Rule 86B of the Central Goods and Services Tax (CGST) Rules, 2017, restricts certain registered taxpayers from using input tax credit (ITC) to discharge their entire GST liability. If the value of taxable supplies (excluding exempt and zero-rated supplies) exceeds ₹50 lakh in a month, eligible businesses must pay at least 1% of their output GST liability in cash, even when sufficient ITC is available.
Effective from 1 January 2021, through Notification No. 94/2020-Central Tax dated 22 December 2020, the rule was introduced to curb fake invoicing and fraudulent ITC claims while allowing genuine taxpayers to continue claiming ITC subject to specified conditions and exemptions. Rule 86B applies separately to each GSTIN and does not block or reverse the ITC available in the electronic credit ledger. As of June 2026, the rule remains in force under the CGST Rules.
What is Rule 86B in GST, and when does it apply?
Rule 86B of the CGST Rules restricts certain registered taxpayers from using ITC to pay more than 99% of their output GST liability. If the rule applies, at least 1% of the output GST liability must be paid through the electronic cash ledger, even if sufficient ITC is available. This restriction applies only when the value of taxable supplies (excluding exempt and zero-rated supplies) exceeds ₹50 lakh in a month, unless the taxpayer qualifies for any of the prescribed exemptions.
Suppose your taxable supplies for April are ₹75 lakh, and your output GST liability is ₹9,00,000. You have ₹9,00,000 in ITC available.
- Maximum ITC you can use: 99% of ₹9,00,000 = ₹8,91,000
- Minimum amount to be paid in cash: 1% of ₹9,00,000 = ₹9,000
Even though you have enough ITC to cover the entire GST liability, you cannot use the full ₹9,00,000 as ITC. You must pay ₹9,000 in cash, while the remaining ₹8,91,000 can be discharged using ITC.
Note:
- The ₹50 lakh threshold is determined separately for each registered person (GSTIN).
- Rule 86B only restricts the utilisation of ITC towards output GST liability. It does not block, reverse, lapse or deny ITC. Any unutilised ITC remains available in the electronic credit ledger and can be used subject to the restrictions under Rule 86B.
Why was Rule 86B introduced?
Rule 86B was introduced to curb GST evasion involving fake invoicing and fraudulent ITC claims while protecting government revenue. Some of the key reasons behind the introduction of Rule 86B include:
- Tax evasion: Rule 86B addresses large-scale GST fraud where businesses generated fake invoices to claim fraudulent ITC and discharged almost their entire GST liability through electronic credit, with little or no cash payment.
- Fake invoicing: It discourages the creation and circulation of fake tax invoices by shell entities that claim or pass on ineligible ITC without any genuine supply of goods or services.
- Revenue protection: The restriction safeguards government revenue by ensuring a minimum cash inflow from taxpayers who fall within the prescribed turnover threshold, thereby reducing losses from fraudulent ITC utilisation.
- Fraud prevention: The provision acts as a deterrent against organised GST fraud involving bogus firms, circular trading and invoice rackets that exploit the ITC mechanism.
- Risk-based application: Rather than applying to all registered persons, Rule 86B applies only where the value of taxable supplies (excluding exempt and zero-rated supplies) exceeds ₹50 lakh in a month, while exempting taxpayers who satisfy the prescribed conditions. This helps focus the restriction on businesses with a relatively higher risk of ITC-related fraud.
Who is exempt from Rule 86B?
A registered person is exempt from the Rule 86B restriction if they satisfy any one of the prescribed conditions under the CGST Rules. The exemption applies in the following cases:
Income tax
Rule 86B does not apply if any one of the following persons has paid more than ₹1 lakh as income tax in each of the last two financial years for which the due date for filing the income tax return under Section 139(1) of the Income-tax Act has expired:
- The registered person (where applicable)
- Proprietor
- Karta of a Hindu Undivided Family (HUF)
- Managing Director
- Any two partners (in a partnership firm)
- Whole-time Directors
- Members of the Managing Committee (for associations)
- Board of Trustees (for trusts)
Refund recipients
Rule 86B does not apply if the registered person received a GST refund exceeding ₹1 lakh in the preceding financial year on account of:
- Unutilised ITC relating to zero-rated supplies made without payment of tax under a bond or Letter of Undertaking (LUT)
- Unutilised ITC arising due to an inverted duty structure under Section 54(3) of the CGST Act
Cash payment
A registered person is exempt if they have already discharged more than 1% of their total output tax liability in cash, cumulatively up to the relevant month in the current financial year, through the electronic cash ledger.
Government bodies
Rule 86B does not apply to the following entities, irrespective of their turnover or ITC position:
- Government Departments
- Public Sector Undertakings (PSUs)
- Local Authorities
- Statutory Authorities
Commissioner relaxation
The Commissioner, or an officer authorised by the Commissioner, may remove the restriction under Rule 86B after conducting the necessary verifications and, where appropriate, recording the reasons in writing.
Conclusion
Rule 86B does not prevent eligible businesses from claiming ITC; it only requires certain taxpayers to pay a small portion of their GST liability in cash when the prescribed conditions are met.
Understanding when the rule applies, the available exemptions and how the 1% cash payment requirement works can help businesses remain compliant and avoid unnecessary GST disputes.
With a GST-enabled business management solution like TallyPrime, businesses can accurately track turnover, monitor ITC utilisation, manage cash tax payments and simplify GST compliance throughout the year.
