Dynamics 365 API limit is a big topic. It was a bit confusing to understand the whole thing. From my understanding, there are two types of API limits. Please refer Microsoft documentation links for accurate info. This post is based on the info that I collected upto November 2020. Micorosoft might change these in the future.
1) Requests limits & allocation
This one, your system wouldn't throttle so operations can continue without issues. However there may be cost implications if you exceed the daily API limit. Might need to buy API Limit licenses( new license introduced by Microsoft). It includes most of the operations like plugins, custom workflow activity etc.
For instance, Dynamics 365 Enterprise application user license has a limit of 20000 API requests per 24 hours
More details are in the below link.
2) Service Protection API limits
This one , your system would throttle if you exceed this sliding window limit( 5minutes). So it is necessary that a retry mechanism should be in place ( For both connection types- organisation service SOAP Api and CRM Web Api) It excludes plugins, custom workflow activity. It is explained in the below link.
"The service protection API limits are evaluated within a 5 minute (300 second) sliding window. If any of the limits are exceeded within the preceding 300 seconds, a service protection API Limit error will be returned on subsequent requests to protect the service until the Retry-After duration has ended."
|Limit per web server
|Number of requests
|The cumulative number of requests made by the user.
|6000 withing 5min sliding window
|The combined execution time of all requests made by the user.
|20 minutes (1200 seconds)
|Number of concurrent requests
|The number of concurrent requests made by the user