How Rule 86B of CGST Rules Limits Credit Use in 2026

Last updated: 26 October 2026

Quick Answer: Rule 86B of CGST Rules, 2017 caps credit-ledger payment at 99% of a month's output tax. It applies when the month's taxable supply, excluding exempt and zero-rated supply, exceeds ₹50 lakh, unless one of six exceptions applies or the Commissioner removes it. HSAG Consulting's GST team can check each month's position against the cap alongside the returns it files.

Rule 86B of CGST Rules, 2017 limits how much of the amount available in the electronic credit ledger a registered person can use to discharge output tax. It was inserted with effect from 1 January 2021 by Notification No. 94/2020-CT dated 22 December 2020, as the text of the rule on the CBIC portal records. Since 1 October 2022 the rule has rested on section 49(12) of the Central Goods and Services Tax Act, 2017, which the Finance Act, 2022 inserted after the rule came into force. That sub-section allows a ceiling on the share of output tax, under that Act or the Integrated Goods and Services Tax Act, 2017, that can be paid from the credit ledger.

However, the applicability of Rule 86B to the period before the insertion of Section 49(12) i.e., prior to October 2022 has been a point of debate as Rule 86B lacked a corresponding empowering provision in the parent Act.

Which months trigger the 1% cash payment?

The restriction applies in any month 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 cannot use the amount available in the electronic credit ledger to discharge output tax in excess of 99% of that tax liability. The threshold is tested month by month, so one large month can trigger the rule even if the rest of the year stays below ₹50 lakh.

In practice, this 1% cash payment rule in GST sets a floor on cash outflow. If output tax for the month is ₹10,00,000, at most ₹9,90,000 can be paid from the credit ledger and at least ₹10,000 must come from the electronic cash ledger. These figures only illustrate the 99% and 1% split.

How is the 1% cash payment computed?

The computation works on the total output tax liability of the month, not on the credit balance. The steps are:

1. Add the month's output tax liability under the CGST Act and the Integrated Goods and Services Tax Act, 2017. State or Union territory tax is paid under that State's or Union territory's own GST law, so check the matching restriction in that law for the State or Union territory share.
2. Compute 99% of that liability. This is the most that can be discharged by debiting the electronic credit ledger.
3. Pay the remainder, at least 1%, through the electronic cash ledger. The rule restricts credit use, so the balance must be paid in cash.

What are the Rule 86B exceptions?

The proviso to Rule 86B lists the situations in which the restriction does not apply, as clauses (a) to (f). Each is a separate route out of the 1% requirement:

• Income tax paid, clause (a): The payer can be the person itself, or its proprietor, karta or managing director. It can also be any of its two partners, whole-time directors, members of the managing committee of associations or board of trustees, as the case may be, who have discharged more than ₹1 lakh of income tax under the Income-tax Act, 1961 in each of the last two financial years. Only financial years for which the time limit to file the return of income under section 139(1) of that Act has expired count.
• Refund on zero-rated supplies, clause (b): The person has received a refund of unutilised input tax credit of more than ₹1 lakh in respect of zero-rated supplies made without payment of tax in the preceding financial year.
• Refund on an inverted duty structure, clause (c): The person has received a refund of unutilised input tax credit of more than ₹1 lakh in respect of inverted duty tax structures (i.e. tax rate on inputs is higher than the rate on output supplies) in the preceding financial year.
• Cumulative cash payment, clause (d): The person has discharged output tax through the electronic cash ledger for more than 1% of the total output tax liability, applied cumulatively, up to that month in the current financial year.
• Government and public bodies, clause (e): The person is a Government Department, a Public Sector Undertaking, a local authority or a statutory body.
• Goods taxed on retail sale price, clause (f): Inserted with effect from 1 February 2026 by Notification No. 20/2025-CT dated 31 December 2025. It states that a registered person other than a manufacturer is exempted, but only for goods listed in rule 31D on which the supplier has paid tax on the basis of retail sale price. Rule 31D lists only pan masala and specified tobacco and nicotine products, so other goods sold at a printed retail price fall outside this clause.

Can the Commissioner remove the restriction?

Yes. The second proviso allows the Commissioner, or an officer authorised by him in this behalf, to remove the restriction after such verifications and such safeguards as he may deem fit. The rule does not prescribe a form, a time limit or a list of verifications for this power. The exceptions in clauses (a) to (f) need no order: where one of them is met, the restriction does not apply.

How does Rule 86B of CGST Rules differ from Rule 86A?

This restriction turns on the size of taxable supplies each month, while Rule 86A is an officer-driven block. Under Rule 86A, the Commissioner or an authorised officer not below the rank of Assistant Commissioner, having reasons to believe that credit was fraudulently availed or is ineligible, may disallow the debit of an equivalent amount from the credit ledger. The restriction under Rule 86A ceases after one year. The 1% restriction under Rule 86B needs no officer action and no allegation of fraud.

What happens if a business breaches the 99% ceiling?

If a registered person uses credit beyond the 99% ceiling, the department can treat the cash shortfall as tax not paid. Under section 50(1) of the CGST Act, 2017, a person who fails to pay tax within the prescribed period pays interest, at a notified rate not exceeding 18%, for the period the tax remains unpaid. Section 49(7) of the same Act requires all liabilities of a taxable person to be recorded and maintained in an electronic liability register.

How should a business plan for Rule 86B of GST?

A business crossing ₹50 lakh of taxable supplies in any month should plan its cash flow around the 1% requirement before the return is due. Practical steps include:

1. Track taxable supply each month against the ₹50 lakh threshold, excluding exempt and zero-rated supplies.
2. Check clause (a) early: confirm whether the person or an individual the clause names, such as the managing director, paid more than ₹1 lakh as income tax in each of the last two financial years. Only years whose section 139(1) filing time limit has expired count.
3. Monitor cumulative cash payments, because the restriction does not apply in a month where cash already paid in the financial year exceeds 1% of the cumulative output tax liability up to that month.
4. Keep refund records: a refund of more than ₹1 lakh of unutilised credit in the preceding financial year, on zero-rated supplies or an inverted duty structure, is another exception.
5. Budget the cash component of GST in months where the ceiling applies, so the return is not filed with a shortfall.
6. Write to the Commissioner where no exception applies: no form is prescribed, so a letter can set out the verifications and safeguards the business is able to offer under the second proviso.

Common Mistakes With Rule 86B

• Counting exempt or zero-rated supplies towards the ₹50 lakh threshold, which overstates the trigger.
• Assuming the rule applies all year once one month crosses ₹50 lakh, when each month is tested on its own.
• Ignoring the cumulative cash exception in clause (d) and paying 1% in cash every month when earlier cash payments in the same financial year already exceed 1% of the cumulative liability.
• Overlooking the retail sale price exception for traders in pan masala and the tobacco and nicotine products valued under rule 31D, available since 1 February 2026.

How can a business get help with Rule 86B credit planning?

Clauses (b) and (c) count only refunds actually received in the preceding financial year, so the timing of a refund claim bears on the exception. The refunds page of HSAG Consulting lists GST refund claims, including export and input tax credit refunds, and its Insights note on refund management for cash flow names export and inverted duty structure refunds among the claims it supports.

For the monthly cash component itself, the taxation services page lists GST return filing, reconciliations and input tax credit advisory. Monthly GST return due dates are set out in the compliance calendar.

Discuss your Rule 86B credit planning

To discuss credit utilisation under the 1% rule, leave your details on the contact page and the team will contact you.