Rule 307 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 307 of the Income-tax Rules, 2026 requires superannuation trustees either to enter a scheme of insurance or to accumulate and buy an annuity on retirement, death or incapacity — exempting ten statutory banking bodies; rule 308 caps commutation at one-third or one-half.
The two routes to an annuity
Sub-rule (1) of rule 307: for the purpose of providing the annuities for the beneficiaries, the trustees shall do one of two things. The 1962 parallel is rule 89.
| Clause | Route | Timing |
|---|---|---|
| (a) | Enter into a scheme of insurance with the Life Insurance Corporation established under the Life Insurance Corporation Act, 1956, or any other insurer as defined in section 2(58) of the Act | The scheme runs throughout |
| (b) | Accumulate the contributions in respect of each beneficiary and purchase an annuity from the LIC or another insurer | At the time of the retirement or death of each employee, or on his becoming incapacitated prior to retirement |
The two clauses of rule 307(1) allocate longevity and interest rate risk differently. Under clause (a) the trustees hand the risk to the insurer at the outset through a running scheme of insurance. Under clause (b) they keep it — accumulating contributions and buying the annuity only when the event happens, at whatever rates then prevail. Clause (b) can produce a materially better or worse annuity than expected, and the beneficiary bears that outcome. Note that clause (b) names three triggering events, not one: retirement, death, and incapacity before retirement — the third is the one most often omitted from a trust deed.
The ten exempt bodies
Sub-rule (2): sub-rule (1) shall not apply to a fund established or constituted under an irrevocable trust which has as its sole purpose the payment of pension or family pension in accordance with rules or regulations made under:
- the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970;
- the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980;
- the State Bank of India Act, 1955;
- the State Bank of India (Subsidiary Banks) Act, 1959;
- the National Bank for Agriculture and Rural Development Act, 1981;
- the Industrial Development Bank of India Act, 1964;
- the Export-Import Bank of India Act, 1981;
- the Industrial Reconstruction Bank of India Act, 1984;
- the Small Industries Development Bank of India Act, 1989; and
- the National Housing Bank Act, 1987.
The bodies listed in rule 307(2) run statutory pension schemes under their own governing enactments, with pension rules and regulations of their own. Requiring them to buy annuities from an insurer would duplicate a structure that already exists in statute. Two conditions gate the exemption and both must hold: the trust must be irrevocable, and its sole purpose must be payment of pension or family pension under those rules or regulations. A nationalised bank's superannuation trust serving a purpose beyond its statutory pension scheme is back inside sub-rule (1).
Rule 308 — how much may be commuted
Any payment in commutation of annuity shall not exceed:
| Case | Limit |
|---|---|
| The employee receives any gratuity | The commuted value of one-third of the annuity he is normally entitled to receive |
| Any other case | The commuted value of one-half of that annuity |
The commuted value is determined having regard to:
- the age of the recipient;
- the state of his health;
- the rate of interest; and
- officially recognised tables of mortality.
The 1962 parallel is rule 90.
The logic of rule 308 is that a lump sum is already available where gratuity is paid, so less of the pension needs to be turned into cash: one-third rather than one-half. Two practical points. The test is whether the employee receives any gratuity — any amount, not a threshold — so a small gratuity moves him to the lower limit. And the valuation factors include the state of his health, which is unusual in a tax rule and means an impaired-life commutation can properly be valued differently from a standard one. Both limits are on the annuity he is normally entitled to receive, so they are computed on the full entitlement, not on a reduced or already-commuted figure.
Worked example
| Facts | Position under rule 307 and rule 308 |
|---|---|
| Trustees take a running insurance scheme with LIC | Clause (a) route |
| Trustees accumulate and buy an annuity at each retirement | Clause (b) route |
| Employee becomes incapacitated at 48 | Annuity purchased then — clause (b) names incapacity |
| Trust deed provides only for retirement and death | Incomplete against clause (b) |
| Annuity bought from a private insurer | Permitted — any insurer within the definition |
| Nationalised bank pension trust under the 1970 Act | Exempt from sub-rule (1) if irrevocable and sole purpose |
| Same trust also funds a welfare benefit | Not sole purpose — sub-rule (1) applies |
| Employee receives gratuity and seeks to commute half his annuity | Limited to one-third |
| Employee receives no gratuity | Up to one-half may be commuted |
| Employee receives a small gratuity only | Still the one-third limit |
| Commuted value computed on standard mortality despite serious illness | State of health is a stated factor |
Compliance checklist
- Choose between the insurance scheme and the accumulate-and-purchase route, and reflect it in the trust deed.
- Where clause (b) applies, provide for all three triggers — retirement, death and incapacity.
- Confirm the counterparty is the LIC or an insurer within the definition.
- For a statutory body, confirm the trust is irrevocable and sole purpose before relying on sub-rule (2).
- Establish whether any gratuity is received before fixing the commutation limit.
- Apply one-third where gratuity is received and one-half otherwise.
- Compute the limit on the annuity the employee is normally entitled to receive.
- Value the commutation on age, health, interest rate and recognised mortality tables.
Common mistakes
- Omitting incapacity from the annuity purchase triggers.
- Assuming only the LIC qualifies under rule 307(1).
- Claiming the sub-rule (2) exemption for a revocable or mixed-purpose trust.
- Allowing half commutation where a gratuity has been paid.
- Treating a small gratuity as immaterial to the limit.
- Computing the limit on an already reduced annuity.
Which year this governs
The Income-tax Rules, 2026 are made under the Income-tax Act, 2025. The 1962 parallels are rule 89 for rule 307 and rule 90 for rule 308, given for tracing only. Verify the current text before commuting an annuity.