Section 18 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 18 of the Code on Wages, 2019 is the gatekeeper for payroll deductions. No deduction may be made from an employee's wages unless this Code authorises it, and the Code lists the permitted purposes in sub-section (2). Total deductions in a wage period are capped at fifty per cent of wages, and excess is recovered later.
Notwithstanding any other law, there can be no deductions from wages except those authorised under the Code (s.18(1)). Sub-section (2) lists fifteen purposes, clauses (a) to (o). The total deductions in any wage period must not exceed fifty per cent of the wages (s.18(3)); any excess may be recovered as prescribed (s.18(4)). If an employer deducts money for a trust or Government fund and does not deposit it, the employee is not responsible for that default (s.18(5)).
Sub-section (1): the rule, and two explanations
The opening words are "Notwithstanding anything contained in any other law for the time being in force". So a deduction that a contract or another law allows is still unlawful as a wage deduction unless the Code authorises it.
The Explanation to sub-section (1) adds two points.
- (a) A payment by the employee is a deduction. Any payment made by an employee to the employer or his agent is deemed to be a deduction from his wages. A "fee", "security" or "contribution" collected from the employee in cash can therefore be tested as a deduction.
- (b) Certain losses are not deductions. A loss of wages for good and sufficient cause resulting from withholding or stoppage of an increment or promotion, reduction to a lower post or time-scale, or suspension, is not deemed a deduction, but only where the provisions made by the employer for these purposes satisfy the requirements in the notification issued by the appropriate Government. The text does not state those requirements; the notification must be checked.
Because every head on a payslip is tested against this section, many employers start with a payroll review. Our payroll compliance audit service maps each deduction head to the clauses below.
Sub-section (2): the permitted purposes
| Clause | Purpose (summary) | Further conditions |
|---|---|---|
| (a) | Fines imposed on the employee | s.19 |
| (b) | Absence from duty | s.20 |
| (c) | Damage to or loss of goods expressly entrusted for custody, or loss of money for which the employee must account, directly attributable to his neglect or default | s.21 |
| (d) | House-accommodation supplied by the employer, by the appropriate Government or a housing board, or another authority engaged in subsidising house accommodation as specified by notification | s.22 |
| (e) | Amenities and services supplied by the employer, as authorised by the appropriate Government or specified officer by general or special order; not above their value; "services" excludes tools and raw materials | s.22 |
| (f) | Recovery of (i) advances (including travelling or conveyance advances) with interest, or adjustment of overpayment of wages; (ii) loans from a welfare fund as prescribed, with interest | s.23 |
| (g) | Loans for house-building or other purposes approved by the appropriate Government, with interest | s.24 |
| (h) | Income-tax or any other statutory levy payable by the employee; deductions ordered by a court or competent authority | None in the Code |
| (i) | Subscription to, and repayment of advances from, any social security fund or scheme constituted by law, including provident fund, pension fund or health insurance | None in the Code |
| (j) | Payment to a co-operative society | Conditions imposed by the appropriate Government |
| (k) | Fees and contribution for membership of a registered Trade Union | Written authorisation of the employee |
| (l) to (n) | Railway administration losses: counterfeit or base coins or mutilated or forged notes accepted; failure to invoice, bill, collect or account for charges; rebates or refunds wrongly granted | (n) requires loss directly attributable to neglect or default; s.21 covers clauses (c) and (n) |
| (o) | Contribution to the Prime Minister's National Relief Fund or another fund the Central Government specifies | Written authorisation of the employee |
Clause (h) mentions income-tax. The Income-tax Act, 1961 has been replaced by the Income-tax Act, 2025 from 1 April 2026; see our income-tax guides on salary TDS.
Map each recurring payslip deduction to one clause above. If a head such as a uniform charge or a training bond recovery cannot be mapped, it is not authorised by s.18(2) on its face. The text does not say whether the fifty per cent ceiling applies separately to a final settlement.
Sub-sections (3) and (4): the fifty per cent ceiling
Notwithstanding anything in the Code and subject to other laws in force, the total amount of deductions under sub-section (2) in any wage period shall not exceed fifty per cent of such wages. Where total authorised deductions exceed fifty per cent, the excess may be recovered "in such manner as may be prescribed".
Two things are worth noticing. First, the ceiling is on the total of all clause (a) to (o) deductions in a wage period, not per head. Second, the ceiling is on "wages" as the Code defines them in section 2(y); do not assume it is calculated on gross pay or on basic pay alone.
What the Central Rules add. Rule 13 of the Code on Wages (Central) Rules, 2026 (G.S.R. 343(E), 8 May 2026) says that where total authorised deductions exceed fifty per cent of wages, the excess is carried forward and recovered from the wages of succeeding wage periods in instalments, so that recovery in any month does not exceed fifty per cent of the employee's wages in that month. The Central Rules apply only where the Central Government is the appropriate Government; where the State Government is the appropriate Government, the State's own wage rules apply. See Rules 13 to 16.
Hypothetical example. An employee's wages for a month are Rs 20,000. Authorised deductions in that month are Rs 4,000 (provident fund), Rs 7,000 (recovery of an advance with interest) and Rs 3,500 (fine and damage deduction), a total of Rs 14,500. The ceiling is 50% of Rs 20,000 = Rs 10,000. The excess of Rs 4,500 is carried forward under rule 13 and recovered in later months, within the same ceiling. The figures are invented only to show the arithmetic.
Sub-section (5): deducted but not deposited
Where the employer makes a deduction under this section but does not deposit it in the account of the trust, Government fund or other account as the law requires, the employee is not held responsible for the employer's default. This protects an employee whose provident-fund or tax deduction was shown on the payslip but never remitted.
Need help with payslip deductions?
An unauthorised deduction is an easy claim for an employee to prove from the payslip alone. Our payroll compliance audit team can tag each deduction to a clause of s.18(2), test the fifty per cent ceiling and set up the carry-forward record.
Key takeaways
- Only deductions authorised by the Code are lawful, even if another law or a contract permits more.
- A payment by the employee to the employer or his agent is deemed a deduction.
- Section 18(2) lists fifteen purposes, clauses (a) to (o); some need written authorisation.
- Total deductions in a wage period cannot exceed fifty per cent of wages; Rule 13 carries the excess forward.
- An employee is not responsible if the employer deducts but does not deposit.
Read next
- Section 19: fines
- Section 17: time limit for payment of wages
- Rules 13 to 16 of the Central Rules: recovery of deductions and procedure for fines
- Authorised deductions under the old Payment of Wages Act
Disclaimer: Based on the Code on Wages, 2019 (as enacted) and, where noted, the Code on Wages (Central) Rules, 2026 (G.S.R. 343(E), 8 May 2026), as on 1 October 2026. The Code is in force from 21 November 2025; State Governments make their own rules for establishments where the State is the appropriate Government, and wage rates are notified separately. Verify the current position before acting.