Learn everything about the Rule 86B Limit under GST. Understand the ₹50 lakh monthly threshold, 1% mandatory cash payment, ITC restriction, exceptions, examples, FAQs, and compliance requirements for FY 2026–27.
If your business has substantial monthly taxable turnover and you rely heavily on Input Tax Credit (ITC) to discharge your GST liability, Rule 86B is one GST provision you cannot afford to ignore.
Introduced as an anti-tax evasion measure, Rule 86B restricts the utilization of Input Tax Credit (ITC) in certain cases by requiring taxpayers to pay a minimum portion of their GST liability in cash.
This comprehensive guide explains everything you need to know about the Rule 86B Limit, including its applicability, threshold, exceptions, calculation, examples, and compliance requirements.
What is Rule 86B Under GST?
Rule 86B of the Central Goods and Services Tax (CGST) Rules, 2017 restricts the use of the balance available in the Electronic Credit Ledger for payment of output GST liability in specified cases.
Where Rule 86B applies, a registered person cannot use ITC to discharge more than 99% of the output tax liability. At least 1% of the output tax liability must be paid through the Electronic Cash Ledger, unless one of the prescribed exceptions applies.
The 1% Cash Payment Rule under GST refers to Rule 86B of the Central Goods and Services Tax Rules, 2017.
What is the Rule 86B Limit?
The Rule 86B threshold limit is:
Taxable supplies exceeding ₹50 lakh in a month (excluding exempt supplies and zero-rated supplies).
Once this monthly threshold is crossed, the restriction on ITC utilisation may apply unless the taxpayer qualifies for an exemption.
How Does Rule 86B Work?
If Rule 86B applies:
- Maximum ITC that can be utilised = 99% of output GST liability
- Minimum GST payable in cash = 1% of output GST liability
Example
Suppose during a month:
- Taxable turnover = ₹80 lakh
- Output GST liability = ₹9,00,000
- Available ITC = ₹9,00,000
Without Rule 86B:
- ITC utilised = ₹9,00,000
- Cash payment = Nil
With Rule 86B:
- ITC utilisation = ₹8,91,000 (99%)
- Cash payment = ₹9,000 (1%)
Thus, even if sufficient ITC is available, a minimum cash payment is mandatory where Rule 86B applies and no exception is available.
Purpose of Rule 86B
The Government introduced Rule 86B to curb:
- Fake invoicing
- Bogus Input Tax Credit (ITC)
- Circular trading
- Shell companies
- Tax evasion through fraudulent ITC claims
The objective is to ensure that businesses with significant taxable supplies contribute at least a small portion of their GST liability through cash instead of relying entirely on ITC.
Who Does Rule 86B Apply To?
Rule 86B generally applies to:
- Registered persons
- Monthly taxable supplies exceeding ₹50 lakh
- Persons intending to discharge almost the entire GST liability using ITC
The ₹50 lakh threshold is tested month-wise, not on the basis of annual turnover. Exempt supplies and zero-rated supplies are excluded while determining the threshold.
Exceptions to Rule 86B
Rule 86B does not apply in several situations. Key exceptions include:
1. Income Tax Paid
The restriction does not apply if the registered person, proprietor, karta, managing director, or specified partners/directors have paid more than ₹1 lakh as income tax in each of the last two financial years (subject to the statutory conditions).
2. Refund Received on Export or Zero-Rated Supplies
If the registered person received a GST refund exceeding ₹1 lakh in the preceding financial year on account of unutilised ITC relating to zero-rated supplies, Rule 86B does not apply.
3. Refund on Inverted Duty Structure
The restriction is also inapplicable where a refund exceeding ₹1 lakh was received in the preceding financial year on account of the inverted duty structure.
4. 1% Cash Already Paid Cumulatively
If the taxpayer has already discharged output tax through the Electronic Cash Ledger in excess of 1% of the cumulative output tax liability up to that month during the financial year, the restriction does not apply.
5. Government and Public Authorities
Rule 86B does not apply to:
- Government Departments
- Public Sector Undertakings (PSUs)
- Local Authorities
- Statutory Bodies
Practical Impact of Rule 86B
Businesses affected by Rule 86B should:
- Maintain adequate working capital for cash payment of GST.
- Monitor monthly taxable supplies closely.
- Track eligibility for statutory exceptions.
- Plan ITC utilisation efficiently.
- Ensure proper GST compliance to avoid disputes.
Common Misconceptions About Rule 86B
Myth 1: Rule 86B blocks ITC.
False. It only restricts the extent to which ITC can be used to discharge output tax liability. ITC remains available in the Electronic Credit Ledger.
Myth 2: It applies to annual turnover.
False. The ₹50 lakh threshold is based on monthly taxable supplies, not annual turnover.
Myth 3: Every taxpayer crossing ₹50 lakh must pay 1% in cash.
False. Several statutory exceptions may remove the restriction.
Compliance Tips
Businesses should:
- Review monthly taxable turnover.
- Verify whether exempt or zero-rated supplies are excluded from the threshold calculation.
- Check if any Rule 86B exception applies.
- Keep documentary evidence supporting exemption claims.
- Consult a GST professional in case of doubt, especially where high-value ITC is involved.
Frequently Asked Questions (FAQs)
What is the Rule 86B limit?
Rule 86B generally applies where the value of taxable supplies exceeds ₹50 lakh in a month (excluding exempt and zero-rated supplies).
What is the 1% GST cash payment rule?
Where Rule 86B applies, at least 1% of the output GST liability must be paid through the Electronic Cash Ledger, unless an exception is available.
Does Rule 86B apply to everyone?
No. It applies only if the prescribed threshold is crossed and none of the statutory exceptions are available.
Does Rule 86B deny Input Tax Credit?
No. It restricts utilisation of ITC for payment of output tax but does not extinguish the credit itself.
Is the ₹50 lakh threshold based on annual turnover?
No. The threshold is determined with reference to monthly taxable supplies.
Conclusion
Rule 86B is an important anti-evasion provision under the GST law. It is designed to ensure that specified taxpayers with monthly taxable supplies exceeding ₹50 lakh contribute at least a small portion of their GST liability in cash instead of relying entirely on Input Tax Credit.
However, the rule is not universally applicable. A number of statutory exceptions protect genuine taxpayers, including those with a sound income tax compliance history, exporters receiving eligible refunds, and certain government entities. Businesses should periodically review their turnover, assess whether any exception applies, and maintain proper documentation to ensure smooth GST compliance.
The information in this article is general in nature and should not be relied upon as legal advice. If you require any further information, you may reach out at hello@lawfluencers.com.