Rule 86B explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 86B of the CGST Rules stops a large taxpayer from paying its entire output tax with input tax credit. If your monthly taxable supplies cross Rs. 50 lakh, at least 1% of the output tax has to go out of the electronic cash ledger, unless one of the listed exceptions applies. The test is run month by month, and a breach can cost you your registration.
Under Rule 86B, a registered person cannot use the electronic credit ledger to pay more than 99% of the output tax liability in a month in which the value of taxable supplies (other than exempt and zero-rated supplies) exceeds Rs. 50 lakh. The rule has a non-obstante clause and overrides the other rules. It does not apply if you meet an income tax test, a refund test, a cumulative cash test or a status test, all listed below. Violating the rule is a ground for cancellation of registration under Rule 21.
What the rule says
The rule reads: the registered person "shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability", where the value of taxable supply, other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees. It was inserted by Notification No. 94/2020-CT with effect from 01.01.2021.
Three points matter in practice:
- The threshold is monthly. Taxable value is counted for the month, not the year. A business that crosses Rs. 50 lakh in only some months is caught only in those months.
- Exempt and zero-rated supplies do not count. Only taxable supplies are added up to test the Rs. 50 lakh limit.
- It restricts ITC use, not ITC availment. Your credit stays in the ledger. You simply cannot use it for the last 1% of output tax.
The Background Material describes the purpose as curbing misuse of input tax credit. Note that the rule speaks of the electronic credit ledger being used for output tax. The 1% has to come from the electronic cash ledger. If you are unsure whether a month has tipped you over the line, a GST health check of your payment pattern is the quickest way to find out.
Who is exempt: the provisos
The restriction does not apply where any one of the following is met. These come from the first proviso to Rule 86B.
| Clause | Exception |
|---|---|
| (a) | The registered person, or the proprietor, karta or managing director, or any two partners, whole-time directors, members of the managing committee of an association or board of trustees, has paid more than Rs. 1 lakh income tax in each of the last two financial years for which the due date of filing the return under section 139(1) of the Income-tax Act has expired |
| (b) | A refund of more than Rs. 1 lakh was received in the preceding financial year for unutilised ITC under clause (i) of the first proviso to section 54(3) |
| (c) | A refund of more than Rs. 1 lakh was received in the preceding financial year for unutilised ITC under clause (ii) of the first proviso to section 54(3) |
| (d) | Output tax paid through the electronic cash ledger exceeds 1% of total output tax liability, applied cumulatively up to that month of the current financial year |
| (e) | The person is a Government department, a public sector undertaking, a local authority or a statutory body |
| (f) | A registered person other than a manufacturer is exempt, but only for goods specified under Rule 31D on which the supplier has paid tax on the basis of retail sale price |
The Background Material reads (b) and (c) as refunds on exports under LUT and on inverted tax structure. The rule text itself refers to the two clauses of the first proviso to section 54(3), so work from the clause references. There is also a second proviso: the Commissioner, or an officer he authorises, may remove the restriction after such verification and safeguards as he considers fit.
Clause (f) is narrower than the commentary. The commentary says the Rule 31D notification exempted the mandatory 1% payment for notified goods. The rule text (inserted by Notification No. 20/2025-CT dated 31.12.2025, effective 01.02.2026) limits the exemption to a person other than a manufacturer, and only for Rule 31D goods on which tax was paid on retail sale price. A manufacturer of those goods should not assume the clause helps it. We follow the rule text.
Worked example (illustration)
A trader has taxable supplies of Rs. 80 lakh in a month. The output tax liability is Rs. 10,00,000 and ITC of Rs. 10,50,000 sits in the credit ledger. None of the exceptions applies.
| Item | Amount (Rs.) |
|---|---|
| Output tax liability | 10,00,000 |
| Maximum payable from credit ledger (99%) | 9,90,000 |
| Minimum payable from cash ledger (1%) | 10,000 |
| Credit left unused in the ledger | 60,000 |
If the same trader had paid Rs. 10,000 or more in cash in earlier months, clause (d) may already take it out of the restriction. Suppose that in April the output tax was Rs. 10,00,000 and cash paid was Rs. 15,000. Cash paid is 1.5% of the cumulative output tax, which is above the 1% mark. Because the test is cumulative, the position needs rechecking each month, since a later large liability can dilute the ratio.
How to run the check each month
- Add up the month's taxable supplies, leaving out exempt and zero-rated supplies. If the total is Rs. 50 lakh or less, the rule is not triggered.
- If it is above Rs. 50 lakh, check each exception: income tax paid, refund received last year, status, cumulative cash paid.
- If none applies, pay at least 1% of the output tax in cash before or along with the return. The GSTR-3B payment table lets you choose the amount paid through credit and cash.
- Keep the working on file, including the income tax challans or returns for the partners or directors if you rely on clause (a).
For how the output tax figure reaches your return, see GSTR-3B auto-populated liability and hard-locking.
What happens if you get it wrong
Rule 21 lists violation of the provisions of Rule 86B among the grounds on which registration can be cancelled. That makes a missed 1% payment more serious than its amount suggests. The Background Material also records that an earlier restriction on furnishing GSTR-1 for a person restricted under Rule 86B was omitted with effect from 01.01.2022, so that particular consequence no longer applies.
If your credit ledger is blocked separately, that is a different provision. See Rule 86A. For the wider picture of how credit and cash are used, read electronic credit ledger and ITC utilisation rules. An older explainer on this rule is at Rule 86B: the 1% cash payment rule above Rs. 50 lakh.
Need help with the 1% cash rule?
Growing businesses often cross the Rs. 50 lakh line without noticing, and the exceptions are easy to misread. Our team can review your monthly payment pattern and test each exception against your records through a GST health check, so you know whether cash payment is needed before you file. We can also set up the monthly working as part of your regular GST return filing.
Key takeaways
- Rule 86B caps ITC use at 99% of output tax in any month where taxable supplies, excluding exempt and zero-rated, exceed Rs. 50 lakh.
- The 1% balance must be paid from the electronic cash ledger.
- Exceptions cover income tax paid over Rs. 1 lakh in each of the last two years, refunds above Rs. 1 lakh last year, cumulative cash payment above 1%, and government bodies.
- The Rule 31D exception is limited to non-manufacturers for retail-sale-price goods.
- Violating Rule 86B is a listed ground for cancellation under Rule 21.
- Test the rule every month, because the cumulative cash test changes as liability grows.
Read next
- Rule 86A: blocking of electronic credit ledger
- GSTR-3B auto-populated liability and hard-locking
- Electronic credit ledger under GST: ITC utilisation rules
- Rule 88C and DRC-01B: GSTR-1 vs GSTR-3B intimation
Disclaimer: Positions stated as on 30 September 2026, based on the CGST and IGST Acts and Rules as amended, the Finance Act 2026, and the ICAI Background Material on GST (14th Edition, July 2026). Verify current notifications before acting.