Rule 86B of the CGST Rules can stop you from paying your entire GST liability using input tax credit (ITC). If your taxable turnover in a month crosses ₹50 lakh, you may have to pay at least 1% of your output tax liability in cash. This guide explains who is affected, how the 1% is worked out, the common exceptions and a simple monthly routine so the restriction does not surprise you on the due date.
What Rule 86B says in plain words
Normally, you set off your output GST against the ITC in your electronic credit ledger and pay only the balance in cash. Rule 86B restricts this for larger taxpayers: ITC cannot be used to discharge more than 99% of the output tax liability in a month. In effect, at least 1% must be paid through the electronic cash ledger.
The restriction applies to the output tax liability, not to your total turnover and not to the tax payable under reverse charge. It is a payment-mode rule: it does not take away credit that is rightfully yours, it only limits how much of it you can use in that month.
Who does it apply to?
The rule applies when the value of your taxable supplies, other than exempt supplies and zero-rated supplies, exceeds ₹50 lakh in the month. Keep two points in mind:
- The test is applied month by month, so a business can be covered in a busy festive month and not in a slow one.
- Exempt supplies and zero-rated supplies (such as exports) are left out when you check the ₹50 lakh limit.
When the restriction does not apply
The rule itself lists situations where you are not subject to the 1% cash requirement. The main ones are:
- The registered person, or the proprietor, karta, managing director or any partner, has paid income tax of more than ₹1 lakh in each of the two preceding financial years.
- The registered person received a refund of more than ₹1 lakh in the preceding financial year because of an inverted duty structure or on account of an unutilised ITC claim.
- The registered person has discharged more than 1% of the total output tax liability through the cash ledger in the current financial year up to that month.
- Certain categories, such as government departments, public sector undertakings, local authorities and statutory bodies, are covered by exclusions.
The rule has been amended from time to time. Before relying on an exception, read the current text on the official GST portal or confirm with your chartered accountant.
A worked example
Suppose your taxable supplies in October are ₹80 lakh and your output GST liability for the month is ₹4,00,000. You hold ₹5,00,000 of ITC in the electronic credit ledger.
ItemAmount (₹) Output tax liability4,00,000 Maximum ITC you can use (99%)3,96,000 Minimum cash payment (1%)4,000Even though your ITC balance is larger than the liability, you would pay at least ₹4,000 in cash. If you have already paid more than 1% of your annual output tax in cash during the year, this requirement may not bite again.
What happens if you ignore it
If you try to use ITC beyond the permitted limit, the system or the tax officer may block the use of the credit ledger. A wrongly used balance can also lead to interest and a demand for the shortfall. It is far cheaper to keep a small cash balance than to face a blocked ledger on the due date.
A simple monthly routine
- Check turnover early. By the middle of the month, estimate your taxable supplies. If you are near ₹50 lakh, plan for the cash payment.
- Test the exceptions once a year. Note down the income tax paid in the two preceding years and any refund received. Record the result so you do not repeat the work each month.
- Keep cash in the ledger. Add a small buffer to the electronic cash ledger before the GSTR-3B due date, not on the last day.
- Reconcile before filing. Match your sales register with GSTR-1 and your credit with GSTR-2B, as explained in our guide on GSTR-1 vs GSTR-3B reconciliation.
- File on time. Late payment attracts interest and late fee; see GST late fee and interest on GSTR-3B for a worked example.
Link with your other GST checks
The 1% rule works alongside the usual ITC controls. Credit that is blocked under Section 17(5) never reaches your ledger in the first place, as covered in blocked credit under Section 17(5). If you are preparing the next return, the GSTR-3B pre-filing checklist for October 2026 is a good companion.
Key takeaways
- Rule 86B can require at least 1% of output tax to be paid in cash when monthly taxable turnover is above ₹50 lakh.
- The test is monthly and excludes exempt and zero-rated supplies.
- Several exceptions exist, including income tax paid above ₹1 lakh in each of the two preceding years.
- Keep a small cash buffer and confirm current rule text on the GST portal.
Keeping clean sales, purchase and ledger records through the month makes this check easy, and accounting software such as AICOUNTLY Smart Books can be a convenient place to keep those records. For your specific facts, please confirm with a chartered accountant.
