Last reviewed: 26 October 2026. Most GST returns are filed as if input tax credit can be set off against output tax rupee for rupee. For a business whose monthly taxable supplies cross ₹50 lakh, that is not quite true. Rule 86B of the CGST Rules requires a slice of the output tax, at least 1%, to be paid in cash. The rule is quiet for years and then shows up as a surprise cash demand in GSTR-3B. This guide sets out what the rule says, who is outside it, how to compute the minimum cash payment, and what to do if credit has already been over-used.
What Rule 86B actually says
Rule 86B sits in Chapter IX of the CGST Rules and was inserted with effect from 1 January 2021 by Notification No. 94/2020-Central Tax dated 22 December 2020. It is framed under section 49(12) of the CGST Act, which lets the Government prescribe the maximum proportion of output tax that may be discharged through the electronic credit ledger. The text on the CBIC tax repository, read on 26 October 2026, shows the rule as active with no amendment after the original insertion.
In plain terms, where the value of taxable supplies other than exempt supplies and zero-rated supplies in a month exceeds ₹50 lakh, the registered person shall not use the amount available in the electronic credit ledger to discharge output tax liability beyond 99% of that liability. The balance, 1% or more, has to go out through the electronic cash ledger. The rule restricts utilisation of credit. It does not block the claim of credit, does not reverse it and does not change the eligibility tests in sections 16 and 17.
| Element | Position |
|---|---|
| Who is covered | Every registered person whose monthly taxable supplies exceed the limit, tested registration by registration |
| Value tested | Taxable supplies in the month; exempt and zero-rated supplies are left out |
| Limit | More than ₹50 lakh in the month |
| Ceiling on credit use | 99% of the output tax liability |
| Minimum cash | 1% of the output tax liability, from the electronic cash ledger |
| Penalty in the rule itself | None; consequences flow from short payment under the general provisions |
The five exceptions, one by one
The rule lists five situations in which the restriction does not apply, and a further power for the Commissioner or an authorised officer to lift it. Because the exceptions are what decide whether a business is affected at all, they are worth testing every year before the first big month.
| Exception | What has to be true | Practical note |
|---|---|---|
| (a) Income tax paid | The registered person, or the proprietor, karta, managing director, partners, whole-time directors, committee members or trustees as the case may be, has paid more than ₹1 lakh as income tax in each of the last two financial years for which the due date of the return has expired | Read the clause against your constitution. Keep the challans and the ITR acknowledgements on file for both years |
| (b) Refund on zero-rated supplies | Refund of more than ₹1 lakh in the preceding financial year of unutilised credit on supplies made without payment of tax (section 54(3), first proviso, clause (i)) | Relevant to exporters under LUT. The refund must have been received in the preceding year |
| (c) Refund on inverted duty | Refund of more than ₹1 lakh in the preceding financial year where inputs bear higher tax than outputs (section 54(3), first proviso, clause (ii)) | Relevant to manufacturers and processors in an inverted structure |
| (d) Cash already paid | Cash paid through the electronic cash ledger exceeds 1% of the total output tax liability, cumulatively for the current financial year up to that month | The most common route for regular businesses. Needs a running month-wise working |
| (e) Government and public bodies | Government department, public sector undertaking, local authority or statutory body | Not relevant to private businesses |
| Commissioner's power | Restriction can be removed after such verification and safeguards as the officer considers fit | Discretionary and in writing. It is a request route, not an entitlement |
Two points on the income-tax exception deserve attention. First, the two years are the last two for which the return due date has expired. For a person whose return for FY 2025-26 has not yet fallen due, for example an audit case covered by the 21 November 2026 date in CBDT Circular 07/2026, the test is likely to run on FY 2024-25 and FY 2023-24 instead. Second, whether tax deducted at source and collected at source count as income tax "paid" is not settled in the text. The conservative approach is to rely on tax actually paid by challan and to document the position you take.
