GST Rule 86B forces a cash payment only when two things happen together: your taxable supplies, leaving out exempt and zero-rated supplies, cross ₹50 lakh in a month, and none of the exceptions in the rule covers you. If both are true, you may use the electronic credit ledger for no more than 99% of that month's output tax. The other 1% (at least) comes from the electronic cash ledger.
The figure that trips people up is the base. The 1% is worked out on the output tax liability for the month, not on turnover. A business with ₹62 lakh of taxable supplies and ₹11,16,000 of output tax needs ₹11,160 in cash, not ₹62,000. And many businesses above ₹50 lakh a month never pay anything under the rule, because an income-tax, refund or cumulative-cash exception already takes them out.
What the rule actually restricts
Section 49(4) of the CGST Act lets you pay output tax from the electronic credit ledger, but only subject to the conditions and restrictions that the rules prescribe. Section 49(12) separately allows the Government, on the GST Council's recommendation, to cap the share of output tax that can be paid through that ledger. You can read both in the current text of section 49 of the CGST Act.
Rule 86B is where that cap sits. It was inserted with effect from 1 January 2021 by Notification No. 94/2020-Central Tax dated 22 December 2020. The text of Rule 86B of the CGST Rules covers months in which the value of taxable supply, other than exempt supply and zero-rated supply, exceeds ₹50 lakh. In such a month the registered person shall not use the credit ledger to discharge output tax "in excess of ninety-nine per cent. of such tax liability".
When the rule came in, Revenue Department sources estimated that only about 45,000 taxpayers, roughly 0.37% of the GST base, would actually have to pay cash after the exceptions, as Business Standard reported in December 2020. The rule is narrow by design. The work lies in proving that you fall outside it, or in getting the cash figure right when you do not.
Reading the ₹50 lakh trigger correctly
Test the trigger every month on its own. It is a monthly figure, not an annual turnover limit, and a business that crosses it in one month and falls below it in the next is inside the rule only for the first month.
Count the value of taxable supplies for the month and remove two categories:
- Exempt supplies, which carry no tax in any case.
- Zero-rated supplies, which section 16 of the IGST Act defines as exports and supplies for authorised operations to an SEZ developer or SEZ unit, whether made under bond or LUT or, where permitted, on payment of IGST.
Use the value of supplies, not the tax amount and not the invoice total including GST. A trader whose monthly sales are ₹48 lakh domestic plus ₹30 lakh of exports stays below the trigger, because the export value is left out. A service provider with ₹51 lakh of domestic taxable billing crosses it.
Six situations in which the restriction does not apply
The first proviso to Rule 86B lists the exceptions. Check them before you plan any cash payment. The table sets out each one and the evidence worth keeping on file for it.
| Clause | Condition in the rule | Evidence to keep |
|---|---|---|
| (a) Income tax paid | The registered person, or its proprietor, karta, managing director, any of its two partners, whole-time directors, members of the managing committee or board of trustees, paid more than ₹1 lakh as income tax in each of the last two financial years whose section 139(1) return due date has passed | Income-tax returns and tax payment records for both years, for each person relied on |
| (b) Export refund | The registered person received a refund of more than ₹1 lakh of unutilised input tax credit in the preceding financial year for zero-rated supplies made without payment of tax | Refund sanction orders for the preceding financial year |
| (c) Inverted duty refund | The registered person received a refund of more than ₹1 lakh of unutilised input tax credit in the preceding financial year because of an inverted duty structure | Refund sanction orders for the preceding financial year |
| (d) Cash already paid | Output tax paid through the electronic cash ledger exceeds 1% of total output tax liability, applied cumulatively up to that month in the current financial year | A running monthly working from the cash and liability ledgers |
| (e) Public bodies | The registered person is a Government department, public sector undertaking, local authority or statutory body | Constitution documents |
| (f) RSP-valued goods | A registered person other than a manufacturer, for goods valued under Rule 31D on which the supplier has already paid tax on the retail sale price, from 1 February 2026 | Purchase invoices showing RSP-based tax paid by the supplier |
A further proviso lets the Commissioner, or an officer he authorises, remove the restriction after such verification and safeguards as he thinks fit. That is a discretionary relief, granted case by case. It is not something to assume in a GSTR-3B.
The income-tax test in clause (a)
For companies and firms with profitable promoters, this is usually the first exception to test. The rule still refers to income tax "under the Income-tax Act, 1961" and to the time limit under section 139(1) of that Act, which is how it reads on the CBIC site as on 30 October 2026. The relevant years are therefore the two most recent financial years whose original return due date has expired, which shift once a year. Before the due date for FY 2025-26 passes for that person, the two years are FY 2023-24 and FY 2024-25. After it passes, they become FY 2024-25 and FY 2025-26.
Each year has to clear ₹1 lakh separately. ₹3 lakh in one year and ₹60,000 in the other does not qualify. The wording "any of its two partners, whole-time Directors" is not clean drafting. The safer reading for a firm or company is to have records for two partners or whole-time directors who each crossed ₹1 lakh in both years. Relying on a single partner is an argument you may have to defend later.
The refund tests in clauses (b) and (c)
Both clauses point to the first proviso to section 54(3), which allows a refund of unutilised credit in only two cases. As the text of section 54 of the CGST Act shows, clause (i) covers zero-rated supplies made without payment of tax and clause (ii) covers credit built up because inputs carry a higher rate than outputs. The refund must have been received in the preceding financial year, not just applied for, and it must exceed ₹1 lakh. An exporter who pays IGST on exports and claims a refund of that IGST is not using clause (i), because that refund is of tax paid, not of unutilised credit.
