Do you know the linkage of Employee loans/advances with payroll compliances?

Do you know the linkage of employee loans/advances with payroll compliance?

Do you know the linkage of Employee loans/advances with payroll compliances?

It is a common phenomenon that sometimes employees ask for advance payments from their salaries before the date of payroll or loans for personal or professional reasons! But do you know that there are payroll compliances set for such advances and loans? Let’s get to know the ABCs and be well-informed about these regulations!

However, before we get into the rules, you should know the difference between an advance and loans!

A loan is given to the employee at a concessional rate of interest as compared to the market rate! It can be a large loan like a home loan or vehicle loan or even a small amount. The main highlight is the low rate of interest which acts as a huge breather to the employee

An advance, on the other hand, is a small portion of the salaries of the employees that are paid before the actual date of handouts! These are later recovered by deducting the amount either in full or in installments from the upcoming salaries. There is no interest on the repayment of advances!

Now let us look at the compliances laid down for these which are governed by the Companies Act 2013(CA):

There was a General Circular issued by the Ministry of Corporate Affairs on 10th March 2015 with respect to clarifications to sections 185 and 186 of CA.

  • The Ministry has relaxed the compliance requirements mentioned under 186. Thus, loans and advances given by the companies to employees (except for Directors or Managing Directors) won’t fall under the ambit of section 186. While making such advances or loans, the following things have to be looked at:
    1. Creation of a written agreement to provide a clear idea to the employee and the loan payback is to be carried out through a payroll deduction which will reflect in the payslips

    2. The difference in the rate of interest between that of the company and market rate will be charged as a prerequisite if it is less than that of the previous year!

    3. If you loan money to an employee versus payroll advance, interest can be charged with a reasonable amount

  • The Government has fixed an overall limit up to which loans can be given without security but for loans exceeding that limit, prior shareholder approval is required to be passed in a special resolution at the general meeting of the company.

  • The companies are also supposed to disclose in the financial statements all the particulars of loans or securities

  • All of these loans and advances are strictly based on the terms of service of the employees and the company!

  • Lowered Interest Rates for employee loans

Boston Financial has an innate solution for all your payroll related compliances. Interested in learning more about our Compliance Inbox, get in touch with us!

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