Summary: Rule 86B of the CGST Rules, introduced via Notification No. 94/2020 dated 22 December 2020, restricts businesses with monthly taxable turnover exceeding ₹50 lakh from using more than 99% of their input tax credit (ITC) to discharge GST liability, thereby requiring at least 1% of output tax to be paid in cash. This measure, aimed at curbing tax evasion and fake invoicing, applies separately to each tax head (IGST, CGST, SGST, UTGST) and excludes reverse charge liabilities. However, the restriction does not apply if the proprietor, partners, or directors have paid income tax exceeding ₹1 lakh in each of the last two financial years, if the taxpayer has received ITC refunds over ₹1 lakh for zero-rated or inverted duty supplies, has already paid more than 1% of output tax in cash cumulatively during the year, or is a government entity, PSU, local authority, or statutory body. Essentially, Rule 86B ensures a minimum cash payment to the government, promoting genuine transactions and compliance in GST operations.
1. Introduction:
In this article, I am explaining the Rule 86B, which mandates that minimum 1% of output tax must be paid in cash, even if there is sufficient balance available in credit ledger. It excludes the RCM liability.
2. Types of liabilities:
a. Output of Integrated Goods & Services Tax (Output IGST)
b. Output of Central Goods & Services Tax (Output CGST)
c. Output of State Goods & Services Tax (Output SGST) or
d. Output of Union Territory Goods & Services Tax (Output UTGST)
3. Types of Input tax credit:
a. Input tax credit of Integrated Goods & Services Tax (Input of IGST)
b. Input tax credit of Central Goods & Services Tax (Input of CGST)
c. Input tax credit of State Goods & Services Tax (Input of SGST) or
d. Input tax credit of Union Territory Goods & Services Tax (Input of UTGST)
4. Steps for off -setting of liabilities:
a. IGST input will first be utilised against IGST output.
b. Remaining input of IGST will be used against SGST/UTGST output or CGST output or it can be utilised in both in any ratio.
c. CGST & SGST/UTGST input can-not be used before utilisation of full input of IGST. IGST input must be fully utilised before utilisation of CGST & SGST/UTGST input.
d. Now, CGST input will be utilised against CGST output.
e. CGST input will be utilised against IGST output.
f. SGST/UTGST input will be utilised against SGST/UTGST output.
g. SGST/UTGST input will be utilised against IGST output.
h. If balance of output remains, it must be paid in cash.
This process will apply on 99% of the output tax liability if Rule 86B is applicable.
5. Applicability of Rule 86B:
If the taxable turnover of a registered person exceeds 50,00,000 in a month then this rule shall apply on them. I am explaining this with the help of a table, showing which types of turnover will be considered or not.
| Sr. No. | Nature of supplies | Considered in “Taxable Turnover for Rule 86B” |
| 1 | Taxable supplies to SEZ with or without LUT | No |
| 2 | Exempt supplies to SEZ with or without LUT | No |
| 3 | Nil rated supplies to SEZ with or without LUT | No |
| 4 | Non Taxable supplies to SEZ with or without LUT | No |
| 5 | Taxable supplies o/s India with or without LUT | No |
| 6 | Exempt supplies o/s India with or without LUT | No |
| 7 | Nil rated supplies o/s India with or without LUT | No |
| 8 | Non Taxable supplies o/s India with or without LUT | No |
| 9 | Taxable supplies in India | Yes |
| 10 | Exempt supplies in India | No |
| 11 | Nil rated supplies in India | No |
| 12 | Non Taxable supplies in India | No |
| 13 | Sale of assets | Yes |
| 14 | Transaction in securities | No |
| 15 | Sale of Land & Building | No |
| 16 | Transaction between DDP | Yes |
a. Output tax in case of exempt supplies will always be zero. Therefore, Exempt supplies is not considered in this rule.
b. If the turnover does not exceed in any month then this rule shall not be applicable for that particular
c. The limit will be checked for each and every month.
d. A minimum 1% payment payment should be in cash for each head of output tax separately. The 1% cannot be deposited in cash only in a single head or in any ratio in various heads.
e. For payment of 1% in cash, we will consider the total output tax liability including GST levied on ZRS but for calculating the 50 Lakhs turnover, ZRS will not be considered. Refer 10th
f. RCM liability on purchase transactions will not be considered/added in output tax liability because it is not a part of sales. It must be paid in cash.
