Salary Deductions in India: Employer Guide

Salary Deductions: What is Legal and What is Not

Salary deductions are a sensitive area of employer-employee relations in India. While certain deductions are mandatory under various statutes (PF, ESIC, PT, TDS), others are permitted only under specific conditions and with proper authorisation. Unauthorised deductions — deducting money for damages, shortages or fines without following legal procedures — are not permitted under the Code on Wages, 2019, which replaced the Payment of Wages Act, 1936, and can result in prosecution, fines and reputational damage.

Deductions from wages are now governed by the Code on Wages, 2019, which replaced the Payment of Wages Act, 1936; the 1936 Act stands repealed. The Code operates alongside state-specific rules such as the Kerala Shops and Commercial Establishments Act, 1960, which remains in force. Under these laws, deductions can only be made for specified purposes, up to specified limits, and with proper documentation. This guide provides a comprehensive reference for Kerala employers on what deductions are legally permitted, the maximum amount that can be deducted, and the procedural requirements for each. For a broader understanding of payroll management, read our Complete Payroll Management Guide. Use our CTC to In-Hand Calculator to see how deductions affect take-home pay.

Mandatory Statutory Deductions

Deduction	Legal Basis	Rate	Applicability	Max Deduction per Month
Employee Provident Fund (EPF)	Code on Social Security, 2020 and applicable EPF scheme/rules; prior periods may be governed by the saved provisions of the EPF Act and Scheme	Generally 12% of eligible contribution wages, subject to coverage, membership and the applicable ceiling	Employees and establishments covered under the current rules	Depends on eligible wages and member status
Employee State Insurance (ESIC)	Code on Social Security, 2020 (Chapter IV) and applicable rules	Standard rates are 0.75% employee and 3.25% employer on ESI contribution wages	Covered establishment and employee, subject to current wage and eligibility rules	Depends on contribution wages and eligibility
Professional Tax (PT)	Kerala local-government law and the applicable local-body schedule	Assessed on half-yearly income; an employer may spread collection across payroll periods	Depends on the applicable schedule and exemption	Up to ₹1,250 per half-year under the revised schedule (₹2,500 annual ceiling)
Tax Deducted at Source (TDS)	Income-tax Act, 2025 for salary events from 1 April 2026; earlier periods follow the Income-tax Act, 1961	As per the applicable tax-year rules and employee’s tax profile	As determined under the law for the relevant period	Varies by income, regime and applicable deductions
Welfare fund contribution	The applicable Kerala welfare-board Act, scheme and current board orders	Coverage, rate and contribution period depend on the board and employee category	Depends on establishment activity, location and applicable board	Confirm with the responsible board; no single rate applies to every Kerala employer

A deduction is mandatory only when the employee and establishment meet the applicable coverage and eligibility rules. For detailed guides, see: EPF Guide, ESIC Guide, PT Guide, TDS Guide and welfare-fund guide.

Authorised Voluntary Deductions (With Employee Consent)

Beyond statutory deductions, employers can deduct amounts from salaries for the following purposes, provided the employee has given written consent:

Loan recovery: Repayment of advances or loans given by the employer to the employee (e.g., housing loan, vehicle loan, personal advance). Must be documented with a loan agreement specifying the repayment schedule. Maximum deduction cannot exceed 50% of the month's wages in most cases.
Insurance premiums: Deduction of premiums for group insurance policies (health insurance, life insurance) where the employer has arranged coverage for employees. Employee consent is required.
Housing rent / accommodation charges: If the employer provides accommodation (staff quarters, guest house), rent or maintenance charges can be deducted as per the accommodation policy communicated to the employee.
Employees' Welfare Fund contributions: Contributions to a registered welfare fund (e.g., cooperative society, festival fund, welfare association) can be deducted only with the employee's written consent.
Provident Fund voluntary contributions: Employees may choose to contribute more than the statutory 12% to their EPF account (Voluntary PF or VPF). The employer deducts the additional amount based on the employee's written request.
National Pension System (NPS) contributions: If the employer facilitates NPS contributions, the employee's voluntary contribution (additional to EPF) can be deducted with consent.

Permitted Deductions Without Employee Consent

Under the Code on Wages, 2019, the following deductions are permitted even without the employee's specific consent in each instance, provided they are authorised by a contract or standing orders. The Code renumbers the provisions that the repealed Payment of Wages Act carried in its sections 7 to 13, so we cite the Code rather than the old section numbers:

Fines: Deductions for fines imposed under the establishment's standing orders or service rules (e.g., for misconduct, lateness, breach of safety rules). Fines must be: for acts or omissions that cause loss or damage, not excessive (proportionate to the offence), recorded in a fines register with the employee's acknowledgment, and the amount collected from fines must be used for employee welfare purposes (creches, canteens, etc.), not for the employer's benefit.
Deductions for absence from duty: If an employee is absent without authorised leave, the employer can deduct wages for the period of absence. However, the deduction cannot exceed the proportionate wages for the period of absence. For example, if an employee earns ₹30,000/month and is absent for 3 days without leave, the employer can deduct ₹3,000 (₹30,000/30 × 3).
Deductions for damage or loss: If the employee causes damage to the employer's property or loss of goods/money entrusted to them, the employer can deduct the amount from wages — but ONLY after giving the employee an opportunity to explain the loss, and after conducting a proper inquiry. The deduction cannot exceed the actual loss.
Deductions for housing accommodation: As mentioned above, rent for employer-provided accommodation can be deducted if this was agreed upon at the time of employment.
Deductions for amenities and services: For amenities provided by the employer (canteen, transport, electricity), deductions can be made if the employee has voluntarily accepted these services.
Deductions for recovery of advances: Advances given for any purpose (travel advance, festival advance, medical advance) can be recovered through salary deductions.

Deductions That Are ILLEGAL Under Indian Law

The following deductions are expressly prohibited and constitute an unauthorised deduction under the Code on Wages, 2019:

Deductions for not meeting sales targets (without prior written agreement): While a lower commission can be paid for lower performance, deducting from the fixed salary for missing targets is illegal unless there is a prior written agreement and the deduction does not reduce wages below the minimum wage.
Deductions for training costs or bond recovery on resignation: The Supreme Court has held that requiring an employee to pay training costs as a condition of resignation amounts to "bonded labour" in certain contexts. Training bond deductions are enforceable only if: the employer actually incurred verifiable training costs, a written bond was signed before training began, and the amount is proportionate to the actual training cost incurred.
Deductions for cash shortages in a cashier's till (without proof of negligence): Before deducting for cash shortages, the employer must prove that the shortage was due to the employee's negligence or dishonesty, not due to system errors or customer defaults.
Deductions for uniform costs (if uniform is mandatory): If the employer requires employees to wear a specific uniform, the cost of the uniform must be borne by the employer, not the employee.
Arbitrary fines without standing orders: Fines can only be imposed if the establishment has certified standing orders under the Industrial Relations Code, 2020, or if the fine is for an act specified in the establishment's service rules that have been communicated to employees.

Maximum Permissible Deductions: The 50% Rule

Under the Code on Wages, 2019, total deductions from an employee's monthly wages cannot exceed 50% of the wages payable. If deductions exceed 50%, the employer must either spread the recovery over multiple months or seek the employee's consent for the excess deduction. This rule applies to the aggregate of all deductions — statutory (PF, ESIC, PT, TDS, LWF) plus voluntary deductions (loan recovery, insurance, etc.). However, TDS is not counted toward this 50% limit in many interpretations, as it is a government-mandated deduction that the employer is legally obligated to make.

📊 See How Deductions Affect Take-Home Pay

Use our CTC to In-Hand Salary Calculator to see exactly how each deduction — PF, ESIC, PT, TDS, and LWF — affects the final take-home salary at any CTC level.

Open CTC to In-Hand Calculator →

Need Help Managing Salary Deductions?

Navigating the complex web of authorised deductions, mandatory deductions, and prohibited deductions requires expert knowledge. GHR Consultancy's payroll services ensure every deduction from your employees' salaries is legally compliant, properly documented, and correctly remitted. Explore Payroll Services or contact us for a compliance review.

GHR Consultancy is available to assist with any aspect of your compliance management. Our team based in Kottayam serves clients throughout Kerala with personalized, responsive service. Contact us for a free initial consultation to discuss your compliance needs.

Explore more articles in our Payroll & Salary series:

How GHR Consultancy Can Help

Navigating the complexities of statutory compliance in Kerala requires expertise, experience, and a thorough understanding of both central and state labour laws. At GHR Consultancy, we have been serving Kerala businesses since our establishment, providing comprehensive compliance management services that give you peace of mind and let you focus on your core business operations.

Our services include end-to-end EPF and ESIC compliance management, including monthly ECR preparation and filing, DSC management, PF and ESIC return filing, and compliance calendar management. We also handle Labour Welfare Fund registration and monthly contribution filing, Professional Tax registration and filing, Kerala Shops & Establishments registration and renewals, and factory-related compliance under the OSH Code. For businesses looking to build internal capability, we offer compliance audits, due diligence reviews, and staff training programs.

What sets us apart is our personalised approach — we assign a dedicated compliance officer to each client, ensuring continuity and accountability. Our team is based in Kottayam and we serve clients across all 14 districts of Kerala. We keep our clients informed of regulatory changes that affect their business, and we proactively manage all compliance deadlines so our clients never miss a filing date.

Contact us today for a free initial consultation. We will review your current compliance status, identify any gaps or risks, and provide a no-obligation proposal for our services. Let GHR Consultancy be your trusted partner in Kerala labour law compliance.