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All-in-one HR platform · v2.0
14-day free trial · No credit cardhello@HrMagix.com
All-in-one HR platform · v2.0
14-day free trial · No credit cardhello@HrMagix.com
Advances and loans are usually started with goodwill and tracked on a spreadsheet. The goodwill lasts; the spreadsheet does not. Months later, nobody is sure how much is outstanding, the deduction stopped when the person was on leave, and the balance is discovered at the full and final settlement.
This guide covers the policy, the paperwork, recovery through payroll and settlement at exit. It distinguishes a salary advance, which is pay brought forward and recovered quickly, from a loan, which is repaid over a longer period. The tax treatment of loans in particular is a point to confirm with your adviser.
01
One-off decisions about who gets an advance create questions of fairness quickly. A short policy answers them in advance and lets HR say yes or no without escalating every request.
02
Every advance or loan needs a written record signed by the employee: amount, date, recovery schedule, interest if any, and the employee's consent to recovery by deduction from salary and, on exit, from the final settlement.
Wage deductions are regulated, and the Payment of Wages Act 1936 and the state rules that apply to your establishments limit what may be deducted and how. Written consent and a stated schedule are the basis for the deduction; check that your recovery stays within the limits that apply.
Watch for itA verbal arrangement is the most common reason a recovery is disputed at exit. If there is no signed schedule, there is no agreed balance.
03
Record each advance or loan against the employee's record with the amount, disbursement date, schedule and outstanding balance. The monthly deduction should be generated from that record by the payroll run, not typed in each month.
That way the balance reduces automatically, the payslip shows the deduction and the remaining balance, and the deduction does not stop because someone forgot to enter it.
04
Recovery schedules assume a full salary every month. When an employee has loss-of-pay days, long unpaid leave or a salary hold, decide in the policy whether the instalment is deducted in full, reduced or deferred.
Avoid recovering so much in one month that the net pay becomes unreasonable, and record any change to the schedule with the reason and the approver.
05
An interest-free or concessional loan from an employer can give rise to a taxable perquisite for the employee under Section 17(2) of the Income Tax Act and the related rules, subject to exceptions such as small loans and loans for specified medical treatment.
Where it applies, the perquisite value is added to salary income and TDS is computed on it. The thresholds, the reference interest rate and the exceptions are set by the rules and can change, so confirm the current position with your tax adviser and configure payroll to match.
06
Include outstanding advances and loans in the exit clearance, so the balance is known before the full and final settlement is computed. Recover it from the final settlement to the extent the agreement allows and the amount permits.
Where the final settlement does not cover the balance, decide in advance whether the company will pursue recovery or write it off, and who can approve a write-off. Record the outcome on the employee record so the balance does not reappear in a later report.
Every guide ends here rather than in a summary. If a line below is not true yet, that is the next thing to do.
Through scheduled deductions from salary over an agreed period, with the employee's written consent. The deduction should be generated by payroll from the advance record so the balance reduces each month.
An advance is pay brought forward and recovered over a short period. A loan is a larger amount repaid over a longer period, sometimes with interest. The policy should treat them separately.
They can give rise to a taxable perquisite under Section 17(2) of the Income Tax Act and the related rules, with exceptions. The thresholds and reference rate can change, so confirm the current position before configuring payroll.
To the extent the signed agreement allows and the deduction limits that apply permit. Include the balance in exit clearance so it is known before the settlement is computed.
The checklist above is generic by necessity. Bring your own structures, states and rota and we will tell you which lines are already true and which are not.
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