---
title: "Rule 86B Under GST: ITC Restrictions Explained | Busy"
description: "Learn all about Rule 86B under GST and its ITC utilization restrictions in the electronic credit ledger. Simplify compliance with Busy software. Click to know m"
canonical: "https://busy.in/gst/everything-you-need-to-know-about-gst-rule-86b-limitations-on-itc-utilisation-in-electronic-credit-ledger/"
author: "Madan Murari"
published: "2023-04-03T05:49:12.000Z"
category: "GST"
---

-   Rule 86B limits large taxpayers from using more than 99% of their Input Tax Credit (ITC) for GST payments, requiring at least 1% to be paid in cash.
-   The rule targets businesses with over ₹5 crores turnover in the previous financial year to prevent fake ITC claims and tax evasion.
-   Before Rule 86B, businesses could freely use their ITC balance to pay GST without any restrictions, as long as the claims were valid.
-   Exceptions to Rule 86B include individuals or entities who have paid significant income tax, obtained certain refunds, or are government bodies.
-   The rule aims to stop fraudulent invoices and ensure tax compliance, affecting only large taxpayers with monthly supplies exceeding ₹50 lakh.

# All About Rule 86B Under GST: Restriction on ITC Utilisation In Electronic Credit Ledger

Rule 86B puts a cap on how much of your GST liability you can pay through Input Tax Credit in the electronic credit ledger. In simple words, once you cross a certain turnover in a month, you **must pay at least a small part of your GST in cash**.

This guide explains:

-   When Rule 86B applies and what “taxable supply” means for the threshold
-   Simple numeric examples so business owners and CAs can understand the 1% rule
-   Practical compliance strategies and how this rule affects cash flow planning

## What is the restriction imposed under Rule 86B?

Rule 86B, introduced by the GST Council, imposes a restriction on the usage of ITC for taxpayers with a turnover of more than ₹5 crores in the preceding financial year. According to Rule 86B, such taxpayers cannot use more than 99% of their available ITC for tax payments. This means that at least 1% of the tax liability must be paid in cash, preventing businesses from completely relying on ITC. This rule was introduced to curb the misuse of ITC and ensure tax compliance, making businesses more accountable for utilizing ITC responsibly.

## How was ITC utilization allowed before Rule 86B?

Before Rule 86B was introduced,  [**Input Tax Credit**](https://busy.in/gst/input-tax-credit/)  (ITC) could be utilized freely against the output tax liability. Businesses could use the available ITC balance to pay GST on their sales without any restrictions. There was no specific limit on how much ITC could be used in one go. This allowed businesses to offset their tax liability by using the full ITC available in their electronic credit ledger. The only condition was that the credit claimed was valid, i.e., it should match the invoices, and the supplier should have filed  [**GST returns**](https://busy.in/gst/gst-returns/) . If these conditions were met, ITC could be used without restrictions.

**Also Check-Out Insights on –**  [**Transitioning To GST**](https://busy.in/gst/transitioning-to-gst/)

## **Clear Threshold Definition — What Counts as “Taxable Supply” for Rule 86B?**

Rule 86B does **not** apply to every taxpayer automatically. It starts working only after a clear turnover condition is met.

### **Basic threshold condition**

Rule 86B applies when **both** these conditions are met in a tax period (month):

1.  The **value of taxable supplies** (other than exempt and zero rated supplies) in a month
2.  **Exceeds ₹50 lakh**

If this happens, then **at least 1% of the GST liability** for that month must be paid **in cash** (through electronic cash ledger). The balance 99% can be paid using ITC from the electronic credit ledger.

### **What is included in “taxable supply” for the ₹50 lakh limit?**

For this threshold, you generally **include**:

-   Normal **intra state and inter state taxable outward supplies**
-   B2B and B2C sales on which GST is charged
-   Deemed supplies and other taxable charges included in turnover

You **exclude** from the threshold calculation:

-   **Exempt supplies** (where no GST is leviable)
-   **Zero rated supplies** like exports and supplies to SEZ with payment of tax
-   Inward supplies liable to **reverse charge** (because those are not outward supplies)

Important: The limit is checked **every month**, not once a year. A taxpayer may be covered in some months and not in others, depending on monthly taxable turnover.

### **Key exceptions where Rule 86B does not apply**

Even if the ₹50 lakh condition is met, the rule has several **built in relaxations**, for example (summary level):

-   If the proprietor, partner, Karta, managing director or whole time director has paid **a minimum specified amount of income tax** in each of the last two years.
-   If the registered person has received significant **refunds on account of exports/zero rated or inverted duty structure** in the preceding financial year.
-   Certain categories like **government departments, PSUs, local authorities and statutory bodies**.
-   Where the registered person has already discharged **more than 1% of output tax liability in cash** in the previous financial year.

