rows A and B: ₹12,000 against a book value of ₹3,20,000 (₹2,00,000 + ₹1,20,000), a shrinkage rate on stock of 3.75%. Netting row C would report ₹11,000 and hide an unposted transfer.

What are the steps, and how do you know each one passed?

This table is our inference from how each cause shows up in counts, not a measured distribution.

Debit loss of stock (shrinkage expense) and credit inventory for the shortage at cost. If the goods were lost, stolen or destroyed, also reverse the related GST input tax credit (ITC), the GST paid on purchases that you set off against your own GST liability.

Accounting. Ind AS 2 paragraph 34 requires losses of inventories to be expensed in the period the loss occurs (Ind AS 2, Inventories). Ind AS means the Indian Accounting Standards; businesses not covered by Ind AS follow ICAI's Accounting Standard 2 (AS 2). Paragraph 16(a) of Ind AS 2 separately excludes abnormal production waste from inventory cost. Your chartered accountant will confirm which standard applies to you.

GST. Section 17(5)(h) of the Central Goods and Services Tax (CGST) Act, 2017 blocks ITC on "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples" (CGST Act, Section 17). The section sets no minimum amount. As of October 2026:

• For traded goods, reverse the ITC actually availed on the missing units, in the GSTR-3B (the monthly GST return) for the month the loss is found. Interest can apply if credit that should have been reversed was already used to pay tax: Section 50(3) allows interest on ITC wrongly availed and utilised, at a rate the government notifies, not exceeding 24% a year.
• For raw materials and packaging, the whole ITC is reversed. For work in progress and finished goods, reverse only the ITC on the inputs and input services embedded in them; multiplying finished-goods value by the GST rate is wrong (TaxGuru, secondary reading). Rule 42 (inputs and input services) and Rule 43 (capital goods) of the CGST Rules set the computation methods.
• The reversal goes in GSTR-3B Table 4(B)(1), which is the table for permanent reversals, including ITC blocked by section 17(5), as clarified in CBIC Circular No. 170/02/2022-GST of 6 July 2022. Table 4(B)(2) is only for reversals that can be reclaimed later. The entry debits loss of stock and credits the ITC ledgers.
• The section lists goods lost, stolen, destroyed, written off or gifted. Damaged goods sent back for repair, reuse or scrapping are not in that list, but the facts decide the outcome, so confirm them with your accountant.
• Goods short-received from a supplier need a proportionate ITC reversal, or a credit note from the supplier (CAclubindia).

Our recommendation: treat an unexplained shortage as lost stock and reverse its ITC unless you can show it was a posting error, and keep the count sheets and reconciliation on file. Verify with your chartered accountant.

Tally. In TallyPrime, the Physical Stock voucher (Ctrl+F7) updates the book quantity to the counted quantity. Record the loss of stock and the ITC reversal in a journal voucher, and use a Stock Journal voucher to record wastage or shortage of stock items.

Arka Inventory, cloud inventory software built natively on Salesforce, reduces shrinkage from receiving errors, unposted transfers and expired lots through barcode receiving, bin putaway and picking, warehouse transfers across multiple warehouses, lot and expiry tracking, and alerts.

• Receiving and picking errors: barcodes and QR codes, bin putaway and picking, and first-in-first-out (FIFO) picking, so stock moves against a scan and a bin location.
• Expiry and damage: lot, batch, expiry-date and serial-number tracking, plus inventory alerts, so dated lots are visible before they become a write-off. For the method behind it, see batch expiry tracking and serial number tracking.
• Unposted transfers: warehouse transfers and stock visibility across multiple warehouses, so a transfer is recorded at both ends.
• Your own measures: custom reports and dashboards you shape around the variance and cost views your count worksheet needs; see what an inventory dashboard should show.
• Accounting link: integrations with Tally and QuickBooks Online.

As of October 2026, plans on the yearly subscription start at $199 a month (Basic) and $499 a month (Advance). Enterprise, which includes lot, expiry and serial tracking, is custom-priced (pricing).

Onboarding typically takes a minimum of two weeks, depending on data readiness. You provide your item, warehouse and opening-stock data, and we include setup guidance. The 15-day free trial gives full access with no credit card. Book a demo on our contact sales page.