Rules 307 to 311 of the Draft Income-tax Rules, 2026 prescribe the operational framework for pension or superannuation funds, focusing on the management of annuities, protection of beneficiaries’ interests, and safeguards against misuse of fund assets. Rule 307 requires trustees to provide annuities to beneficiaries either by entering into an insurance scheme with the Life Insurance Corporation of India or any recognized insurer, or by accumulating contributions and purchasing annuities at the time of retirement, death, or incapacity of the employee. However, this requirement does not apply to certain irrevocable pension funds created under specified Central Acts governing public sector banking and financial institutions. Rule 308 regulates the commutation of annuity payments by limiting lump-sum withdrawals to one-third of the annuity if the employee receives gratuity, or up to one-half where gratuity is not received, with the commuted value determined based on factors such as age, health, interest rates, and mortality tables. Rule 309 protects the independence of the fund by stating that beneficiaries have no ownership interest in the insurance policies themselves and can only receive annuity payments, while employers are barred from receiving or claiming any money from the fund. Rule 310 imposes a tax consequence if an employee assigns or charges their beneficial interest in the fund, treating the consideration received as taxable income if the assignment is not cancelled within two months after notice from the Assessing Officer. Rule 311 addresses situations where an employer’s business is wound up or discontinued, requiring trustees—subject to approval from the competent authority—to arrange annuity payments for employees or their dependents. Together, these rules establish safeguards to ensure pension funds are used exclusively for employee benefits and remain insulated from employer control or misuse.
Extract of Rules No. 307, 308, and 309, 310, 311 of Draft Income-tax Rules, 2026
Rule 307
Scheme of insurance or annuity.
(1) For the purpose of providing the annuities for the beneficiaries, the trustees shall—
(a) enter into a scheme of insurance with the Life Insurance Corporation established under the Life Insurance Corporation Act, 1956 (31 of 1956) or any other insurer as defined in section 2(58) of theIncome Tax Act, 2025, or
(b) accumulate the contributions in respect of each beneficiary and purchase an annuity from the said Life Insurance Corporation of India or any other insurer at the time of the retirement or death of each employee or on his becoming incapacitated prior to retirement :
(2) The provisions of sub-rule (1) shall not apply to a fund established or constituted, under an irrevocable trust which has its sole purpose to make payment of pension or family pension, in accordance with the rules or regulations made under the following Central Acts, namely:-
(a) the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970); or
(b) the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980); or
(c) the State Bank of India Act, 1955(23 of 1955); or
(d) the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); or
(e) the National Bank for Agriculture and Rural Development Act, 1981(61 of 1981); or
(f) the Industrial Development Bank of India Act, 1964 (18 of 1964);
(g) the Export-Import Bank of India Act, 1981(28 of 1981); or
(h) the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984); or
(i) the Small Industries Development Bank of India Act, 1989(39 of 1989); or
(j) the National Housing Bank Act, 1987 (53 of 1987)
Rule 308
Commutation of annuity.
Any payment in commutation of annuity shall not exceed—
(a) in a case where the employee receives any gratuity, the commuted value of one-third of the annuity which he is normally entitled to receive, and
(b) in any other case, the commuted value of one-half of such annuity, such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality.
Rule 309
Beneficiary not to have any interest in insurance and employer not to have any interest in fund’s moneys.
(1) No beneficiary shall have any interest in any insurance policy taken out by the trustees under the rules of a fund and he shall be entitled only to an annuity from the fund.
(2) No money belonging to the fund shall be receivable by the employer under any circumstances nor shall the employer have any lien or charge on the fund.
Rule 310
Penalty if employee assigns or charges interest in fund.
If an employee assigns or creates a charge upon his beneficial interest in a fund, the Assessing Officer shall give notice to the employee that if he does not secure the cancellation of the assignment or charge within two months of the date of receipt of the notice, the consideration received for such assignment or charge shall be deemed to be income received by him in the tax year in which the fact became known to the Assessing Officer and shall be assessed accordingly.
Rule 311
Arrangements on winding up, etc., of business.
When the employer’s business is to be closed or discontinued, the trustees must, with the prior approval of and subject to conditions imposed by the approving authority, make suitable arrangements for providing annuities to current employees, or to their widows, children, or dependents in the event of their death.
