Rule 299 of the Income-tax Rules, 2026

Where this rule sits

← Rule 298  ·  Rule 300 →

What this rule does

Rule 299 deals with what happens to an employee's accumulated balance when the approving authority withdraws recognition from a provident fund. The balance to the credit of each employee at the end of the financial year before the withdrawal of recognition is to be paid to him free of tax at the time when he receives the accumulated balance due to him, subject to the provisions of paragraph 9 of Part A of Schedule XI. The remaining accumulated balance due to him is subject to tax as if the fund had never been recognised.

The rule therefore draws a line at a date: the balance standing to the employee's credit at the end of the financial year before withdrawal is protected, and everything beyond it is not.

Why it is there

Recognition of a provident fund is granted to the fund, but the tax consequences of losing it fall on employees who had no part in the default. The rule keeps faith with what the employee accumulated while the fund was recognised, and withdraws the protection only from the part of the balance that accrued after the recognition was lost — with the exception preserved by paragraph 9 of Part A of Schedule XI.

Who it applies to

• An employee with a balance in a provident fund whose recognition has been withdrawn
• The trustees or administrators of that fund paying the accumulated balance
• The approving authority withdrawing recognition

The figures, and what each one turns on

What this means in practice

The freedom from tax attaches to a measured amount, not to the payment as a whole, and the measuring date is the end of the financial year before withdrawal — not the date of withdrawal itself, and not the date of payment. Everything above that figure is taxed as if the fund had never been recognised, which reaches back over the accumulation rather than treating it as a fresh receipt. Timing of payment does not change the split: the protected part is paid free of tax whenever the employee receives the accumulated balance due to him. And the protection is not unqualified — it is expressly subject to paragraph 9 of Part A of Schedule XI, so that paragraph has to be read before the exemption is claimed.

An example

Recognition is withdrawn from a provident fund during a financial year. At the end of the preceding financial year an employee's balance stood at Rs 14,00,000. He leaves two years later and receives an accumulated balance of Rs 18,50,000. Subject to paragraph 9 of Part A of Schedule XI, Rs 14,00,000 is paid to him free of tax, and the remaining Rs 4,50,000 is subject to tax as if the fund had never been recognised.

Where you meet this rule

An employee meets it when a fund loses recognition and the payment of his accumulated balance is split into a protected part and a taxable part, and again in the tax treatment shown by the fund when it pays.

The words themselves

What people get wrong

• Measuring the protected balance at the date of withdrawal. The rule takes the balance at the end of the financial year before the withdrawal of recognition.
• Treating the whole accumulated balance as tax free. Only the balance at that earlier date is paid free of tax; the remainder is taxed as if the fund had never been recognised.
• Reading the exemption as unqualified. It is subject to the provisions of paragraph 9 of Part A of Schedule XI to the Act.
• Assuming the tax falls when recognition is withdrawn. The rule speaks of the time when the employee receives the accumulated balance due to him.