Last updated: 7 September 2026. If the value of your taxable supplies crosses ₹50 lakh in a single month, Rule 86B of the CGST Rules stops you settling that month's GST out of input tax credit alone. Credit can cover 99% of the output tax liability; the last 1% has to leave the electronic cash ledger, however large your credit balance. GSTR-3B for the August 2026 tax period is due on Sunday 20 September 2026, and this rule bites at the payment rather than the return.
Applicability Note: This guide is based on GST provisions applicable as of 7 September 2026, including Rule 86B of the CGST Rules as amended with effect from 1 February 2026. Always verify the current position on gst.gov.in or with a GST professional before taking action.
Who Should Care?
- Any registered person whose taxable supplies exceed ₹50 lakh in a month — one heavy month pulls you in even if the year is modest
- Traders and distributors on thin margins, where credit almost fully covers output tax and the cash ledger is normally untouched
- Newer businesses, which cannot use the income-tax exit in clause (a) because it looks back two full financial years
- Dealers other than manufacturers in goods valued on retail sale price — clause (f), added from 1 February 2026, carves them out for those goods only
1. What Rule 86B Actually Says
The rule is short, and the operative words sit in its main text rather than in any proviso:
"Notwithstanding anything contained in these rules, the registered person shall not use the amount available in 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" — Rule 86B, CGST Rules, 2017, inserted with effect from 1 January 2021 by Notification No. 94/2020-Central Tax dated 22 December 2020
Read it as a ceiling on the credit ledger, not a tax. Nothing extra is payable. What changes is where the money comes from: 1% of the month's output tax is deposited in cash, and the credit you could not use carries forward.
The opening words are narrower than they look. Notwithstanding anything contained in these rules is confined to the rules — it displaces the ordinary credit-utilisation position elsewhere in them, not anything in the Act. Section 49(4) lets credit be used towards output tax subject to such conditions and restrictions as may be prescribed; whether Rule 86B is validly prescribed under it is the question section 7 comes back to.
2. The ₹50 Lakh Test Is Monthly, and It Is Not Turnover
Three things about the threshold are routinely misread.
It is a monthly test, not an annual one. The rule asks whether the value of taxable supply "in a month" exceeds ₹50 lakh. Cross it in August and August is restricted; fall below in September and September is not. No annual lock-in, no carry-over.
It is not aggregate turnover. The annual measure that drives e-invoicing, HSN digits and QRMP eligibility is aggregate turnover under Section 2(6) — the PAN-wide figure the portal reports back to you as your AATO. Rule 86B looks only at the value of taxable supply in the month.
Two categories come out of the count. Exempt supplies are excluded, and so are zero-rated supplies. An exporter billing ₹2 crore of zero-rated supplies and ₹30 lakh of domestic taxable supplies in the same month is under ₹50 lakh here, and outside the rule for that month.
3. What "Output Tax" Means Here
The 99% cap is measured against "his liability towards output tax", and Section 2(82) of the CGST Act defines output tax as the tax chargeable on taxable supplies made by the person or his agent, "but excludes tax payable by him on reverse charge basis".
Reverse charge liability is therefore outside the calculation. That is no concession: it already has to be paid in cash, because the credit ledger under Section 49(4) can only be used towards output tax. The same logic keeps interest, late fee and penalty out of the ledger. The 1% is computed on forward-charge output tax alone.
The trigger and the cap are not the same quantity, which is easy to miss. An outward supply on which your recipient pays under reverse charge still counts towards the ₹50 lakh trigger — it is a taxable supply, neither exempt nor zero-rated — while producing no output tax of yours for the 1% to bite on. The threshold is measured on supply value, the cap on tax.