Because of these carve-outs, many compliant businesses and CAs may rarely see Rule 86B actually restrict ITC in practice, but they must still be aware of it.

## **Applicability of Rule 86B under GST**

Rule 86B does not apply to every GST registered person. It mainly targets cases where the taxable value of outward supplies in a month crosses a specific limit.

In simple words, Rule 86B applies when:

-   The taxable value of outward supplies in a month is more than fifty lakh rupees
-   While checking this limit, exempt supplies and zero rated supplies are not counted
-   The check is done month by month before filing the return for that month

If in a particular month your taxable outward supplies are less than fifty lakh rupees, Rule 86B does not apply for that month, even if your annual turnover is very high.

If in another month the taxable value crosses fifty lakh rupees, you must apply the one percent cash payment rule on the tax liability for that month, subject to the exceptions given in the rule.

## **How to calculate the turnover limit for Rule 86B**

While checking whether the fifty lakh limit is crossed in a month, it is important to be clear about what to include and what to exclude.

You should include:

-   Taxable outward supplies made within India that are liable to GST
-   Supplies made to regular domestic customers, dealers and distributors

You should not include:

-   Exempt supplies
-   Zero rated supplies such as exports or supplies to special economic zone units without payment of tax
-   Supplies which are completely outside the scope of GST

The calculation is done on the value of supplies, not on the tax amount.

Once you confirm that taxable outward supplies in a month are more than fifty lakh rupees, you then check whether you fall under any exception. If no exception is available, at least one percent of the output tax liability for that month must be paid in cash and the balance can be paid through input tax credit.

## **Detailed List of Exemptions Under Rule 86B**

Rule 86B allows certain exceptions, as mentioned below:

1.  If the individuals listed below paid more than Rs. 1 lakh in income tax pursuant to the Income Tax Act, 1961
2.  -   The registered person
    -   Proprietor, Managing Director, or Karta of the Registered Person
    -   Any partners, full-time directors, or any other individual as the case may be.
3.  If the registered person has previously obtained a refund for export under LUT or because of an  [**inverted tax structure**](https://busy.in/gst/what-is-an-inverted-duty-structure-under-gst/)  totalling more than Rs. 1 lakh.
4.  If the registered person in question has paid all of his output tax liability through an electronic cash ledger that cumulatively exceeds 1% of the outstanding output tax liabilities up to the relevant month in the current fiscal year.
5.  If the registered individual in question is any of the following:
6.  -   Government department
    -   Public sector initiative
    -   Local authority
    -   Statutory Authority

**Also, Get Familiar With –**  [**Reverse Charge Mechanism in GST**](https://busy.in/gst/all-about-reverse-charge-mechanism-rcm-under-gst/)

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## **When can the department relax the Rule 86B restriction**

Rule 86B is designed to curb fake input tax credit, but the law also recognises that genuine businesses may face hardship in some cases.

The commissioner or an authorised officer can relax the restriction in suitable cases. In simple terms:

-   The registered person can apply to the jurisdictional officer, explaining why the one percent cash payment rule is causing genuine difficulty
-   The officer can look at past compliance behaviour, filing track record and pattern of tax payments
-   If the officer is satisfied that the risk of fake credit is low and the business is genuine, the restriction can be removed, fully or partly, subject to conditions mentioned in the order

## **Numeric Examples for Easy Understanding**

Let us look at simple examples to see how Rule 86B works when it is applicable. We will assume the threshold and basic conditions are met and no exemption applies.

### **Example 1: Domestic sales above ₹50 lakh, heavy ITC balance**

-   Month’s taxable outward supplies (excluding exempt, zero rated): **₹80 lakh**
-   Applicable GST rate (for simplicity): **18%**
-   Output tax liability = 18% of ₹80 lakh = **₹14,40,000**
-   ITC available in electronic credit ledger = **₹20,00,000**

Without Rule 86B, you could simply set off the **entire ₹14,40,000** from ITC and pay **zero** in cash.

With Rule 86B in force:

-   You must pay **at least 1% of output tax liability in cash**
-   1% of ₹14,40,000 = **₹14,400** (minimum cash payment)
-   You can use ITC for the balance:
-   -   From ITC: ₹14,40,000 – ₹14,400 = **₹14,25,600**
    -   In cash: **₹14,400**

So even with a large ITC balance, you **cannot pay 100% through ITC** in this month if Rule 86B applies.

### **Example 2: Turnover below threshold – Rule 86B not triggered**

-   Month’s taxable outward supplies: **₹45 lakh**
-   Output tax liability at 18% = **₹8,10,000**
-   ITC available = **₹9,00,000**

Here, taxable supplies do **not exceed ₹50 lakh**.

-   Rule 86B is **not applicable**.
-   You can use ITC to pay the **full ₹8,10,000**, if other conditions are met.
-   No minimum cash payment is forced by this rule.