The cumulative cash test in clause (d)
This exception rewards a business that has already paid enough in cash during the year. Add up the output tax paid through the cash ledger from April to the month being tested. Compare it with 1% of the total output tax liability for the same months. If cash paid is more than that 1%, the restriction does not apply in that month, even if supplies cross ₹50 lakh.
The test resets every April, because it runs "in the current financial year". A business that paid heavily in cash during a slow year starts again from zero.
The RSP exception in clause (f)
The CGST (Fifth Amendment) Rules, 2025, notified as Notification No. 20/2025-Central Tax dated 31 December 2025, inserted Rule 31D and clause (f) with effect from 1 February 2026. As the GST Council Secretariat's December 2025 newsletter explains, Rule 31D values pan masala and specified tobacco and nicotine products on the declared retail sale price. Clause (f) exempts registered persons other than manufacturers from Rule 86B for those goods where the supplier has already paid tax on that basis. It does not help any other trader, and it does not help the manufacturer.
Working out the cash figure in a month the rule applies
When the trigger is crossed and no exception applies, the arithmetic is short:
- Take the month's output tax liability across IGST, CGST, SGST or UTGST and cess on your forward-charge supplies.
- Multiply by 99%. That is the most you may set off from the credit ledger.
- Pay the balance, at least 1% of the liability, from the electronic cash ledger through Table 6 of GSTR-3B.
The rule caps credit use on the total output tax, and it does not say how the 1% must be spread across tax heads. A simple approach is to keep the cash payment in proportion to each head's liability, which also keeps the working easy to explain. Paying more than 1% in cash is never a breach. It also builds up headroom under clause (d) for later months.
A three-month illustration
This is an illustration with assumed figures. A Pune distributor, a private limited company, supplies goods taxed at 18%. It makes no exempt or zero-rated supplies. Its directors' income tax does not meet clause (a), and it received no refunds last year. Its figures for the first quarter of FY 2026-27 are as follows.
| Month | Taxable supplies | Output tax at 18% | Rule 86B triggered? | Minimum cash payment |
|---|---|---|---|---|
| April 2026 | ₹62,00,000 | ₹11,16,000 | Yes | ₹11,160 (credit capped at ₹11,04,840) |
| May 2026 | ₹45,00,000 | ₹8,10,000 | No, below ₹50 lakh | Nil |
| June 2026 | ₹70,00,000 | ₹12,60,000 | Yes, unless clause (d) applies | ₹12,600, or nil if clause (d) is met |
Suppose the company pays exactly ₹11,160 in cash in April and nothing in May. In June, total output tax for April to June is ₹31,86,000, so 1% of it is ₹31,860. Cash paid so far is ₹11,160, which is short. Clause (d) does not apply, and June needs at least ₹12,600 in cash. Even after that, cumulative cash of ₹23,760 is still below ₹31,860.
Now suppose the company had paid ₹35,000 in cash in April instead. By June, cash paid of ₹35,000 is more than ₹31,860, so clause (d) applies and the whole of June's ₹12,60,000 may be set off from credit. This working counts June's own liability in the total, which is the cautious reading of "up to the said month". A company with steady monthly volumes can use this to pay a little more cash early in the year and keep later months clear. The test has to be repeated every month, because a large month can pull the cumulative ratio back below 1%.
What the credit ledger could not pay in any case
Rule 86B sits on top of the ordinary utilisation rules, and some liabilities never touch the credit ledger. The GST portal's FAQs on utilisation of cash and input tax credit say credit cannot be used for reverse charge liabilities, TDS, TCS, interest, penalty, fee or others; it can pay tax only. Section 49(3) and 49(4) of the CGST Act point the same way: the cash ledger can pay tax, interest, penalty and fees, while the credit ledger is limited to output tax.
Two consequences follow for the Rule 86B working. Reverse charge tax and interest go through cash anyway, so keep them in separate lines and do not mix them into the 99% computation. And because the credit ledger also follows the cross-utilisation order in section 49(5), with no set-off of CGST against SGST or the other way round, check that the cash portion leaves each head's credit set-off still valid.
The portal leaves the calculation to you
The portal's FAQs on Form GSTR-3B describe how tax is paid through Table 6 of the return, and they do not describe any Rule 86B check in the payment screen. In practice, that means the split between cash and credit in Table 6 is your decision, and the working that supports it is your evidence if the department later asks why credit covered the whole liability.
A month-end routine that works before every GSTR-3B:
- Extract the month's taxable supply value from the GSTR-1 data and remove exempt and zero-rated supplies.
- If the figure is ₹50 lakh or less, record that and stop.
- If it is more, check clauses (a), (b), (c), (e) and (f), which usually stay the same for the whole year once tested in April.
- If none applies, update the running clause (d) working with cumulative output tax and cumulative cash paid.
- If clause (d) also fails, compute 1% of the month's output tax and enter at least that amount as cash in Table 6.
- File the working with the return papers for the month.
Re-run the clause (a) test whenever the income-tax return due date for a new year passes, since the pair of years shifts on that date. Before relying on any clause, also check the latest Central Tax notifications amending the CGST Rules. The consolidated rule page on the CBIC site did not yet show clause (f) on 30 October 2026, and the list of exceptions can change by notification.