4. Six Ways Out, and One Discretionary Release
The first proviso lists five exceptions, and a sixth was added from 1 February 2026. Any one switches the restriction off.
| Clause | What it requires | Who it usually fits |
|---|---|---|
| (a) | More than ₹1 lakh paid as income tax under the Income-tax Act, 1961 in each of the last two financial years for which the Section 139(1) filing deadline has expired — by the registered person or, as the case may be, its proprietor, karta, managing director, any two partners, whole-time directors, members of the managing committee or board of trustees | Established businesses and promoters |
| (b) | A refund of more than ₹1 lakh received in the preceding financial year of unutilised credit on zero-rated supplies — clause (i) of the first proviso to Section 54(3) | Exporters and SEZ suppliers |
| (c) | A refund of more than ₹1 lakh received in the preceding financial year of unutilised credit on account of inverted duty structure — clause (ii) of the same proviso | Inverted-duty manufacturers |
| (d) | Output tax already discharged in cash beyond 1% of total output tax liability, applied cumulatively, up to that month in the current financial year | Anyone paying cash all year |
| (e) | The registered person is a Government Department, a public sector undertaking, a local authority or a statutory body | Public sector |
| (f) | Added from 1 February 2026: a registered person other than a manufacturer is exempted "only in respect of goods specified under rule 31D, on which the tax has been paid by the supplier on the basis of retail sale price" | Non-manufacturer dealers in pan masala and tobacco products |
Clause (d) is worth planning around. It is cumulative and looks at the year to date, so a business that paid meaningful cash earlier in 2026-27 may already be clear when the heavy month arrives. It is the only exit you can create for yourself.
Clause (f) is new and narrower than it looks. It arrived with the instrument that introduced retail-sale-price valuation for notified goods — Notification No. 20/2025-Central Tax dated 31 December 2025, effective 1 February 2026 — and exempts non-manufacturers only in respect of those goods, not across the whole business.
Separately, the second proviso lets the Commissioner, or an officer authorised by him, remove the restriction "after such verifications and such safeguards as he may deem fit" — discretionary relief on application, worth pursuing where the cash impact is large and recurring.
5. What It Costs You This Month
Take a distributor with ₹80 lakh of taxable supplies in August 2026 — none of it exempt or zero-rated — all at 18%, and ₹14.8 lakh of eligible credit, subject to the four conditions in Section 16. Assume none of the six exits applies.
| Step | Amount |
|---|---|
| Output tax for August 2026 (₹80,00,000 at 18%) | ₹14,40,000 |
| Maximum that credit can discharge (99%) | ₹14,25,600 |
| Minimum payable in cash (1%) | ₹14,400 |
| Credit left unused, carried forward | ₹54,400 |
₹14,400 is small in isolation; repeated monthly it is roughly ₹1.7 lakh a year of working capital locked behind credit you already own. It is a floor for a taxpayer outside all six exits, not a universal toll — a business already past 1% cumulative cash for the year falls under clause (d).
Timing matters more than the amount. Cash has to be in the electronic cash ledger before you offset, and GSTR-3B for August is due on Sunday 20 September 2026 — a Sunday does not move a GST due date. Over-the-counter deposits are capped at ₹10,000 per challan per tax period under Rule 87(3) and need an open bank counter. Clear the cash ledger by Friday 18 September and the weekend stops mattering.
6. What Happens If You Get It Wrong — and One Thing That Is No Longer True
The exposure is at the registration. Rule 21(g) makes a registration liable to be cancelled where the person "violates the provision of rule 86B" — inserted by the same Notification No. 94/2020-Central Tax dated 22 December 2020 that created the rule, alongside the other grounds in our guide to cancellation and revocation.
That ground has been used, and a High Court has pushed back on how. In M/S A.M. Enterprises v. State of Himachal Pradesh & Ors. (Himachal Pradesh High Court, CWP No. 1517 of 2024, decided 20 September 2024), a registration had been cancelled on three grounds: Rule 21(g) for the Rule 86B breach, with Rule 21(b) and Rule 21(e). The court called cancellation for the Rule 86B breach "a disproportionate punishment", held the action on the other two arbitrary and in breach of Article 14, and directed restoration. Read it for the proportionality point, not as a licence — the obligation was not disturbed.
Now the part most older guides get wrong. Rule 59(6) once carried a clause (c) barring a Rule 86B-restricted person from furnishing GSTR-1, or using the Invoice Furnishing Facility, where the previous period's GSTR-3B was unfiled. It was live for exactly one year, through 2021. That clause was omitted with effect from 1 January 2022 by Notification No. 35/2021-Central Tax dated 24 September 2021, and the current rule renders it as a blank. What survives has nothing to do with Rule 86B: under clause (a) a monthly filer cannot furnish GSTR-1 while the preceding month's GSTR-3B is unfiled, and clause (b) does the same for quarterly filers. Guides written in 2021 still describe a Rule 86B filing block that has not existed for over four years.
