Rule 86B on utilisation of ITC

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Amit Mittal

32 Points Posted on 26 December 2024

There is an exception in Rule 86B on utilisation of ITC, which states as follows:-

If the persons mentioned below have paid more than Rs.1 lakh as Income Tax under Income Tax Act, 1961 in each of the last two financial years for which the time limit to file the income tax return under Section 139(1) of the said Act has expired:

The registered person
Proprietor, karta or Managing Director of the registered person

In my situation, the GST registered entity is a Private Limited Company, and the CEO, who is also a director on the board, pays more than ₹1 lakh in income tax per annum. In this case, am I required to pay 1% of GST via bank transfer, or can I take advantage of the exemption? I have received a notice from the department; how should I respond to it?

Replies (2)

Quick Summary

Rule 86B restricts the utilisation of Input Tax Credit (ITC) for businesses with taxable supplies exceeding Rs 50 lakh per month, requiring at least 1% of the output tax liability to be paid in cash. However, there are specific exemptions. This discussion clarifies whether a Private Limited Company, whose CEO (also a director) pays over £1 lakh in income tax annually, qualifies for the income tax exemption under this rule, and advises on responding to departmental notices.

V SUBRAMANIAM

Tax consultant

375 Points Posted on 26 December 2024

Managing director and full-time directors should have paid one lakh income tax are only exempted under rule 86b.

Aashok Kumar Sharma

Finance/Compliance Consultant

75675 Points Posted on 07 November 2026

Rule 86B in short:

• Where taxable supply value in a month exceeds Rs 50 lakh, a registered person can't use ITC to pay more than 99% of the output tax liability. At least 1% must be paid in cash.

• Exceptions include: the person (or proprietor, karta, MD, partners or whole-time directors) paid income-tax above Rs 1 lakh in each of the last 2 FYs; or received a refund above Rs 1 lakh of unutilised ITC (exports or inverted duty) in the preceding FY; or has paid more than 1% of total output liability in cash cumulatively in the current FY; or is a government department, PSU, local authority or statutory body.

• Officers can also remove the restriction after verification.

• New registrants (first year) without income-tax history don't qualify for the income-tax exception until 2 years of returns exist. The cash-payment cumulative exception still works.