Rule 86B in GST: When 1% of Your Tax Must Be Paid in Cash (2026)

What Rule 86B says

Rule 86B of the CGST Rules (in force from 1 January 2021) restricts the use of the electronic credit ledger. If the value of taxable supplies in a month — excluding exempt and zero-rated supplies — is more than ₹50 lakh, the registered person cannot use ITC to pay more than 99% of the output tax liability. At least 1% must be paid from the electronic cash ledger.

The aim was to stop fake-invoice networks that paid all their tax with paper credit.

Example

Item	Amount
Taxable supplies in the month	₹80,00,000 (above ₹50 lakh)
Output tax (18%)	₹14,40,000
ITC available	₹20,00,000
Maximum that ITC can pay (99%)	₹14,25,600
Minimum cash payment (1%)	₹14,400

The unused ITC is not lost — it stays in the credit ledger for later months.

Who is exempt from Rule 86B?

The restriction does not apply where:

• the proprietor, Karta, managing director, any two partners, whole-time directors or members of the managing committee each paid income tax of more than ₹1 lakh in each of the last two financial years (or the registered person itself paid that much);
• the registered person received a refund of more than ₹1 lakh of unutilised ITC in the preceding financial year — on exports/zero-rated supplies without payment of tax, or because of an inverted duty structure;
• the person has already paid more than 1% of the total output tax in cash, cumulatively, up to that month in the current financial year;
• the registered person is a Government department, public sector undertaking, local authority or statutory body.

The Commissioner (or an authorised officer) may also lift the restriction after verifying the person's credentials.

How it shows in GSTR-3B

The set-off happens in Table 6.1 (Payment of tax). Where Rule 86B applies, keep at least 1% of the liability in the "Paid in cash" column. Create a challan (PMT-06) for that amount before filing.

Common mistakes

• Counting exempt or zero-rated supplies in the ₹50 lakh test — they are excluded.
• Thinking the extra ITC lapses — it carries forward.
• Ignoring the cumulative 1% exception — if you already pay some tax in cash every month, you may be outside the rule.

Practise the set-off

GSTR-3B Table 6.1, the credit ledger and challan payment can be practised end to end on IndIaTaxSim. See also our GSTR-3B guide and cash ledger & challan guide.