6. Practical scenario:
| Type | IGST | CGST | SGST |
| Output tax | 40,000 | 1,70,000 | 1,70,000 |
| Input tax credit | 50,000 | 1,40,000 | 1,40,000 |
| 1% in cash of output tax | 400 | 1,700 | 1,700 |
| Net output tax | 39,600 | 1,68,300 | 1,68,300 |
In this example, IGST input used in SGST output before utilising in CGST output.
| Input Set off | ||||
| Output | IGST | CGST | SGST | Total input utilised against output |
| IGST | 39,600 | – | – | 39,600 |
| CGST | – | 1,40,000 | Not allowed | 1,40,000 |
| SGST | 10,400 | Not allowed | 1,40,000 | 1,50,400 |
| Payment required in cash | 400 | 30,000 | 19,600 | |
We need to deposit the tax 1% in cash in each head separately, as I have explained.
7. Non applicability of Rule 86B (A):
a. Proprietor
b. HUF or Karta of the HUF
c. Company or Managing director of the company or Whole time director of the company (Other category of directors shall not be considered)
d. Partnership firm or any two partners of Partnership firm
e. LLP or any two partners of LLP
f. Board of trustees etc.
If any of the above person has paid income tax more than 1,00,000 in each of last two years for which due date of ITR has been expired then this rule will not apply. Explained as below in 8th point.
8. Meaning of income tax:
a. It includes tax, surcharge & cess but does not include interest leviable u/s 234A, 234B & 234C. It also does not include the late fees leviable u/s 234F.
| S No | Nature | Amount |
| 1 | Income tax | 90,000 |
| 2 | Surcharge | 8,000 |
| 3 | Cess | 1,000 |
| 4 | Total tax | 99,000 |
| 5 | Int. 234A | 1,000 |
| 6 | Int. 234B | 1,000 |
| 7 | Int. 234C | 1,000 |
| 8 | Late fees | 5,000 |
| 9 | Total liability | 1,07,000 |
| 10 | TDS | 90,000 |
| 11 | TCS | 10,000 |
| 12 | Advance tax | 5,000 |
| 13 | Tax Payable | 2,000 |
In this case, the total tax liability is 99,000. Rule 86B will apply due to non-fulfilment of the prescribed conditions. Although you have deposited a total tax of 1,07,000, for the purpose of this rule, interest and late fees are excluded.
b. Practical scenario 2:
| S No | Nature | Amount |
| 1 | Income tax | 90,000 |
| 2 | Surcharge | 8,000 |
| 3 | Cess | 1,000 |
| 4 | Total tax | 99,000 |
| 5 | Int. 234A | 1,000 |
| 6 | Int. 234B | 1,000 |
| 7 | Int. 234C | 1,000 |
| 8 | Late fees | 5,000 |
| 9 | Total liability | 1,07,000 |
| 10 | TDS | 90,000 |
| 11 | TCS | 10,000 |
| 12 | Advance tax | 20,000 |
| 13 | Refundable | -13,000 |
In this case, the total tax liability is 99,000. Rule 86B will apply due to non-fulfilment of the prescribed conditions. Although you have deposited a total tax of 1,20,000 and also claimed a refund of 13,000, making the net tax paid 1,07,000, for the purpose of this rule, interest and late fees are excluded. Therefore, this rule will still be applicable.
c. Practical scenario 3:
| S No | Nature | Amount |
| 1 | Income tax | 1,20,000 |
| 2 | Surcharge | 8,000 |
| 3 | Cess | 1,000 |
| 4 | Total tax | 1,29,000 |
| 5 | Int. 234A | 1,000 |
| 6 | Int. 234B | 1,000 |
| 7 | Int. 234C | 1,000 |
| 8 | Late fees | 5,000 |
| 9 | Total liability | 1,37,000 |
| 10 | TDS | 1,40,000 |
| 11 | TCS | 10,000 |
| 12 | Advance tax | 20,000 |
| 13 | Refundable | -33,000 |
In this case, the total tax liability is 1,29,000. Rule 86B will not be apply due to fulfilment of the prescribed conditions. Although you have deposited a total tax of 1,70,000 and also claimed a refund of 33,000, making the net tax paid 1,29,000 excluding interest & late fees for the purpose of this rule. Therefore, this rule will not be applicable.
d. Suppose we are filing the GSTR-3B for the month of Oct 2025. Here, we will considered the last 2 years i.e 23-24 & 24-25 because due date of ITR for both the years has been expired.
e. Example:
If the HUF has paid the tax more than 1,00,000 in each of the last two years then this rule will not apply to the HUF. If HUF has not fulfilled the condition then we need to check whether Karta has paid the tax more than 1,00,000 in both the years. If Karta has deposited the tax then this rule will also not be applicable to the HUF.
