Recovering monies from an Employee by making deductions from pay (INDIA)

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Recovering monies from an Employee by making deductions from pay (INDIA)

December 2, 2023


Relationships exist with a give and take policy. It may be master-servant, principle-agent, employer-employee etc. Only when an employee works for his master, follows his orders and finishes his task as instructed the employer has a duty to give him/her salary or wages for his service. The payment of wages and salaries in India is dealt under the Payment of Wages Act, 1936 and other related national and state-level rules. There might arise situations where an employee owes money to his employer. The situations could be many, for example:

  • When the employer overpays the employee while giving his salary.
  • When employer helps and covers an employee’s expense.
  • When the employee has damaged any property of the employer.

So, when the above situations occur, how can the employer recover his money? It can be done by deducting the amount from his monthly wage or terminating his job. Deduction of amount from an employer’s salary cannot be done normally, this concept is regulated by the Payment of wages Act, 1936. The Payment of Wages Act of 1936 was passed to guarantee prompt wage payments and stop employers from making unlawful withholdings. As the Bombay High Court said in the matter of Arvind Mills Ltd. v. K.R. Gadgil[i], the overall goal of the Act is to mandate that salaries be provided to employees on time, in a specific format, and without any unauthorized deductions at regular intervals.[ii]

People who work in factories, railroads, and any other establishments that the Central or State Government may designate in this regard are subject to the terms of this Act.


Payment of wages Act is a very important statute which guarantees payment of wages to employees on time and prevents the employer from making deductions to the wages of an employee as he wishes. While paying salaries to workers the employers should make deductions as per the provisions of the Act. The employer does not have the discretion to reduce wages as and when he wishes. The Act specifies the people on whom the law applies. All individuals working in factories, specific industries, or other places of employment, whether directly or through contractors, are covered by this Act. The Central Government is in charge of enforcing the Act in the areas of air transportation, mines, and oil fields.

Section 3-6 of the Act talks about Rules for payment of wages, fixation of wage periods, time of payment of wages etc. Section 7 deals with authorized deductions from wages given to the employees. The Section 7 under this Act permits employers to make certain deductions from the wages of employee’s and the Payment of wages act applies on specific type of establishment only as per Section 2(ii) of the Payment of Wages Act.[iii]

Factories and specific “industrial or other establishments” are covered by the PoWA. The following industrial or other establishments are as follows:

  •  Mines, Plantations, quarries, and establishments that have been notified by the relevant state government.

According to Section 1(6) of the PoWA, employees who work in these situations and get a monthly salary of up to INR24,000 are covered by the law.

Section 7 lists the various circumstances under which the employers can deduct amount from employees’ wages. Each of these circumstances are discussed in detail under different sections of the Act.

The various circumstances are:

  1. Fines – Section 8 of the Act deals with this particular aspect and states that an employer should not impose any fine for any act or omission unless those acts and omission prescribed from the appropriate government and a notice mentioning the acts and omissions must be prescribed on the office premises. No fine should be imposed on an employee without giving him an opportunity to show cause against the fine. The total sum of fine being imposed on the employee should not be more than 3% of the wages payable to the person. Fines are deemed to have been imposed on the day the employee committed the act or omission. A person is responsible for payment of wages and recording fines and realizations in a register in the prescribed format. Realizations must be approved by the prescribed authority for purposes beneficial to employees in the factory or establishment.
  2. Absence from duty – Section 9 of the Act talks about deductions made when the employee is absent from duty. Deductions for absence from duty can only be made for an employed person’s absence from their required work place, excluding the period during which they were absent. The deduction does not affect wages payable to the employed person during the wage period. If ten or more employees act in concert without due notice and reasonable cause, deductions may include wages for eight days. An employed person is considered absent from their work place if they refuse to carry out their duties due to a stay-in strike or other unreasonable circumstances. Anant Ram v. District Magistrate, Jodhpur[iv] is a case in which it was held in this case that the absence of work must be voluntary. Hence no deduction can be made under section 7[v], clause (2), when the absence from the duty is for the period between employee’s dismissal and reinstatement as such absence cannot be said to be voluntary.
  3. Damage to or loss of goods – (Section 10)[vi] Deductions for damage or loss under clauses (c) and (o)of sub-section (2) of section 7 must not exceed the employer’s damage or loss caused by the employed person’s neglect or default. Deductions must be made after the employed person has shown cause against the deduction, and all deductions and realizations must be recorded in a register for wages payment under section 3.
  4. House-accommodation or other amenities the employer provides – (Section 11) Deductions for services rendered under clause (d) or clause (e) of sub-section (2) of section 7 cannot be made from an employed person’s wages unless they accept a house-accommodation amenity or service. Deductions must not exceed the value of the service and are subject to government conditions. In this section the term “services” does not mean supplying tools or raw materials.
  5. Deductions for recovery of advances (Section 12) – Deductions for recovery of advances under clause (f) of sub-section (2) of section 7 are subject to conditions, including recovery from the first payment of wages for a complete wage period, no recovery for travel expenses, and government-imposed conditions for advances given after employment began. Recovery of wages not earned is subject to rules regulating the extent and instalments.
  6. Deductions for Loan recoveries. (Sec 12A) Deductions for repayment of loans for home construction or other purposes are subject to any state government regulations governing the amount that can be borrowed and the interest rate that will be charged.
  7. Deductions for payments made to co-operative societies and Schemes related to insurance (Sec 13)[vii] -The State Government may impose restrictions on deductions for payments to cooperative societies, payments to the Indian Postal Service’s insurance programmee, or deductions made with an employee’s consent for the payment of any premium on the employee’s life insurance policy to the Life Insurance Corporation.
  8. Section 7(2)(f) of the PoWA permits deductions from an employee’s compensation for the rectification of overpayments of wages (including accrued interest). States like Telangana and Uttar Pradesh have equivalent provisions under their respective Shops and Establishments Acts.[viii]

However, there are a few standards that must be met by an employer before deducting money from an employee’s paycheck under state regulations for the PoWA and state-specific Shops and Establishments Acts.

The bare act language of Section 7 also lists the various circumstances which cannot be called as deduction. These situations are:

  • Suspending the employee
  • Stopping the promotion of the employee
  • Demotion of employee
  • Not providing incentive due to lack of performance by the employee
  • Not providing increment to the employee

All these actions taken by the employer should be backed by a proper reason.[ix]


Any act or statute would serve as an example to define peace and order. A law is formulated, specific provisions are made to be implemented and imposed on the public to follow, so that there is no chaos or nuisance. Even in the present scenario when employees are due to their employers or if they do not come for duty or if there is any other reason, and the employer’s deduct certain amount from their monthly wages as and when they wish then conflicts will arise. To prevent this chaos the Section 7 of the Payment of Wage s Act, 1936 and other provisions of this act have been formulated and enacted. It respects every party’s position and is formulated in such a way as to not effect either party adversely. There is no legal requirement in India that explicitly states which prospective deductions (together with any related obligations or regulations relating to the deduction) must be included in the employment agreement. The act is applied when ever above listed situations in the article arise.

[i] Arvind Mills Ltd. v. K.R. Gadgil, AIR 1941 Bom 26.

[ii] Mehar Sabharwal, Analysis of Issues and Concerns regarding the Payment of Wages Act, 1936, 24 Supremo Amicus [802] (2021).

[iii] The Payment of Wages Act, 1936, § 2, No. 4, Acts of Parliament, 1961(India).

[iv] Anant Ram v. District Magistrate, Jodhpur, (AIR 1956 Raj 145)

[v] The Payment of Wages Act, 1936, § 7, No. 4, Acts of Parliament, 1961(India).

[vi] The Payment of Wages Act, 1936, §10, No. 4, Acts of Parliament, 1961(India).

[vii] The Payment of Wages Act, 1936, §13, No. 4, Acts of Parliament, 1961(India).

[viii] P Vivek Ilawat & Others, Recovering Monies from an Employee by Making Deductions from Pay (India), PRACTICAL LAW, Jan 2023.

[ix] M Deepa, A Study On The Deduction of Wages Under payment of Wages Act 1936, 7 IJTI, July 2022.

Author: Abhishek Gupta, Principal Associate

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at

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