### **Example 3: Turnover > ₹50 lakh but exemption applies**

-   Month’s taxable outward supplies: **₹70 lakh**
-   Output tax liability: **₹12,60,000**
-   ITC available: **₹13,00,000**
-   Proprietor has paid **sufficient income tax** in the past two years and fulfills the specific condition given in the rule.

Even though the threshold is crossed:

-   Rule 86B **does not restrict ITC** because the taxpayer falls under an **exempt category**.
-   Full liability of ₹12,60,000 can be set off from ITC.

In real advisory work, CAs should **always check exemptions** before forcing clients to arrange extra cash.

## Effect of Rule 86B on Firms and Working Capital

After examining Rule 86B, it is clear that the above rule only applies to large taxpayers. Small and micro businesses are not affected by this rule.

The aim of implementing this rule is to prevent the issuance of fake invoices that claim fraudulent input tax credits to discharge liabilities. It also prevents scammers from claiming high turnovers when they have none.

Further clarification from the CBIC states that 1% is to be computed on the tax liability in a month and the turnover of the particular month.

##### Illustration

Let’s use the following example to understand it better:

A taxpayer named Mr A sold products for Rs. 1 crore at a 12% tax rate. According to this rule, he can fulfil his obligation in this situation up to 99% through ITC and pay Rs. 12,000 in cash.

## **Practical examples of Rule 86B in different situations**

Along with the illustration already given, you can understand Rule 86B better with a few more simple examples.

### **Example one: Rule 86B does not apply**

A trader has the following supplies in a month:

-   Taxable domestic supplies: forty three lakh rupees
-   Exempt supplies: ten lakh rupees
-   Export supplies without payment of tax: twelve lakh rupees

For Rule 86B, only the taxable domestic supplies are considered. The taxable value is forty three lakh rupees, which is below fifty lakh.

In this month, Rule 86B does not apply. The trader can use eligible input tax credit to pay the full output tax, subject to normal ITC conditions.

### **Example two: Rule 86B applies but exception is available**

A manufacturer has taxable domestic supplies of eighty lakh rupees in a month. The output tax liability for that month is twelve lakh rupees. On the face of it, Rule 86B applies because the taxable supplies for the month exceed fifty lakh rupees.

However, in the earlier financial year the business received a refund of more than one lakh rupees due to exports under a letter of undertaking or due to inverted duty structure.

Because this condition is met, the manufacturer falls under one of the exceptions. So even though the taxable value crosses fifty lakh rupees, Rule 86B does not restrict the use of input tax credit for this taxpayer in that month.

## **Compliance Strategies & Cash Flow Implications**

Rule 86B is not a very high percentage restriction, but it directly affects **cash flow planning**, especially for ITC rich businesses.

### **Cash-flow impact**

1.  **Minimum cash outgo every applicable month**
2.  -   Businesses cannot rely on **ITC alone** to meet 100% of tax liability if Rule 86B applies.
    -   Even heavily credit positive entities must arrange **at least 1% of output tax liability in cash**.
3.  **Extra working capital requirement**
4.  -   ITC sitting in the electronic credit ledger **cannot be used for anything else**.
    -   Rule 86B effectively pushes the business to keep a buffer cash balance in its GST cash ledger or bank account.
5.  **Effect on pricing and vendor terms**
6.  -   If cash gets tight, businesses may delay vendor payments or look for advances from customers.
    -   CAs should factor this into **working capital forecasts and pricing discussions**, especially in sectors with thin margins and high GST.

### **Practical compliance strategies**

To handle Rule 86B smartly, consider these steps:

1.  **Monthly monitoring of taxable turnover**
2.  -   Track taxable supplies (excluding exempt and zero rated) every month.
    -   If values are moving close to **₹50 lakh**, plan for the possibility that Rule 86B may apply in that month.
3.  **Check if client fits into any exemption**
4.  -   Before arranging extra cash, see whether your client:
    -   -   Has paid sufficient **income tax** in previous years, or
        -   Has received significant **refunds** (exports/inverted duty), or
        -   Falls into a category for which the rule is not applicable.
5.  **Pre plan cash requirement**
6.  -   Take projected output tax liability and calculate **1% of that amount**.
    -   Ensure that this minimum cash portion is built into monthly **cash flow budgets**.
7.  **Use ITC efficiently for remaining liability**
8.  -   Beyond the 1% cash rule, continue to apply ITC to the fullest allowed extent.
    -   Keep ITC reconciliations tight (GSTR 3B vs GSTR 2B and books) so that you do not lose usable credit due to mismatches.
9.  **Discuss business model changes if Rule 86B hits regularly**
10.  -   If the client is repeatedly impacted by Rule 86B and is still under cash stress, review:
     -   -   Payment terms with customers and vendors
         -   Inventory cycles
         -   Whether they can restructure some parts of the business to ease working capital pressure

### **Role of a CA and accounting software**

A CA should:

-   Build Rule 86B checks into **monthly GST review** routines.
-   Use accounting / GST software that:
-   -   Shows **monthly taxable turnover** clearly,
    -   Calculates projected tax liability, and
    -   Highlights months where **Rule 86B might apply**.