7. The Validity Question, Stated Plainly
Rule 86B is in force and no court has struck it down. A question about its foundation has been raised and left open, and a reader about to pay cash deserves both halves.
Rule 86B was made under the general rule-making power in section 164 of the CGST Act, which is what Notification No. 94/2020-Central Tax dated 22 December 2020 recites, and it took effect on 1 January 2021. The two provisions that speak specifically to restricting the credit ledger arrived later: Section 49(4) gained the words "and restrictions", and a new Section 49(12) empowered the Government, on the Council's recommendations, to "specify such maximum proportion of output tax liability … which may be discharged through the electronic credit ledger". Both took effect on 1 October 2022 — section 110 of the Finance Act 2022 (No. 6 of 2022), brought into force by Notification No. 18/2022-Central Tax dated 28 September 2022 — twenty-one months after the rule they describe.
In A.M. Enterprises, the court said it found force in the argument that Rule 86B "has no statutory backing and appears to be ultra vires the provisions of the HPGST Act, 2017", then said in terms that it need not base its decision on that issue, and left the other issues open for consideration in an appropriate case. The observation stands and it is not a holding — and the judgment does not discuss Section 49(12) at all.
The practical reading: comply now — the rule binds and the cancellation ground is real. Whether the October 2022 amendments answer the observation is open, and not a question this article settles.
Key Takeaways
- Cross ₹50 lakh of taxable supply in a month and credit settles only 99% of that month's output tax. The other 1% is cash — no extra tax, a different source.
- The test is monthly and it is not turnover. Exempt and zero-rated supplies are excluded, so exporters often fall outside it.
- Reverse charge tax is outside the cap — Section 2(82) excludes it from output tax, and it is paid in cash regardless — but an outward supply taxed in your recipient's hands still counts towards the ₹50 lakh trigger.
- Six exits exist — income tax above ₹1 lakh in each of the last two eligible years, a zero-rated refund above ₹1 lakh last year, an inverted-duty refund above ₹1 lakh last year, cumulative cash already above 1% this year, public sector status, and from 1 February 2026 a carve-out for non-manufacturers on retail-sale-price goods. The Commissioner can also lift it on application.
- Rule 21(g) makes a breach a ground for cancelling the registration, though the Himachal Pradesh High Court set one such cancellation aside as disproportionate in September 2024.
- The old GSTR-1 block for Rule 86B taxpayers is gone — rule 59(6)(c) was omitted from 1 January 2022.
Frequently Asked Questions
Does Rule 86B apply if my annual turnover is more than ₹50 lakh?
No. The test is whether taxable supply other than exempt and zero-rated supply exceeds ₹50 lakh in a month. An annual turnover of ₹4 crore spread evenly never crosses it; one month of ₹60 lakh does.
Is the 1% calculated on turnover or on tax?
On tax. Credit is capped at 99% of the month’s output tax liability, so the cash component is 1% of that tax, not of the supply value. On ₹80 lakh of supplies at 18% it is ₹14,400, not ₹80,000.
Does Rule 86B apply to QRMP taxpayers?
The restriction operates on using the credit ledger to discharge output tax, which for a QRMP filer happens in the quarterly GSTR-3B; the monthly PMT-06 is a cash challan in any event. The ₹50 lakh test is monthly, and one large month does not by itself breach the ₹5 crore QRMP ceiling, so the two can coexist. Check your own numbers with your advisor.
What is the difference between Rule 86A and Rule 86B?
Rule 86A is an officer-driven blocking power: where an authorised officer has reasons to believe credit was fraudulently availed or is ineligible, the ledger can be blocked. Rule 86B is automatic, applies once the ₹50 lakh monthly threshold is crossed, and limits how much of an unblocked ledger you may use. Separate rules, separate triggers.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. GST rules are subject to frequent changes through notifications and circulars. Please consult a qualified tax professional or verify the current provisions on the official GST portal (gst.gov.in) before making any compliance decisions.
Have a specific question about Rule 86B, your cash ledger position, or whether one of the exits applies to you? Our GST experts can help → gstconsultancy.com