Worked example 1: the basic computation
A trader in Thane makes taxable supplies of ₹80 lakh in April at 18% GST. There is no exception available to the business.
| Step | Amount (₹) |
|---|---|
| Output tax at 18% on ₹80,00,000 | 14,40,000 |
| Maximum payable from credit ledger (99%) | 14,25,600 |
| Minimum cash payment (1%) | 14,400 |
| ITC available in the credit ledger | 20,00,000 |
| ITC actually used for the month | 14,25,600 |
| ITC carried forward | 5,74,400 |
Even though the credit balance is larger than the tax, only ₹14,25,600 of it can be used. The cash outflow is ₹14,400, and the carried-forward credit stays available. The cost is small in rupees but it is a cash item that a finance team may not have budgeted for, particularly when credit is large and cash was expected to be nil.
Worked example 2: the cumulative cash exception
Exception (d) is easy to misread, so here is a three-month illustration for the same trader. Figures are illustrative.
| Month | Taxable supplies (₹) | Output tax at 18% (₹) | Cash paid (₹) | Rule 86B tested? |
|---|---|---|---|---|
| April | 80,00,000 | 14,40,000 | 14,400 | Yes, above ₹50 lakh |
| May | 40,00,000 | 7,20,000 | 0 | No, below ₹50 lakh |
| June | 60,00,000 | 10,80,000 | to be decided | Yes, above ₹50 lakh |
Cumulative output tax for April to June is ₹32,40,000, so 1% is ₹32,400. Cash paid so far is ₹14,400, which is well short. In June the restriction therefore applies: credit use is capped at 99% of ₹10,80,000, that is ₹10,69,200, with at least ₹10,800 in cash. On our reading, if the trader had put cumulative cash above ₹32,400 (₹32,401 or more) in time, the cumulative exception would have lifted the restriction for the month. The lesson is operational: do not test the rule only in the months you cross ₹50 lakh. Keep the cumulative cash position visible every month, so the choice between "pay 1% each time" and "build a cumulative cushion" is made deliberately.
Worked example 3: the income-tax exception
A sole proprietor files returns on time. Income tax paid by challan was ₹1,35,000 for FY 2025-26 and ₹1,10,000 for FY 2024-25, and the due date for both returns has passed. Both years exceed ₹1 lakh, so the restriction does not apply to the proprietorship for the year. If the FY 2024-25 figure had been ₹95,000, the test would fail, and the business would fall back on exceptions (b), (c) or (d), or pay the 1% in cash. This is why year-end tax planning and GST cash planning should be looked at together.
How to build Rule 86B into the monthly close
Treat the rule as a control, not a surprise. A workable sequence for the monthly GST close is:
- Day 1 to 3: compute taxable supplies for each GSTIN for the month, excluding exempt and zero-rated supplies and checking amendments and credit notes. Compare with ₹50 lakh.
- Day 3 to 5: if above ₹50 lakh, test exceptions (a) to (e) in order and file the evidence for the one you rely on.
- Before payment: work out the 99% ceiling and the minimum cash. Check that the cash ledger holds enough in the right tax heads, because cash in one head cannot pay liability in another.
- At GSTR-3B: pay through the cash ledger, match the credit utilised to the ceiling, and keep the working with the return file.
- Month-end: update the cumulative sheet of output tax and cash paid, which is the base for exception (d).
For taxpayers who file under the quarterly scheme, the monthly challan for the first two months is a cash payment, so it counts as cash paid, but the ₹50 lakh test is still made month by month. Our QRMP guide covers the payment calendar. The month-end routine in our month-end close checklist is a natural place to add the Rule 86B step.
If you have already crossed the line
The GST portal applies the credit-ledger restriction as a check at the payment stage of GSTR-3B, so a breach through the portal is unusual, but it can happen where liability was paid through a different route or where a month was mis-classified. If more than 99% of the output tax was discharged from the credit ledger in a month where no exception applied, the tax is effectively short-paid in cash. Rule 86B itself does not prescribe a penalty, but interest under section 50 and a demand under the general provisions are possible. The corrective steps usually involve paying the cash shortfall with interest and then dealing with the credit that was over-used. Practitioners follow different procedural routes for the second part, so the route should be settled on the facts of the case, with the working papers in hand, before anything is filed.
