Rules 320 to 326 of the Draft Income-tax Rules, 2026 prescribe detailed conditions governing employee benefit funds to ensure transparency, proper management, and protection of employee interests. Rule 320 permits directors of a company to be admitted to the benefits of a fund only if they are whole-time bona fide employees and do not beneficially own more than 5% of the company’s total voting power. Rule 321 regulates ordinary annual employer contributions to the fund, requiring them to be made on a reasonable basis approved by the approving authority, taking into account the length of service of employees, and restricting such contributions to a specified percentage of each employee’s salary. Rule 322 allows employers to make initial contributions in respect of past services of employees admitted to the fund, but limits the deductible amount to a prescribed percentage of the employee’s salary for each year of past service. Rule 323 imposes a penalty if an employee assigns or creates a charge on their beneficial interest in the fund; if the assignment is not cancelled within two months of notice from the Assessing Officer, the consideration received will be treated as taxable income in the relevant tax year. Rule 324 ensures that employers have no claim, lien, or charge over fund money under any circumstances. Rule 325 requires trustees, with prior approval of the approving authority, to make satisfactory arrangements for gratuity payments to existing beneficiaries if the employer’s business is wound up or discontinued. Rule 326 further mandates that any winding up of the fund or its amalgamation with another fund must receive prior approval from the approving authority and comply with prescribed conditions.
Extract of Rules No. 320, 321, 322, 323, 324, 325, 326 of Draft Income-tax Rules, 2026
Rule 320
Admission of directors to a fund.
Where the employer is a company as defined in section 2(20) of the Companies Act, 2013, a director of the company may be admitted to the benefits of the fund only if he is a whole time bona fide employee of the company and does not beneficially own shares in the company carrying more than five per cent of the total voting power.
Rule 321
Ordinary annual contributions.
The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the approving authority having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 813% of the salary of each employee during each year.
Rule 322
Initial contributions.
The amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed 8 1% of the employee’s salary for each year of his past service with the employer.
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Rule 323
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 324
Employer not to have interest in fund moneys.
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 325
Arrangements for winding up, etc., of business.
Where the employer’s trade or undertaking is to be wound up or discontinued, the trustees shall, with the prior approval of, and subject to such conditions as may be imposed by, approving authority, make satisfactory arrangements for the payment of gratuity to the existing beneficiaries.
Rule 326
Arrangements for winding up of the fund.
Any arrangements for the winding up of the fund or for its amalgamation with another fund shall be subject to the prior approval of, and to such conditions as may be imposed by, the approving authority.
