Payment of Bonus Act (India)
India's central legislation enacted in 1965 that mandates payment of an annual bonus to employees in establishments with 20 or more workers, with a minimum bonus of 8.33% and a maximum of 20% of wages or salary.
- What Is the Payment of Bonus Act (India)?
- Applicability and Employee Eligibility
- How Bonus Is Calculated
- Payment Deadlines and Mode
- Common Compliance Scenarios
- Penalties for Non-Compliance
- Exemptions and Customary/Contractual Bonuses
- Year-End Bonus Compliance Checklist
- Bonus Payment Data in India
- Frequently Asked Questions About the Payment of Bonus Act
What Is the Payment of Bonus Act (India)?
Key Takeaways
- ✓The Payment of Bonus Act, 1965, requires employers in establishments with 20 or more employees to pay an annual bonus to every eligible employee, calculated as a percentage of the employee's wages or salary.
- ✓The minimum bonus is 8.33% of wages (or Rs 100, whichever is higher), payable even if the employer earns no profit in that year. This makes it a statutory entitlement, not a performance-based reward.
- ✓The maximum bonus under the Act is 20% of wages, payable when the employer's allocable surplus allows it. Bonus above 20% can be paid voluntarily but isn't covered by the Act.
- ✓Employees earning up to Rs 21,000 per month in wages or salary are eligible. For calculation purposes, even if actual wages exceed Rs 7,000 per month, the bonus is calculated on Rs 7,000 (or the minimum wage, whichever is higher).
- ✓The Act was amended in 2015 to raise the eligibility ceiling from Rs 10,000 to Rs 21,000 and the calculation ceiling from Rs 3,500 to Rs 7,000, significantly expanding coverage.
The Payment of Bonus Act was born from India's tripartite industrial relations system. In the 1960s, the government appointed the Bonus Commission to settle the long-standing dispute between employers and unions over profit-sharing. The Commission's recommendations became this Act. The core principle: employees who contribute to an employer's productivity deserve a share of the surplus, regardless of how small. Even when there's no surplus, they deserve a minimum payment, recognizing their contribution to keeping the business running. This is why the 8.33% minimum bonus is payable regardless of profits. It's not a bonus in the conventional sense. It's a statutory deferred wage. The Act creates a specific formula for calculating "allocable surplus" from the employer's gross profits, and the bonus payable to each employee is derived from this surplus, subject to the 8.33% floor and 20% ceiling. For HR and payroll teams, the Act creates year-end compliance obligations: calculate allocable surplus, determine individual bonus amounts, pay within 8 months of closing the accounting year, and maintain prescribed records.
Applicability and Employee Eligibility
The Act applies to specific types of establishments and covers employees below a defined wage threshold.
Covered establishments
The Act applies to every factory and every establishment where 20 or more persons are employed on any day during an accounting year. Once an establishment is covered, it remains covered even if the headcount drops below 20 in subsequent years. This "once covered, always covered" principle (Section 1(5)) prevents employers from manipulating headcount to escape the Act's requirements. Government establishments and certain specified institutions (like the LIC, RBI, and IFCI) are excluded.
Eligible employees
Every employee earning wages or salary up to Rs 21,000 per month is eligible for bonus, provided they have worked for at least 30 days in the accounting year. "Employee" includes anyone doing skilled, unskilled, manual, supervisory, managerial, administrative, or technical work, whether temporary, permanent, or employed through a contractor. Employees dismissed for fraud, riotous or violent behavior, or theft, misappropriation, or sabotage of employer property are disqualified from bonus for that year.
New establishments
New establishments are exempt from paying bonus (beyond the minimum 8.33%) for the first five years if they haven't earned profits. However, the minimum 8.33% bonus is always payable from the first year of operations. In the first year, it's payable if the employer earns any profit. From years two through five, the minimum bonus is payable regardless of profit. From the sixth year onward, full bonus provisions apply including profit-linked calculations.
How Bonus Is Calculated
The bonus calculation involves determining the employer's allocable surplus and distributing it to eligible employees.