This way, the client is not surprised at the time of filing GSTR 3B and can plan cash in advance instead of rushing to arrange funds at the last moment.

## **Compliance checklist for businesses under Rule 86B**

To avoid last minute issues while filing GSTR 3B, businesses can follow a simple month wise checklist.

**Step one: Check taxable supplies for the month**
Calculate the taxable value of outward supplies for the month, excluding exempt and zero rated supplies, and see whether it is more than fifty lakh rupees.

**Step two: Compute output tax liability**
Prepare a monthly summary of outward tax, taking into account all taxable supplies and any credit notes or debit notes.

**Step three: Test Rule 86B applicability**
If taxable supplies for the month are more than fifty lakh rupees, treat Rule 86B as applicable, subject to the exceptions. If they are below this limit, Rule 86B does not apply for that month.

**Step four: Check if any exception is available**
Review whether any of the following conditions are satisfied:

-   Income tax of more than one lakh rupees has been paid in each of the last two years by the registered person or by key persons such as proprietor, karta, managing director or partner
-   A refund of more than one lakh rupees was received in the previous year on account of exports or inverted duty structure
-   Cumulative tax paid in cash in the current financial year already exceeds one percent of total output tax liability
-   The registered person is a government department, public sector undertaking, local authority or statutory body

If any one of these conditions is met, the restriction under Rule 86B does not apply for that month.

**Step five: Decide the minimum cash payment**
If Rule 86B applies and no exception is available, calculate one percent of the output tax liability for that month. This is the minimum amount that must be paid in cash through the electronic cash ledger.

**Step six: Maintain working papers**
Keep a simple monthly working paper showing:

-   Turnover used for the fifty lakh test
-   Whether any exception applies
-   How the one percent cash amount was computed

These records will help during audits and departmental enquiries.

## **Common mistakes to avoid under Rule 86B**

Many businesses run into trouble under Rule 86B because of small practical mistakes. Some frequent errors are:

-   Checking the fifty lakh limit on total turnover including exempt and zero rated supplies instead of only taxable supplies
-   Treating the fifty lakh limit as a yearly test and not checking it separately for each month
-   Forgetting that cash payments made in earlier months can help satisfy the one percent condition and may give an exception
-   Ignoring the effect of large credit notes or debit notes while computing taxable value and tax liability for the month
-   Not keeping a clear breakup of domestic taxable supplies, exempt supplies and exports in internal reports

By avoiding these mistakes, businesses can reduce the risk of notices, interest demands and disruption to working capital.

## **How BUSY helps you stay compliant with Rule 86B**

BUSY helps businesses stay on top of Rule 86B without extra manual work.

With BUSY you can:

-   Track month wise taxable turnover separately from exempt and export turnover using flexible sales and GST reports
-   View clear summaries of output tax liability and input tax credit for every tax period
-   Reconcile GSTR 3B figures with the electronic credit ledger and cash ledger so you can see how much tax is being paid through ITC and how much in cash
-   Plan cash flows better by knowing in advance when the one percent cash payment requirement is likely to apply
-   Use audit trails and user wise logs to support your workings if the department asks for details

This way, BUSY does not only help you file accurate GST returns, it also gives you better control over cash outflow and compliance under Rule 86B.

## Conclusion

Rule 86B has been introduced to stop fake  [**claims for input tax credit**](https://busy.in/gst/how-to-claim-itc-in-india/) . The rule affects only large taxpayers who have minimum taxable supplies of Rs. 50 lakhs in a month. Yes, this rule will also affect the large taxpayers who legitimately pay their tax dues, making it a little difficult for them, but the Government’s ultimate goal is to prevent fake invoices and eventually stop tax evasion.

## About the author

**Madan Murari**

Hi there! I’m a Chartered Accountant with over 20 years of experience in financial accounting and a passion for writing. I enjoy simplifying complex topics like GST and income tax, believing that learning should be a lifelong journey. I'm here to share insights and make financial matters easier for everyone!

## Frequently asked questions

### Who is required to comply with Rule 86B under GST?

Businesses with monthly taxable supplies exceeding ₹50 lakh must follow Rule 86B. It restricts using more than 99% of the input tax credit (ITC) for GST payment, requiring at least 1% of the liability to be paid in cash.

### What is the primary objective of Rule 86B in the GST framework?

The main goal of Rule 86B is to prevent fake ITC claims and tax evasion. It ensures businesses pay some tax in cash to maintain transparency and encourage genuine compliance with GST rules.

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