Rule 86B: the one percent cash payment restriction explained
A rule that forces cash payment even when you have credit. It applies to fewer taxpayers than most assume, and the exceptions are worth checking.
Rule 86B restricts a registered person whose taxable turnover in a month, other than exempt and zero rated supply, exceeds fifty lakh rupees from using the electronic credit ledger to discharge more than ninety nine percent of its output tax liability for that month. At least one percent must be paid in cash. The rule does not apply where specified income tax payments have been made, where a substantial refund has been received on account of zero rated supplies or an inverted duty structure, where cumulative cash payment in the year already exceeds one percent, or to specified categories of registered persons.
Who it applies to
The threshold is monthly taxable turnover exceeding fifty lakh rupees, excluding exempt supplies and zero rated supplies. It is a monthly test, so a taxpayer can be within the rule in one month and outside it in the next.
The restriction operates on the discharge of output tax liability for that month. It does not restrict the availment of credit, only its utilisation beyond ninety nine percent.
The rule is aimed at entities that discharge their entire liability from credit month after month, which is the pattern associated with invoice trading.
The exceptions to check before you pay
Income tax paid exceeding one lakh rupees in each of the last two financial years by the registered person, its proprietor, managing director or specified partners.
A refund exceeding one lakh rupees received in the preceding financial year on account of unutilised credit from zero rated supplies made without payment of tax, or on account of an inverted duty structure.
Cash payment of output tax through the electronic cash ledger, cumulatively in the current financial year, already exceeding one percent of the total output tax liability up to that month.
Registered persons in specified categories, including a Government department, a public sector undertaking, a local authority and a statutory body.
The Commissioner may also remove the restriction after such verification as he considers fit.
Where the disputes arise
The most common demand is a mechanical one, computed by the portal, that ignores an available exception. The reply is documentary — the income tax challans, the refund order, or the cumulative cash payment working.
The second is on the computation of the one percent, where the department applies it to the total liability including reverse charge liability that must be paid in cash in any event. Reverse charge liability is discharged in cash by law and the working should reflect it.
The third is on the consequence. Non compliance results in the liability being treated as unpaid to that extent, with interest, and the restriction being enforced on the portal. It is not a ground for denial of credit.
What to do on Monday
Test the monthly threshold as part of the return process rather than assuming the rule applies or does not.
Keep the income tax payment record of the entity and its specified persons for the last two years in the GST file, because that is the most commonly available exception.
Maintain a cumulative cash payment working for the year, since it becomes an exception in its own right.
Where the restriction bites structurally, apply to the Commissioner for removal with the supporting record.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Does Rule 86B apply where turnover is mostly exports?
Zero rated supplies are excluded from the turnover test, so an exporter frequently falls outside the rule; and a refund received on zero rated supplies is itself an exception.
Is the one percent computed on tax or on turnover?
On the output tax liability for the month, not on turnover.
Does credit utilised for reverse charge liability count?
Reverse charge liability cannot be discharged from the credit ledger at all. Ensure the working does not double count it.
Can the restriction be lifted?
The Commissioner or an authorised officer may remove the restriction after verification. An application supported by the income tax and refund record is the route.
Is the rule constitutionally valid?
Challenges have been raised on the ground that it compels cash payment despite available credit. The rule remains in force and the practical defence is the exceptions.
In this cluster
- Input tax credit under GST: the complete 2026 position
- Section 16(2)(c): can your ITC be denied because the supplier did not pay tax?
- Section 16(4) time limit for claiming ITC: what survives after the amnesty
- GSTR-2A and 2B mismatch notices: how to answer without conceding
- Blocked credits under Section 17(5): the clause by clause map
- Safari Retreats: what the Supreme Court decided on ITC for construction, and what Parliament then undid
- ITC on canteen, transport, insurance and other employee benefits
- ITC reversal under Rules 42 and 43: working the formula correctly
- Rule 37: ITC reversal when you do not pay your supplier within 180 days
- Rule 37A: reversal where your supplier did not file its GSTR-3B
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.