Pension & Superannuation Fund Governance: Rules 307 to 311 of the Draft Income-Tax Rules, 2026
The Draft Income-Tax Rules, 2026 introduce a comprehensive operational framework governing approved pension and superannuation funds in India. Among the most significant provisions are Rules 307 to 311, which collectively establish the structural and compliance obligations for trustees managing such funds. These rules address the mechanics of annuity provisioning, limits on commutation, protection of beneficiary rights, consequences of prohibited transactions, and procedures applicable when an employer's business ceases operations. Together, they form a robust protective architecture designed to ensure that fund assets are deployed solely for the welfare of employees and their dependents.
Rule 307 — Framework for Insurance or Annuity Schemes
Core Obligation of Trustees
Rule 307 places a direct obligation on trustees of approved pension or superannuation funds to ensure that annuity benefits are made available to all eligible beneficiaries. The rule prescribes two permissible routes for discharging this responsibility:
Entry into an insurance scheme — Trustees may execute a formal scheme of insurance with the Life Insurance Corporation of India, established under the Life Insurance Corporation Act, 1956 (31 of 1956), or with any other insurer as defined under
Section 2(58)of the Income Tax Act, 2025.Accumulation and subsequent purchase of annuity — Alternatively, trustees may accumulate contributions attributable to each individual beneficiary and then utilise those accumulated funds to purchase an annuity from the Life Insurance Corporation of India or any recognised insurer, at the point of the employee's retirement, death, or onset of incapacity prior to retirement.
Important: Both routes are designed to guarantee that no beneficiary is left without a structured income stream upon exit from service, regardless of the circumstances of that exit.
Exempted Categories of Funds
The obligations under Rule 307(1) do not apply universally. Certain pension funds are carved out from these requirements, specifically those:
- Established or constituted under an irrevocable trust
- Whose sole purpose is the payment of pension or family pension
- Constituted in accordance with rules or regulations framed under the following Central Acts:
| S. No. | Central Act |
|---|---|
| (a) | The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) |
| (b) | The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) |
| (c) | The State Bank of India Act, 1955 (23 of 1955) |
| (d) | The State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) |
| (e) | The National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981) |
| (f) | The Industrial Development Bank of India Act, 1964 (18 of 1964) |
| (g) | The Export-Import Bank of India Act, 1981 (28 of 1981) |
| (h) | The Industrial Reconstruction Bank of India Act, 1984 (62 of 1984) |
| (i) | The Small Industries Development Bank of India Act, 1989 (39 of 1989) |
| (j) | The National Housing Bank Act, 1987 (53 of 1987) |
The rationale for exempting these entities is rooted in the fact that pension arrangements under these Central Acts already operate under robust statutory frameworks, rendering an additional insurance or annuity procurement mandate redundant.
Rule 308 — Commutation of Annuity: Permissible Limits
What Is Commutation?
Commutation refers to the process by which an assessee converts a portion of their future periodic annuity payments into a single lump-sum amount. While this facility provides financial flexibility upon retirement, unrestricted commutation could undermine the very purpose of a pension fund — namely, ensuring a steady post-retirement income.
Rule 308 addresses this concern by prescribing ceiling limits on commutation, calibrated to whether the assessee also receives gratuity.
The Two-Tier Cap
Where gratuity is also received: The commuted lump sum must not exceed the commuted value of one-third of the annuity that the employee would normally be entitled to receive.
Where no gratuity is received: The permissible commutation rises to the commuted value of one-half of such annuity.
Determination of Commuted Value
The computation of the commuted value is not arbitrary. Rule 308 specifies that the following factors must be taken into account while arriving at the commuted value: