Rule 325 of the Income-tax Rules, 2026

Where this rule sits

← Rule 324  ·  Rule 326 →

What this rule does

Where the trade or undertaking of the employer is to be wound up or discontinued, the trustees shall, with the prior approval of the approving authority and subject to such conditions as it may impose, make satisfactory arrangements for the payment of gratuity to the existing beneficiaries.

Why it is there

Winding up the employer's business is the point at which a gratuity fund's beneficiaries are most exposed, because the source of contributions ends. The rule puts a positive duty on the trustees at that moment and makes it answerable to the approving authority in advance, so the arrangements are settled before the business goes rather than tested afterwards.

Who it applies to

• The trustees of the fund, where the employer's trade or undertaking is to be wound up or discontinued
• The approving authority, whose prior approval and conditions govern the arrangements
• Existing beneficiaries entitled to gratuity from the fund

What this means in practice

The duty is the trustees' and it is prospective — it attaches where the trade or undertaking is to be wound up or discontinued, not only once it has been. Approval must come first: the rule requires the prior approval of the approving authority, so arrangements made and then submitted do not answer it, and the authority may impose conditions the trustees must observe. What counts as satisfactory is for that authority, and the arrangements are for the existing beneficiaries, so the rule looks to those already entitled rather than to future employees.

An example

An employer decides to discontinue its manufacturing undertaking. Before that happens, the trustees of its gratuity fund put proposed arrangements for paying gratuity to the existing beneficiaries to the approving authority, obtain its approval, and give effect to them subject to the conditions imposed.

Where you meet this rule

You meet it at the closure of a business, in the trustees' application to the approving authority and in the approval and conditions under which the fund's obligations to existing beneficiaries are settled.

The words themselves

What people get wrong

• Making the arrangements and seeking approval afterwards. The rule requires the prior approval of the approving authority.
• Waiting until the business has closed. The duty arises where the trade or undertaking is to be wound up or discontinued.
• Treating the trustees' judgment as final. The arrangements are subject to such conditions as the approving authority may impose.
• Extending the arrangements beyond existing beneficiaries. The rule speaks of payment of gratuity to the existing beneficiaries.