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.
A business with more credit than liability would ordinarily pay nothing in cash. Rule 86B says that above a turnover threshold, it must pay at least one per cent — regardless of its credit position.
Rule 86B: notwithstanding anything contained in the rules, a registered person shall not use the amount available in the 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.
The threshold
Value of taxable supply in a month, exceeding ₹50 lakh — computed excluding:
- exempt supply; and
- zero-rated supply.
So an exporter with ₹5 crore of zero-rated turnover and ₹30 lakh of domestic taxable supply is below the threshold. The rule targets domestic taxable turnover.
The test is applied month by month, not on annual turnover. A business crossing ₹50 lakh in one month is within the rule for that month only.
The five exceptions
The rule does not apply where:
(a) Income tax paid. The registered person, or the proprietor, karta, managing director, any of the two partners, whole-time directors, members of the managing committee of associations or the board of trustees, as the case may be, has paid more than one lakh rupees as income tax under the Income-tax Act, 1961 in each of the last two financial years for which the time limit to file the return of income under s.139(1) has expired.
(b) Refund on zero-rated supplies. The registered person has received a refund exceeding one lakh rupees in the preceding financial year on account of unutilised input tax credit under s.54(3)(i) — zero-rated supply made without payment of tax.
(c) Refund on inverted duty. The registered person has received a refund exceeding one lakh rupees in the preceding financial year on account of unutilised credit under s.54(3)(ii) — inverted duty structure.
(d) Cash already paid. The registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of one per cent of the total output tax liability, applied cumulatively, up to the said month in the current financial year.
(e) Public sector. The registered person is a Government department, a public sector undertaking, a local authority or a statutory body.
Exception (d) is the one that changes behaviour
It is cumulative for the financial year, not monthly.
So a business that pays a large cash amount in April — because credit had not yet accumulated — banks that payment against the whole year. In each subsequent month, the test is whether cumulative cash paid up to that month exceeds 1% of cumulative output tax liability.
The practical consequence: front-loading the cash payment satisfies the rule for the rest of the year, provided the cumulative ratio stays above 1%. A business that manages its cash payments deliberately rather than reacting monthly will usually find itself within exception (d) without additional cost.
Exception (a): who has to have paid the income tax
Read the list. For a company, it is the registered person or the managing director or any whole-time director. For a partnership, any of the two partners. For a proprietorship, the proprietor.
So a company whose managing director personally paid more than ₹1 lakh income tax in each of the last two completed years is outside Rule 86B — a common and easily documented position that is frequently overlooked.
The condition attaches to years for which the s.139(1) filing deadline has expired, so the two years are settled, not current.
The Commissioner's power
The proviso to Rule 86B: the Commissioner or an officer authorised by him in this behalf may remove the said restriction after such verification and such safeguards as he may deem fit.
An application route exists, though it is little used.
Practical notes
- Test the exceptions before assuming the rule applies. Most businesses above ₹50 lakh monthly turnover fit exception (a) or (d).
- Document exception (a) annually — the income tax paid by the specified person for the two relevant years, with the acknowledgements.
- Track exception (d) cumulatively from April, not monthly.
- Remember the exclusions from the threshold — exempt and zero-rated supplies do not count towards ₹50 lakh.
- The 1% is of output tax liability, not of turnover.
- Rule 59(6)(c) separately blocks GSTR-1 for a Rule 86B taxpayer who has not filed the preceding period's GSTR-3B. Sequential filing →
Key takeaways
- Rule 86B caps credit utilisation at 99% of output tax liability where monthly taxable supply exceeds ₹50 lakh.
- The threshold excludes exempt and zero-rated supplies.
- Five exceptions: income tax above ₹1 lakh in each of two years, refunds above ₹1 lakh on zero-rated or inverted duty, cumulative cash above 1%, and public sector entities.
- Exception (d) is cumulative for the year, so front-loaded cash payments carry forward.
- The Commissioner may remove the restriction on application.
- The 1% is of output tax liability, not turnover.
Read next
- Order of Utilisation: Sections 49A, 49B and Rule 88A
- Electronic Credit Ledger: ITC Utilisation Rules
- Sequential Filing: Why One Missed Return Blocks Everything
- Rule 86A: Blocking the Electronic Credit Ledger
Disclaimer: Positions stated as on 5 September 2026, based on the CGST Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition).