Rule 295 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 295 of the Income-tax Rules, 2026 gives an employee who charges his provident fund interest two months to cancel it before the consideration is taxed; rule 298 lets recognition be withdrawn after a show cause, rule 299 preserves the earlier balance tax free and rule 300 puts the appeal in Form No. 187.
Assigning or charging the beneficial interest
Rule 295 is a single sentence with a mechanism inside it. If an employee assigns or creates a charge on his beneficial interest in a recognised provident fund, the Assessing Officer, on learning of it, shall give notice to the employee. The notice informs him that if he does not cancel the assignment or charge within two months of receiving the notice:
- the consideration received for the assignment or charge
- shall be deemed to be income received by him in the tax year in which the Assessing Officer became aware of the situation, and
- assessed accordingly.
The 1962 parallel is rule 76.
Two features of rule 295 are easy to miss. First, it is curable: the charge can be cancelled within two months of receiving the notice and no income arises. The rule exists to unwind the arrangement, not primarily to raise tax. Second, if it is not cured, the deemed income falls in the tax year in which the Assessing Officer became aware — not the year the charge was created. An assignment made years earlier and discovered now is taxed now, which can put the consideration into a year of much higher marginal rates. Responding to the notice inside the two months is therefore worth real money.
Note the parallel with rule 310, which applies the identical mechanism to an approved superannuation fund. The wording, the two months and the deemed-income year are the same in both.
Rule 298 — withdrawal of recognition
Sub-rule (1): the approving authority has the right to revoke recognition given to a provident fund where it fails to meet the conditions in:
- Part A of the Fourth Schedule to the Income-tax Act, 1961, as it existed prior to its repeal; or
- Part A and Part C of Schedule XI to the Act; or
- subsequent conditions set after recognition was granted under either Act;
and where the exemption granted under section 17 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 is withdrawn under section 17(4) of that Act, recognition may be withdrawn. The 1962 parallel is rule 79.
Sub-rule (2): before withdrawing recognition, the approving authority shall give an opportunity to the employer and the trustees of the fund to show cause why recognition should not be withdrawn.
The second limb of rule 298(1) is the one an employer is least likely to be watching. Recognition can be withdrawn where the section 17 exemption under the EPF and Miscellaneous Provisions Act, 1952 is withdrawn — a decision taken by an entirely different authority, on labour-law grounds, in a proceeding the tax department is not party to. An exempted establishment that loses its section 17 exemption should treat that as an immediate tax exposure and expect a rule 298 show cause. Note also that both the employer and the trustees must be heard under sub-rule (2), so a notice served on only one of them is incomplete.
Note the dual reference in sub-rule (1) to the repealed 1961 Act's Fourth Schedule and to Schedule XI of the 2025 Act. That is deliberate rather than a slip: recognition granted under the old Act continues into the new regime, so the conditions it was granted on remain relevant to whether it should stand.
Rule 299 — what happens to the balances
Where recognition is withdrawn, the balance is split by date:
| Part of the balance | Treatment under rule 299 |
|---|---|
| The balance to the credit of each employee at the end of the financial year before the withdrawal | Subject to paragraph 9 of Part A of Schedule XI, paid to him free of tax when he receives the accumulated balance due to him |
| The remaining accumulated balance | Subject to tax as if the fund had never been recognised |
The 1962 parallel is rule 80.
Rule 299 draws the line at the end of the financial year before the withdrawal. Everything accumulated up to that point was earned while the fund was recognised, and it stays tax free in the employee's hands. Everything after is taxed as if the fund had never been recognised — a phrase that reaches back to the character of the receipt, not merely to the year of withdrawal. For employees, the practical question after a withdrawal is therefore what the balance stood at on the last 31 March before it, and trustees should compute and record that figure immediately.
Rule 300 — the appeal
An appeal under paragraph 13(1) of Part A of Schedule XI shall be:
- made in Form No. 187;
- verified in the manner indicated in it; and
- accompanied by a fee of Rs 1,000.
The 1962 parallel is rule 81. The same form and the same Rs 1,000 fee serve the superannuation fund appeal under rule 315, so a group appealing on both funds uses one form design and pays two fees.
How the four rules sit together
- Rule 295 — an individual employee's default, curable in two months.
- Rule 298 — the fund's loss of status, after a show cause to employer and trustees.
- Rule 299 — the consequence of that loss, split at the previous financial year end.
- Rule 300 — the remedy, in Form No. 187 with a Rs 1,000 fee.
Worked example
| Facts | Position under rules 295 and 298 to 300 |
|---|---|
| Employee pledges his provident fund balance for a loan | Officer issues a notice; two months to cancel |
| Charge cancelled within two months | No deemed income |
| Charge created in 2022, discovered by the officer in 2026 | Consideration taxed in the year of discovery |
| Fund breaches a Schedule XI condition | Recognition may be withdrawn after a show cause |
| Establishment loses its section 17 EPF exemption | A ground for withdrawal under rule 298(1) |
| Show cause served on the employer only | Sub-rule (2) requires the trustees to be heard too |
| Recognition withdrawn in November 2027 | Balances at 31 March 2027 remain tax free on receipt |
| Contributions and interest after that date | Taxed as if never recognised |
| Appeal filed on plain paper | Must be in Form No. 187 |
| Appeal filed without the fee | Defective — Rs 1,000 must accompany it |
Compliance checklist
- Warn employees that assigning or charging the fund interest triggers rule 295.
- On receiving a notice, cancel the charge within two months and evidence the cancellation.
- Monitor Schedule XI Part A and Part C conditions continuously.
- Treat withdrawal of the section 17 EPF exemption as an immediate tax exposure.
- Ensure any show cause reaches both the employer and the trustees.
- On withdrawal, compute and record the balance at the previous 31 March for each employee.
- Appeal in Form No. 187 with the Rs 1,000 fee, verified as indicated.
- Remember the identical mechanism applies to superannuation funds under rules 310 and 315.
Common mistakes
- Letting the two months run after a rule 295 notice.
- Assuming the charge is taxed in the year it was created.
- Overlooking the EPF section 17 limb of rule 298(1).
- Hearing only the employer before withdrawal.
- Treating the whole balance as taxable after withdrawal.
- Filing the appeal without the Rs 1,000 fee.
Which year this governs
The Income-tax Rules, 2026 are made under the Income-tax Act, 2025. The 1962 parallels are rule 76 for rule 295, rule 79 for rule 298, rule 80 for rule 299 and rule 81 for rule 300, given for tracing only. Verify the current text and Schedule XI before responding to a notice.