Rule 303 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 303 of the Income-tax Rules, 2026 lets superannuation fund moneys sit with a Post Office or scheduled bank or be used for insurance and annuities, with the balance invested per a 2015 notification; rules 305 and 306 cap employer contributions at 27% of salary less provident fund contributions.
Where the money may go
Sub-rule (1) of rule 303: all moneys contributed to the fund, or received or accrued by way of interest or otherwise, may be:
- (a) deposited in a Post Office Savings Bank Account in India; or
- (b) deposited in a current account or a savings account with any scheduled bank; or
- (c) utilised in accordance with rule 307 for making payments under a scheme of insurance or for purchase of annuities referred to in that rule.
Sub-rule (2): funds not so deposited or used shall be invested in accordance with the Ministry of Finance (Department of Financial Services) notification F. No. 11/14/2013-PR dated 2 March 2015, published in the Gazette of India, Extraordinary, Part I, Section 1, as amended from time to time. The 1962 parallel is rule 85.
Rule 303(2) points to a Department of Financial Services notification of 2 March 2015. The provident fund pattern in rule 292(2) points to a Ministry of Labour and Employment notification of 29 May 2015. They are not the same instrument, and a group operating both funds must track both.
More importantly, clause (c) of sub-rule (1) marks the structural difference between the two schemes. A superannuation fund's purpose is to provide annuities, so its moneys may be applied directly to insurance premiums and annuity purchases under rule 307 rather than held as investments at all. Only the residue falls into the investment pattern.
The 27% cap on ordinary annual contributions
Rule 305: the yearly contribution of the employer to a fund for each employee shall not exceed 27% of their salary for each year, as reduced by any contributions the employer made to a provident fund for the same employee during that year, whether recognised or not. The 1962 parallel is rule 87.
The reduction in rule 305 is the whole substance of the rule. The 27% is not a superannuation allowance sitting on top of provident fund contributions — it is a combined ceiling, and whatever the employer has already put into a provident fund for that employee in that year comes off it. An employer contributing 12% to a provident fund has 15% of headroom left for superannuation, not 27%. Note also that the deduction applies to a provident fund whether recognised or not, so an unrecognised fund's contributions reduce the ceiling even though they carry no recognition benefit of their own. The test is per employee, per year, so it must be computed employee by employee rather than on a payroll average.
Initial contributions for past service
Rule 306: for the deduction allowable under section 29(1)(a), and subject to any condition which the Board may think fit to specify, the employer's initial contribution for the past services of an employee shall not exceed the total of 27% of the salary of the employee for each year of past service, as reduced by the employer's contributions to a provident fund (recognised or unrecognised), if any, for the same employee for each such year. The 1962 parallel is rule 88.
| Feature | Rule 305 — ordinary annual | Rule 306 — initial |
|---|---|---|
| Covers | The current year's contribution | The employee's past services |
| Rate | 27% of salary for the year | Total of 27% of salary for each year of past service |
| Reduction | Provident fund contributions during that year | Provident fund contributions for each such year |
| Extra condition | None stated | Subject to any Board condition, and tied to the section 29(1)(a) deduction |
The wording of rule 306 is exact and it is where the computation usually goes wrong. The limit is the total of 27% of the salary of the employee for each year of past service — his salary in each of those years — reduced by the provident fund contributions for that same year. It is not 27% of current salary multiplied by years of service, which for a long-serving employee whose pay has risen would give a much larger figure. The employer needs the historical salary and provident fund record for every year being funded, and where those records are incomplete the deduction is difficult to support.
How the three rules fit the scheme
- Rule 303 — what the trustees may do with the money once it arrives.
- Rule 305 — how much the employer may put in each year.
- Rule 306 — how much it may put in at the outset for service already rendered.
- Rule 307 — the route in rule 303(1)(c), being the insurance and annuity scheme.
Worked example
| Facts | Position under rules 303, 305 and 306 |
|---|---|
| Trustees pay annuity premiums to an insurer | Permitted — rule 303(1)(c) with rule 307 |
| Surplus parked in a scheduled bank savings account | Permitted — clause (b) |
| Residue invested per the labour ministry pattern | Wrong notification — sub-rule (2) points to the 2015 DFS notification |
| Employer contributes 12% to a provident fund | Superannuation headroom is 15% |
| Employer contributes nothing to a provident fund | Full 27% available |
| Employer contributes to an unrecognised provident fund | Still reduces the 27% |
| Employer computes the cap on average payroll | The test is per employee, per year |
| Initial contribution computed as 27% of current salary × 15 years | Overstated — use each past year's salary |
| Past salary records unavailable for early years | The section 29(1)(a) deduction is hard to support for those years |
| Board specifies a condition on initial contributions | The limit applies subject to it |
Compliance checklist
- Route annuity and insurance payments through rule 307, as rule 303(1)(c) contemplates.
- Hold uninvested balances only in a Post Office Savings Bank Account or a scheduled bank account.
- Invest the residue per the 2 March 2015 Department of Financial Services notification, as amended.
- Do not confuse it with the labour ministry notification that governs provident fund investment.
- Compute the 27% ceiling per employee, per year.
- Deduct provident fund contributions from it, recognised or not.
- For initial contributions, use each past year's salary and provident fund figure.
- Check for any Board condition before claiming the section 29(1)(a) deduction.
Common mistakes
- Treating 27% as available in full alongside provident fund contributions.
- Ignoring unrecognised provident fund contributions in the reduction.
- Applying the cap on an aggregate payroll basis.
- Computing past-service funding on current salary.
- Using the provident fund investment notification for a superannuation fund.
- Overlooking the annuity and insurance route and investing everything instead.
Which year this governs
The Income-tax Rules, 2026 are made under the Income-tax Act, 2025. The 1962 parallels are rule 85 for rule 303, rule 87 for rule 305 and rule 88 for rule 306, given for tracing only. Verify the current text and the 2015 notification as amended.