Rule 323 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 323 of the Income-tax Rules, 2026 taxes the consideration for an assigned gratuity interest not cancelled within two months; rule 324 bars the employer from receiving fund money or holding any lien or charge; rules 325 to 329 require prior approval and supply Forms No. 188 and 187.
Assigning or charging the interest
Rule 323: if an employee assigns or creates a charge upon his beneficial interest in a gratuity fund, the Assessing Officer shall give notice 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 shall be deemed to be income received by him in the tax year in which the fact became known to the Assessing Officer, and assessed accordingly. The 1962 parallel is rule 105.
Rule 323 is word-for-word the machinery of rule 295 for a recognised provident fund and rule 310 for an approved superannuation fund: a notice, two months to cancel, and failing that the consideration is taxed in the year the officer became aware. The consistency is useful — one warning to employees covers all three funds. The trap is also common to all three: the deemed income falls in the year of the officer's knowledge, not the year of the assignment, so an old arrangement discovered now is taxed at today's rates in today's year. Responding inside the two months is the whole of the defence.
Rule 324 — the employer stays out
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. The 1962 parallel is rule 106.
Compare rule 324 with rule 309, its superannuation counterpart. Rule 309 has two sub-rules: one keeping the beneficiary out of the trustees' insurance policy, and one keeping the employer out of the fund's money. Rule 324 carries only the second. The reason is structural: a superannuation beneficiary's entitlement is an annuity, so it was necessary to say he has no interest in the underlying policy. A gratuity beneficiary's entitlement is a lump sum from the fund, and no equivalent question arises.
What survives is the important half. The deductibility of an employer's gratuity contributions rests on the money being irrevocably gone. An arrangement letting the employer recover a surplus, or offering the fund as security to a lender, defeats that and puts approval at risk — and the words "under any circumstances" leave no room for a negotiated exception.
Winding up — rules 325 and 326
| Rule | Event | Requirement |
|---|---|---|
| 325 | The trade or undertaking of the employer is to be wound up or discontinued | The trustees shall, with the prior approval of and subject to conditions imposed by the approving authority, make satisfactory arrangements for the payment of gratuity to the existing beneficiaries |
| 326 | Winding up of the fund, or its amalgamation with another fund | Subject to the prior approval of, and conditions imposed by, the approving authority |
The 1962 parallels are rules 107 and 108.
Note the difference in reach between rule 325 and its superannuation counterpart rule 311. Rule 311 requires arrangements for annuities to current employees or to their widows, children or dependents on death. Rule 325 requires arrangements for payment of gratuity to the existing beneficiaries — a narrower and more immediate obligation, because a gratuity is a lump sum that crystallises on exit rather than a stream that must continue after death.
Rules 325 and 326 both require prior approval, and they cover different events: the closing of the business and the winding up or amalgamation of the fund. A sale, closure or group reorganisation touches both. A transaction plan that treats the gratuity trust as something to be tidied up after completion has the order wrong — by then the arrangements will have been made without the approval the rules require, and the approving authority's power to impose conditions has been bypassed.
Approval, amendment and appeal
| Rule | Provision | 1962 parallel |
|---|---|---|
| 327 | The application for approval of a gratuity fund required under paragraph 4(1) of Part B of Schedule XI shall be made in Form No. 188, verified in the manner indicated | Rule 109 |
| 328 | No alteration in the rules, constitution, objects or conditions of an approved fund without the prior approval of the approving authority | Rule 110 |
| 329 | An appeal under paragraph 9(1) of Part B of Schedule XI in Form No. 187, verified as indicated, with a fee of Rs 1,000 | Rule 111 |
Form No. 188 is the approval application for both a gratuity fund (rule 327) and a superannuation fund (rule 313) — both under paragraph 4(1) of Part B of Schedule XI. Form No. 187 is the appeal form for all three funds: a gratuity appeal (rule 329) and a superannuation appeal (rule 315) under Part B paragraph 9(1), and a provident fund appeal (rule 300) under Part A paragraph 13(1). The Rs 1,000 fee is the same in every case, and it is payable per appeal. So the form is shared but the paragraph cited on it is not, and getting that wrong on the face of the appeal is an avoidable defect.
Rule 328's four words — rules, constitution, objects or conditions — cover essentially any change the trust might make, including a change to the contribution basis approved under rule 321 or a change of trustees under rule 317. Prior approval is required in each case.
Worked example
| Facts | Position under rules 323 to 329 |
|---|---|
| Employee pledges his gratuity entitlement for a loan | Notice; two months to cancel under rule 323 |
| Charge cancelled within two months | No deemed income |
| Assignment made in 2021, discovered in 2026 | Consideration taxed in the year of discovery |
| Employer proposes to draw down a fund surplus | Barred by rule 324 |
| Lender asks for a charge over the fund | Barred — no lien or charge |
| Business discontinued; trustees pay out and dissolve | Needed prior approval under rule 325 |
| Two group gratuity funds merged on completion | Needed prior approval under rule 326 |
| Contribution basis changed by trustee resolution | Alters the rules — prior approval under rule 328 |
| Approval sought by covering letter | Must be in Form No. 188 |
| Appeal filed on Form No. 187 citing Part A paragraph 13(1) | A gratuity appeal is under Part B paragraph 9(1) |
| One appeal covering the gratuity and superannuation funds | The Rs 1,000 fee is per appeal |
Compliance checklist
- Warn employees that assigning or charging the interest triggers rule 323, as it does for the other two funds.
- On a notice, cancel within two months and evidence the cancellation.
- Remove any deed provision letting the employer recover fund money or take a lien or charge.
- Never offer the fund as security for the employer's borrowing.
- Obtain prior approval before making arrangements on a business closure.
- Obtain prior approval before winding up or amalgamating the fund.
- Obtain prior approval for any change to rules, constitution, objects or conditions.
- Use Form No. 188 for approval and Form No. 187 for an appeal, citing Part B paragraph 9(1), with the Rs 1,000 fee.
Common mistakes
- Letting the two months run after a rule 323 notice.
- Treating a fund surplus as the employer's on a business closure.
- Making winding-up arrangements first and seeking approval afterwards.
- Amending the trust deed by resolution alone.
- Citing the Part A appeal paragraph on a gratuity fund appeal.
- Paying one fee for appeals on two different funds.
Which year this governs
The Income-tax Rules, 2026 are made under the Income-tax Act, 2025. The 1962 parallels are rule 105 for rule 323, rule 106 for rule 324, rules 107 and 108 for rules 325 and 326, and rules 109 to 111 for rules 327 to 329, given for tracing only. Verify the current text and Schedule XI Part B before acting.