Deductions

A deduction is money withheld from wages that the employee had earned. That definition does more work than it looks.

An employee who was absent without leave for three days did not earn three days of wages. Their gross is lower. Nothing was deducted from them. An employee whose provident fund contribution was withheld earned their full wages and had part of them withheld. That is a deduction.

The distinction matters practically, because a payslip that presents absence as a deduction invites an argument about money being taken rather than a conversation about attendance. It matters less legally than it once did, and it is worth being accurate about why. The Code lists absence from duty as one of the permitted deduction purposes and regulates it: the deduction must be proportionate, bearing no larger relation to the wages for the period than the absence bears to the period the employee was required to work. So absence sits inside the deduction scheme rather than outside it. Where ten or more employees absent themselves in concert without notice and without reasonable cause, the deduction may additionally include up to eight days' wages in lieu of notice, and an employee who is present but refuses to work in a stay-in strike counts as absent.

The governing provisions sit in the Code on Wages, 2019, in force since 21 November 2025, which repealed the Payment of Wages Act, 1936 and carried its scheme forward: a closed list of permitted deductions, conditions attached to several of them, and an overall ceiling per wage period. One boundary worth knowing is that this chapter does not apply to Government establishments unless the appropriate government notifies that it does.

The permitted categories cover familiar ground, and the list is closed rather than illustrative. Section 18(2) sets out fifteen purposes at clauses (a) to (o); grouped, they come to this.

• Income tax and any other statutory levy payable by the employee, and deductions required by an order of a court or other competent authority.
• Subscriptions to, and repayment of advances from, any social security fund or scheme constituted by law, including a provident fund, pension fund or health insurance fund.
• Fines, imposed in accordance with the section 19 procedure.
• Absence from duty.
• Damage to or loss of goods expressly entrusted to the employee, or loss of money for which they are accountable, where the loss is directly attributable to their neglect or default.
• House accommodation supplied by the employer or a specified housing authority, and amenities and services the appropriate government has authorised, where the employee has accepted them and capped at their value.
• Recovery of advances of whatever nature and interest on them, and adjustment of overpayment of wages; and recovery of loans for house-building or other approved purposes, and loans from a labour welfare fund.
• Payments to a cooperative society, subject to conditions the appropriate government may impose.
• Trade union membership fees and contributions, and contributions to the Prime Minister's National Relief Fund or another notified fund. These two are the ones that require the employee's written authorisation.
• Specified railway administration recoveries, which are of no application to most employers.

Two points about that list are commonly got wrong.

First, written authorisation is not a general gateway. The Code requires it for trade union dues and relief fund contributions specifically; it is not a mechanism for bringing an otherwise impermissible deduction inside the list. So a charge for a lost access card, an informal penalty for late arrival that is not a properly imposed fine, or a contribution to an office collection do not become lawful deductions because the employee signed something. Cooperative society payments, often assumed to need written consent, are governed instead by whatever conditions the appropriate government imposes.

Second, the Code closes the obvious workaround. Any payment made by an employee to the employer or its agent is deemed to be a deduction from wages, so asking for the money back rather than taking it off the payslip does not escape the rules or the ceiling. Running the other way, a loss of wages resulting from withholding an increment or promotion, from reduction to a lower post, or from suspension is not treated as a deduction, provided the employer's arrangements for those measures meet the requirements of the appropriate government's notification.

Total deductions in any wage period cannot exceed fifty per cent of the wages for that period. That single rule does more practical work than the permitted-category list.

It is worth being explicit about what the Code does not say, because a good deal of payroll guidance still carries the old rule. Under the Payment of Wages Act, 1936 the ceiling rose to seventy-five per cent where the deductions included payments to a cooperative society. The Code has no such exception. There is one flat fifty per cent covering the total of everything permitted, and cooperative society payments sit inside it as one permitted purpose, subject to whatever conditions the appropriate government imposes. A payroll configured with a higher ceiling for cooperative cases is running a repealed provision.

Consider an employee who was overpaid a substantial amount over several months, has an outstanding salary advance, and whose statutory deductions already take a meaningful share of wages. The employer cannot take the overpayment in one month even though the recovery is a permitted category, because the total would breach the ceiling.

What happens to the excess is where the Code is thinner than the practice built on it. It says the excess may be recovered in such manner as may be prescribed, and leaves that manner to the rules. Spreading the recovery across later wage periods is the ordinary and sensible course, and it is what most systems do, but it is not something the Code itself provides for. Until the rules are read, treat the position as: the excess cannot be taken in the period, and the mechanism for taking it later rests on the rules rather than on the Code.

Two consequences follow for payroll.

• The ceiling has to be tested before the run, not discovered afterwards. A payroll that produces a negative or near-zero net pay has usually breached it.
• Recovery schedules need a start date, an instalment and an end date, agreed and communicated. An open-ended recovery that simply continues until the balance clears is difficult to explain and easy to get wrong.

These two categories carry a procedure, and the procedure is the point. A deduction imposed without it is not saved by being deserved.

The asymmetry in that table is the useful part. A fine is heavily constrained in amount and must be recovered quickly or not at all; a damage recovery has no ceiling beyond the loss itself and no deadline. The temptation to characterise something as damage rather than as a fine should therefore be resisted on the facts, not indulged because the limits are looser: the damage head requires an actual loss of entrusted goods or money, directly attributable to neglect or default, and a general penalty for misbehaviour does not become one by being called one.

Employers rarely follow either procedure properly, usually because the amounts are small and the process feels disproportionate. The exposure is not the individual amount. It is that a pattern of undocumented fines is visible in an inspection and indefensible in a dispute.

Most deduction disputes are presentation problems rather than legal ones.

• Keep reduced earnings out of the deductions column. Show days paid and days of loss of pay in the earnings block, so a lower gross explains itself.
• Keep employer contributions out of the deductions column too. An employee seeing the employer provident fund share alongside their own reads it as being charged twice.
• Name each recovery, with its balance. A line called other deduction is a query waiting to happen.
• Show year-to-date figures against each deduction, which answers most questions about tax without anyone running a report.
• Tell the employee before a new recovery starts rather than after they notice it.

The test is whether an employee can reconcile their own payslip without calling anyone. Where they can, deductions stop being contentious even when they are large.