We are trying to downgrade user license from unlimited to 10000. Deactivating users will reduce the valid user license limit?
Yes, the license limit count only active users.
You can either deactivate the users, or you can also remove them from the jira-users group, that should also help getting the numbers down. If you need bulk deactivation, check out the User Deactivator for JIRA plugin from Riada: https://marketplace.atlassian.com/plugins/com.riadalabs.jira.plugins.userdeactivator.
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