Sections 37 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.
Sections 37 and 38 of the Code on Wages, 2019 deal with two adjustments to the bonus payable for an accounting year. Section 37 lets the employer deduct a puja bonus, other customary bonus or an advance part of the bonus already paid. Section 38 lets the employer deduct the amount of a financial loss caused by an employee's proved misconduct.
If, in an accounting year, an employer has paid a puja bonus or other customary bonus, or a part of the bonus before the date it becomes payable, the employer may deduct that amount from the bonus payable under the Code for that year, and the employee gets only the balance (s.37). If an employee is found guilty of misconduct causing financial loss to the employer in an accounting year, the employer may deduct the amount of the loss from the bonus for that accounting year only, and the employee gets the balance, if any (s.38).
Section 37: customary and interim bonus
Section 37 covers two situations in the same accounting year:
| Clause | What the employer has paid | Effect |
|---|---|---|
| (a) | A puja bonus or other customary bonus to the employee | Employer may deduct that amount from the bonus payable under the Code for that year |
| (b) | A part of the bonus payable under the Code to the employee before the date on which the bonus becomes payable | Employer may deduct that amount from the bonus payable under the Code for that year |
In each case "the employee shall be entitled to receive only the balance". Employers with festival bonus practices, such as a puja or Diwali payment, should align them with these sections; our payroll compliance audit service can review how such payments are labelled in payroll.
Points to read carefully:
- Same accounting year. The wording is "where in any accounting year" the employer has paid, and the deduction is from the bonus "in respect of that accounting year". A festival payment made in one accounting year does not reduce the bonus of a different accounting year.
- It is an adjustment, not a new right. The section says the employer is "entitled to deduct". It does not say the employer must treat a customary bonus as part of statutory bonus in every case; the employer should record, at the time of payment, that the amount is an adjustable advance of bonus or a customary bonus.
- Amount deducted, not a percentage. Only the amount actually paid is set off.
- No cap in the text. The section says nothing about the case where the customary bonus is higher than the bonus payable under the Code. The text does not provide for any recovery of the excess; it provides only that the employee gets "only the balance". Whether the excess customary bonus is simply retained by the employee is therefore a matter on which advice should be taken, based on the terms on which the customary bonus was given.
Hypothetical example. An employee's bonus under the Code for the accounting year works out to Rs 12,000. During the year the employer paid a puja bonus of Rs 3,000 and a part-payment of bonus of Rs 2,000 in October, before the bonus became payable. Under s.37 the employer may deduct Rs 3,000 + Rs 2,000 = Rs 5,000. The balance payable is Rs 7,000. The figures are invented only to show the arithmetic.
Section 38: deduction for misconduct causing financial loss
Where in any accounting year an employee is found guilty of misconduct causing financial loss to the employer, it is lawful for the employer to deduct the amount of loss from the bonus payable by him to the employee under the Code in respect of that accounting year only. The employee is entitled to receive the balance, if any.
Reading the section:
- "Found guilty." The text does not say who finds the employee guilty or by what procedure. A documented inquiry with an opportunity to be heard is the prudent basis; see the deduction procedures for loss in section 21, which concern wages, not bonus.
- Financial loss. The deduction equals the amount of loss, no more.
- That accounting year only. The loss can be recovered from the bonus of the year in which the misconduct occurred. If the loss exceeds the bonus, the section does not allow carrying the balance of the loss into the next year's bonus. "Balance, if any" shows that the bonus can be reduced to nil.
- Link to section 29. Dismissal for theft, misappropriation or sabotage disqualifies the employee from bonus altogether under section 29; section 38 is for an employee who is still in service or not dismissed on those grounds.
The Code does not state whether the fifty per cent ceiling on deductions in section 18(3) applies to deductions from bonus. Section 18 deals with deductions from "wages", and the text of ss.37 and 38 does not refer to it. Employers should not assume either way and should keep the deduction proportionate.
| Question | Position in the text |
|---|---|
| Who decides guilt under s.38? | Not stated |
| Is there a cap on the s.38 deduction? | Only the amount of the loss and the bonus of that year |
| Does s.38 refer to the s.18(3) ceiling? | No |
| Can a past year's loss be recovered from this year's bonus? | The section says "in respect of that accounting year only" |
What the Central Rules add
The Code on Wages (Central) Rules, 2026 (G.S.R. 343(E), 8 May 2026) 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. In the Rules text read for this article, there is no rule prescribing a procedure for ss.37 or 38. The bonus rules (21 to 28) deal with contractual employees, the sixth and seventh years, gross profits, prior charges and set-on and set-off. See Rules 21 to 23. For the old-law comparison, see our guide on deductions from bonus: festival advance and puja.
Need help with bonus adjustments?
Mislabelled festival payments and unsupported loss deductions are the usual sources of bonus complaints. Our payroll compliance audit team can review your festival payment records, the loss-deduction file and the final bonus working before payment.
Key takeaways
- A puja bonus, other customary bonus or an advance part of the Code bonus paid in the accounting year can be deducted from that year's bonus.
- The employee receives only the balance.
- Misconduct causing financial loss allows a deduction of the amount of loss from that year's bonus only.
- The text sets no procedure for finding guilt; keep a documented inquiry.
- Whether the fifty per cent ceiling of s.18(3) applies to bonus deductions is not stated.
Read next
- Section 36: set on and set off of allocable surplus
- Section 39: time limit for payment of bonus
- Sections 29 and 30: disqualification for bonus and departments of an establishment
- Deduction from bonus: festival advance and puja under the old 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.