How Rule 86B fits with other ITC rules
| Rule or provision | What it controls | Link to Rule 86B |
|---|---|---|
| Section 16(2) and 16(4) | Eligibility and the time limit to claim credit | Decides how much credit exists. Rule 86B only limits how much of it can be used in a month. See our guide on the 30 November 2026 ITC deadline |
| Section 17(5) | Blocked credit | Blocked credit never enters the ledger, so it never reaches the 99% test. See blocked ITC under section 17(5) |
| Section 49(4) and 49(5) | Order of utilisation across IGST, CGST and SGST | The 99% ceiling applies on top of the set-off order |
| GSTR-2B and IMS matching | What credit can be claimed in GSTR-3B | Cleaner reconciliation means the credit figure used in the computation is reliable. See GSTR-3B ITC reconciliation checks |
Checklist before the next high-turnover month
- List each GSTIN and its last twelve months of taxable supplies. Mark months above ₹50 lakh.
- Confirm which of exceptions (a) to (d) is available, with the evidence file for each.
- Decide whether to build a cumulative cash cushion or to pay 1% in the months the rule bites.
- Add the minimum cash figure to the monthly cash-flow forecast, head by head.
- Record how reverse charge liability is treated in your computation, and apply it consistently.
- Keep the working paper with the GSTR-3B file. A note of the basis is what you will want if the figure is questioned later.
Frequently asked questions
What is Rule 86B of the CGST Rules?
Rule 86B restricts how much of your output tax liability can be paid from the electronic credit ledger. If the value of your taxable supplies (leaving out exempt and zero-rated supplies) exceeds ₹50 lakh in a month, you cannot use credit for more than 99% of that month's output tax. At least 1% has to be paid in cash through the electronic cash ledger. It has applied since 1 January 2021.
Is the ₹50 lakh limit tested on the whole year or every month?
Every month. The rule looks at the value of taxable supplies in a month, so a business with ₹4 crore of annual turnover can still cross ₹50 lakh in a busy month and be caught for that month alone. It is tested for each registration (GSTIN), not on a PAN-wide basis.
Does the 1% cash payment mean I lose the rest of my ITC?
No. The credit is not denied or reversed. It simply stays in the electronic credit ledger and can be used in later months, subject to the same cap in any month where the rule applies. The cost of the rule is a small, recurring cash outflow, not a loss of credit.
Which taxpayers are exempt from Rule 86B?
The rule does not apply where the taxpayer, or its proprietor, karta, managing director, partners, whole-time directors, committee members or trustees as relevant, paid more than ₹1 lakh as income tax in each of the last two financial years for which the return due date has expired; where the taxpayer received a refund of more than ₹1 lakh in the preceding year on zero-rated supplies without payment of tax or on an inverted duty structure; where cumulative cash payment in the current year exceeds 1% of cumulative output tax; and for government departments, public sector undertakings, local authorities and statutory bodies. The Commissioner can also lift the restriction after verification.
Does reverse charge tax count towards the 99% limit?
Tax payable under reverse charge can be paid only in cash, never from the credit ledger, so it is paid in cash in any case. Practitioners generally leave it out of the output tax on which the 99% ceiling is worked, but the point is not spelt out in the rule. Check how the GST portal computes your figure in a test month and document the basis you follow.
What if I have already used more than 99% of ITC in a month?
Rule 86B carries no separate penalty, but credit used beyond the ceiling means part of the tax is treated as not paid in the manner required, which can attract interest under section 50 and a demand. The usual corrective route is to pay the shortfall in cash with interest, and then deal with the credit that was wrongly used. The exact procedure depends on facts, so settle it with your tax adviser before acting.
We can review the last twelve months of taxable supplies, check which exception applies, and set up a month-wise working that fits into your close.
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This article is for general information and does not constitute advice on any specific case. Rules, due dates and notifications change; confirm the current position on the GST portal and the CBIC tax repository before acting. Firm details: CA Somesh Chandak & Associates, Unit 119, 1st Floor, Centura Square IT Park, SG Barve Road, Wagle Estate, Thane West 400604. FRN 158694W.