However, If Karta has their own GSTIN, then we will not check whether HUF has paid the tax more than 1,00,000. In that case, only the Karta’s tax payment will be considered, and it will be treated as a proprietor.
f. If the assessee has not filed the return for any year out of two last years of which due date has been expired it means that condition has not been fulfilled. It will be treated as total tax liability was zero. Therefore, exemption will not be available.
g. It does not depend on whether you have actually filed the ITR or not.
h. It depends on which two financial years’ ITR due dates have expired as on the date of checking.
9. Non applicability of Rule 86B (B):
a. The registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of sub-section (3) of section 54e Refund of ITC in case of Zero rated supplies without payment of tax.
* If ZRS is made with payment of tax, then the benefit of this exception will not be available.
** If ZRS is made without payment of tax, then the benefit of this exception will be available.
*** The amount of refund received will be considered in the last year irrespective of whether refund belongs to the same year or two or more earlier years.
b. the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub-section (3) of section 54e refund of ITC in case of Inverted duty structure (IDS).
* The amount of refund received will be considered in the last year irrespective of whether refund belongs to the same year or two or more earlier years.
Note: Refund of ZRS & Inverted duty structure will be considered separately.
c. The registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year.
Explanation:
Suppose we are filing GSTR-3B of Jan 2026. We will consider the output tax from April to Dec 2025 i.e 10,00,000 excluding RCM liability & total output tax paid in cash is 11,000 excluding RCM. It exceeds 1% of liability. Therefore, Rule 86B will not be apply in GSTR-3B of Jan 2026.
d. the registered person is –
(i) Government Department; or
(ii) Public Sector Undertaking; or
(iii) Local authority; or
(iv) Statutory body.
10. Types of supplies considered in output tax:
| S No | Nature of supplies | Considered in “Output tax liability for Rule 86B” |
| 1 | Taxable supplies to SEZ with LUT | No |
| 2 | Exempt supplies to SEZ with LUT | No |
| 3 | Nil rated supplies to SEZ with LUT | No |
| 4 | Non Taxable supplies to SEZ with LUT | No |
| 5 | Taxable supplies o/s India with LUT | No |
| 6 | Exempt supplies o/s India with LUT | No |
| 7 | Nil rated supplies o/s India with LUT | No |
| 8 | Non Taxable supplies o/s India with LUT | No |
| 9 | Taxable supplies in India | Yes |
| 10 | Exempt supplies in India | No |
| 11 | Nil rated supplies in India | No |
| 12 | Non Taxable supplies in India | No |
| 13 | Sale of assets | Yes |
| 14 | Transaction in securities | No |
| 15 | Sale of Land & Building | No |
| 16 | Transaction between DDP | Yes |
| 17 | Taxable supplies to SEZ without LUT | Yes |
| 18 | Exempt supplies to SEZ without LUT | No |
| 19 | Nil rated supplies to SEZ without LUT | No |
| 20 | Non Taxable supplies to SEZ without LUT | No |
| 21 | Taxable supplies o/s India without LUT | Yes |
| 22 | Exempt supplies o/s India without LUT | No |
| 23 | Nil rated supplies o/s India without LUT | No |
| 24 | Non Taxable supplies o/s India without LUT | No |
| 25 | RCM on purchase transactions | No |
11. Bare Act of Rule 86B:
Rule 86B. Restrictions on use of amount available in electronic credit ledger.-
Notwithstanding anything contained in these rules, 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, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees:
Provided that the said restriction shall not apply where –
(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or
(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of sub-section (3) of section 54; or
(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or
(d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year; or
(e) the registered person is –
(i) Government Department; or
(ii) a Public Sector Undertaking; or
(iii)a local authority; or
(iv) a statutory body:
Provided further that the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.
Reference: Notification No. 94/2020 December 22, 2020
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Disclaimer: The views and opinions expressed in this article are those of the author. This article is intended for general information purposes only and does not constitute professional advice. Readers are strongly advised to consult a qualified professional for guidance specific to their individual situation before making any financial, legal, or tax-related decisions. The author shall not be held liable for any loss or damage of any kind incurred as a result of the use of this information or for any actions taken based on the content of this article.
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