Rule 306 — Initial contributions. Made under s.29 of the Income-tax Act, 2025.
Rule 306 gives effect to Section 29 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
The rule limits the initial contribution of an employer to a superannuation fund for the past services of an employee, for the purposes of the deduction allowable under section 29(1)(a) and subject to any condition the Board may think fit to specify. That contribution shall not exceed the total of 27% of the salary of the employee for each year of past service, as reduced by the contributions of the employer to a provident fund, whether recognised or unrecognised, for the same employee for each such year.
An initial contribution for past service is a lump sum that can cover many years at once, so without a limit the deduction under section 29(1)(a) could be made as large as the employer chose. The rule caps it by reference to the employee's salary for each year of past service, and then subtracts what the employer has already put into a provident fund for the same employee for those years, so that the same past service is not funded twice at the revenue's cost.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Ceiling on the initial contribution for past services | Not exceeding the total of 27% of the salary of the employee for each year of past service | Reduced by the employer's contributions to a provident fund, recognised or unrecognised, for the same employee for each such year; this is an upper limit, not a prescribed amount | Rule 306 |
| Further conditions | Any condition which the Board may think fit to specify | The rule states no such conditions of its own; the deduction is subject to those the Board specifies | Rule 306 |
The 27% figure is a ceiling on what may be contributed, not a rate at which a contribution is to be made, and it is computed year by year over the period of past service before the years are totalled. The subtraction is mandatory and takes in provident fund contributions whether the fund is recognised or unrecognised, so an employer who has funded a provident fund throughout the past service may find the permitted initial contribution much reduced or exhausted. The rule also leaves room for further conditions the Board may specify, which the rule itself does not state. It governs the amount that may be contributed for the purposes of the deduction; the deduction itself is given by section 29(1)(a).
An employer sets up a superannuation fund and wants to fund ten years of an employee's past service. Taking 27% of the employee's salary for each of those ten years gives Rs. 18,00,000. The employer had contributed Rs. 6,00,000 to a provident fund for the same employee over those years, so the initial contribution is limited to Rs. 12,00,000, and the deduction under section 29(1)(a) cannot be built on any larger figure.
In the computation of the deduction claimed for an initial contribution to a superannuation fund in the year the fund is set up or an employee's past service is funded, and in any examination of that claim.
the initial contribution of the employer to a superannuation fund 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 contributions of the employer to a provident fund (recognised or unrecognised), if any, for the same employee for each such year