GST Rule 86B: When You Must Pay 1% of Output Tax in Cash — and the 6 Ways Out

Rule: Rule 86B, CGST Rules 2017
Trigger: Monthly taxable supply over ₹50 lakh
Effect: Min 1% of output tax paid in cash
Escape: Six exceptions + Commissioner relief

The short version

Rule 86B caps how much of your output tax you can pay using ITC — at 99%. The remaining 1% must be paid in cash.
It kicks in only when your taxable supplies in a month exceed ₹50 lakh (exempt and zero-rated supplies are left out of that count).
There are six exceptions — if any applies, the 1% cash rule doesn't bite. Most businesses that trigger the threshold actually qualify for one.
So before you part with cash: check the exceptions first.

Rule 86B catches a lot of growing businesses by surprise. You have plenty of input tax credit sitting in your ledger, you're ready to set off your whole GST liability with it — and then you're told at least 1% has to go out in cash. The rule is real, but so are its exits. Here's exactly how it works, and the six ways out.

What Rule 86B actually says

Where a registered person's taxable supplies in a month exceed ₹50 lakh, Rule 86B restricts the use of the electronic credit ledger to 99% of the output tax liability for that month. In plain terms: at least 1% of your output tax must be discharged in cash, no matter how much ITC you're holding.

Two things are easy to get wrong about the threshold. First, it's a monthly test, not annual. Second, the ₹50 lakh is of taxable supplies excluding exempt and zero-rated supplies — so exports and exempt turnover don't push you over the line.

What the 1% actually costs

The 1% is of your output tax liability, not of turnover — so on a month's output tax of, say, ₹9 lakh, at least ₹9,000 goes in cash. It isn't a new tax; it's a cash-flow and timing requirement meant to curb fake-ITC misuse. But if you qualify for an exception, even that doesn't apply.

The six exceptions — when the 1% rule does NOT apply

₹1 lakh income tax paid (last two years)

The registered person — or its proprietor, Karta, MD, any two partners, whole-time directors, managing-committee members or trustees (as applicable) — paid more than ₹1 lakh income tax in each of the last two financial years for which the ITR due date under Section 139(1) has already passed.

Over ₹1 lakh export refund received

Received a refund of more than ₹1 lakh in the preceding FY on account of unutilised ITC on zero-rated supplies (exports) made without payment of tax.

Over ₹1 lakh inverted-duty refund received

Received a refund of more than ₹1 lakh in the preceding FY on account of unutilised ITC due to an inverted duty structure.

Already paid over 1% in cash this year

Has already discharged output tax in cash in excess of 1% of total output tax liability, taken cumulatively, up to the relevant month in the current financial year.

Government & public bodies

Government departments, PSUs, local authorities and statutory bodies are outside the restriction.

Non-manufacturers of Rule 31D goods

A registered person other than a manufacturer, dealing in goods specified under Rule 31D (such as pan masala / tobacco, valued on retail-sale-price basis on which the supplier has paid tax). The relief is for non-manufacturers of those goods.

And the Commissioner can lift it too

Beyond these six, the Commissioner (or an authorised officer) may remove the 1% cash restriction after such verification and safeguards as considered appropriate. So even a business that doesn't fit an exception has a route to relief on application.

Before you pay 1% in cash — check this

The most common mistake is paying the 1% on autopilot the moment supplies cross ₹50 lakh. In practice, a profitable business that files its income tax, or an exporter that has drawn refunds, will usually fall inside an exception — and owes nothing extra in cash. Run the exception check every month you cross the threshold, because eligibility (income-tax paid, refunds received, cumulative cash) can change year to year.

Not sure if Rule 86B applies to you this month?

efiletax can check your Rule 86B position against all six exceptions, confirm whether the 1% cash payment is actually required, and keep your ITC working for you.

Talk to our GST team

Disclaimer: This article explains Rule 86B of the CGST Rules, 2017 for general understanding and is current as at the date of publication. Application depends on your specific facts, entity type and the rule and notifications in force — verify your position before relying on an exception or making payment. This is not legal or tax advice; please consult a qualified professional. Talk to efiletax if you need help.