Salary Advance Policy: Rules, Limits and Recovery

A receptionist at a physiotherapy clinic in Indore asks the owner for ₹30,000. Her sister's wedding is in three weeks. She has been there four years, she's never late, and the owner says yes on the spot. Then he realises he has no idea how she'll pay it back, what happens if she leaves in February, or whether the clinic's accountant will have something to say about it.

Most small businesses give advances this way, and most of the time it works out. The trouble starts with the second advance, or the one that's still open when someone resigns. A one-page policy settles those questions before anyone asks for money.

What a salary advance policy should cover

Seven lines are enough. Write them down, have each person sign the policy once, and have them sign a short request each time they borrow.

1. Who can ask. Usually anyone past probation. New joiners are the riskiest borrowers, because they're the likeliest to leave.
2. How much. One month's gross is the common ceiling for an advance. Anything bigger is a loan, with its own rules.
3. How it's repaid. A fixed number of monthly instalments, taken from salary. Three to six is typical for an advance.
4. Interest, if any. Most advances carry none. A larger staff loan may, and the method matters (there's a table on this below).
5. One at a time. Say whether a second advance is allowed while the first is being repaid.
6. Who approves. One named person, and a second one when the owner is the borrower's manager.
7. What happens at exit. The balance is recovered from the final settlement, and anything the settlement can't cover is still owed.

The advance, instalment by instalment

The clinic's policy says six instalments with no interest, the first one due a month after the money is paid out. Here's the schedule, worked out by the same code Facto Lite runs when an advance is disbursed:

₹30,000 lent, ₹30,000 repaid, and the balance reaches exactly zero on 5 May 2026. When an amount doesn't divide evenly, the last instalment takes the odd paise. Nobody gets chased for 8 paise in the seventh month.

Employee loan policy: flat or reducing interest

A bigger loan is where interest comes in, and the way it's charged changes the cost more than the rate does. Say the clinic lends a physiotherapist ₹1,50,000 over 24 months at 9% a year.

Flat interest is charged on the whole ₹1,50,000 for the whole two years, even when half of it has already been paid back. Reducing balance charges interest only on what's still owed each month. At the same headline rate, flat costs the borrower 1.9 times as much in interest. If your policy says "9% interest", say which kind. Facto Lite shows the borrower both totals before they apply.

Salary advance deduction from salary, and the 50% limit

The instalment comes out of salary, but there's a ceiling on how much you can take in a month. Under section 18 of the Code on Wages, everything deducted in a month can't add up to more than half of that month's wages, and that total includes PF, ESI and income tax as well as advances, loans and fines. So when two instalments land in the same month for someone on modest pay, they may not both fit.

In December the receptionist's advance instalment of ₹5,000 is due, and so is ₹3,000 from a festival advance she took in October. Her wages for the month are ₹14,000. The clinic has eight people, so PF and ESI don't apply to it yet, her pay is below income tax, and Madhya Pradesh charges no professional tax up to ₹2.25 lakh a year. Nothing statutory comes off first, so the whole half is room for the two instalments.

The first instalment is taken in full, ₹2,000 of the festival instalment fits, and the remaining ₹1,000 moves to January. Nothing is lost. The borrower just finishes a month later.

Advance recovery on resignation

When someone resigns with an advance still open, the balance comes off their full and final settlement. Two things to know before you count on that.

• The same rules apply to the final wages. Deductions from the wages paid in the settlement follow section 18, including the half-of-wages ceiling. Whatever doesn't fit, or anything owed once no wages are left to pay, is a debt you ask the person to repay.
• Your policy is your evidence. A signed request that says the balance is recoverable at exit is what makes the recovery hard to dispute.

In Facto Lite the advance's outstanding balance is on the loan record, and you add it as a recovery on the settlement. The full and final settlement calculator has a line for advances, so you can see the net figure before the conversation.

Interest-free loan to employees: the perquisite rule

An interest-free or cheap loan from an employer can be a taxable perquisite for the employee. The value is interest at the State Bank of India's rate on the outstanding balance, less whatever interest the employee pays. There's a threshold below which none of it counts:

• Up to 31 March 2026 it was ₹20,000 of loans outstanding in total.
• From 1 April 2026, under the Income-tax Rules 2026, it's ₹2,00,000.

The threshold works as a cliff: one rupee over and the whole balance counts, so check the combined balance of every loan the person has. The receptionist's ₹30,000 advance was over the old threshold and is well under the new one. Facto Lite names a loan that crosses the threshold for your accountant. It doesn't compute the perquisite, and a written-off loan is recorded as a possible perquisite for the same reason.

A policy you can copy

Here's the clinic's, in full. Change the numbers to suit you.

Advances are one line in a longer monthly routine. How to run payroll for a small business shows where they fit, and the expense reimbursement process covers money going the other way.