Gross profit and available surplus
Step 1: Calculate gross profits using the formula in the First Schedule (for banking companies) or Second Schedule (for other companies). Step 2: Deduct depreciation, development rebate, direct taxes, and certain reserves to arrive at the available surplus. Step 3: Add any set-on or set-off amounts carried forward from previous years (the Act allows surplus and deficits to be carried forward for up to four years). Step 4: Calculate allocable surplus: 67% of available surplus for companies, 60% for other establishments.
Individual bonus calculation
Each eligible employee's bonus is calculated on their wages or salary, but capped at Rs 7,000 per month (or the minimum wage for the scheduled employment, whichever is higher) for calculation purposes. So an employee earning Rs 21,000 per month has their bonus calculated on Rs 7,000 per month, not Rs 21,000. The bonus percentage (between 8.33% and 20%) depends on the allocable surplus available. If the allocable surplus supports it, all employees get the same percentage. If the surplus only supports 10%, all eligible employees get 10%.
Set-on and set-off mechanism
If the allocable surplus in a year exceeds the amount payable at the maximum rate (20%), the excess is carried forward as "set-on" to the following year(s), up to a maximum of 4 years. Conversely, if the allocable surplus is less than the amount payable at the minimum rate (8.33%), the shortfall is "set-off" against the surplus of the following year(s), again up to 4 years. This mechanism smooths bonus payments across profitable and unprofitable years, preventing employers from arguing that a single bad year eliminates the bonus obligation entirely.
Payment Deadlines and Mode
The Act specifies when and how bonus must be paid.
Payment deadline
Bonus must be paid within 8 months of the close of the accounting year. If there's a dispute pending before any authority under the Act, the bonus must be paid within one month of the date the award becomes enforceable. For most companies with an April-March accounting year, this means the bonus must be paid by November 30 at the latest. Many companies pay at Diwali (October-November), aligning the statutory obligation with the cultural practice of festival bonuses.
Mode of payment
The Act doesn't prescribe a specific payment mode. Bonus can be paid in cash, by cheque, or through bank transfer. Most organized-sector employers pay bonus along with a regular salary cycle. The bonus amount should be clearly identified as "statutory bonus" in the pay slip to distinguish it from any ex-gratia or performance bonus the employer may pay separately.
Common Compliance Scenarios
Practical situations HR teams encounter when implementing the Payment of Bonus Act.
Employee who joins mid-year
An employee who joins after the start of the accounting year is eligible for prorated bonus if they have worked for at least 30 days. The bonus is calculated on the wages earned during the actual period of employment in that year. For example, an employee who joins on October 1 and earns Rs 15,000 per month has their bonus calculated on Rs 7,000 per month for 6 months (October to March), and receives 8.33% of Rs 42,000 = Rs 3,499.
Employee earning above Rs 21,000 but below management level
An employee earning Rs 25,000 per month is not eligible for statutory bonus under the Act because their salary exceeds the Rs 21,000 ceiling. However, many employers pay ex-gratia bonus to such employees to maintain internal equity. Ex-gratia payments are voluntary and not governed by the Act. Some companies include a clause in the appointment letter specifying that the ex-gratia bonus is "in lieu of" statutory bonus, though this doesn't change the legal position for employees below the ceiling.
Employer with zero or negative profits
The minimum 8.33% bonus is payable even if the employer has no profits or incurs losses. This is the most misunderstood aspect of the Act. The 8.33% minimum is a statutory obligation that exists independently of the profit-based calculation. Only the variable portion between 8.33% and 20% depends on allocable surplus. A loss-making company must still pay 8.33% bonus to all eligible employees.
Penalties for Non-Compliance
The Act imposes penalties on employers who fail to pay bonus or violate its provisions.
| Violation | Penalty | Section |
|---|---|---|
| Failure to pay bonus within prescribed time | Imprisonment up to 6 months, fine up to Rs 1,000, or both | Section 28 |
| Contravention of any other provision | Imprisonment up to 6 months, fine up to Rs 1,000, or both | Section 28 |
| Failure to maintain prescribed registers/records | Imprisonment up to 6 months, fine up to Rs 1,000, or both | Section 28 |
| Failure to submit annual return | Imprisonment up to 6 months, fine up to Rs 1,000, or both | Section 28 |
| Company: offense with consent/neglect of director/officer | That person is also personally liable | Section 29 |
Exemptions and Customary/Contractual Bonuses
The Act has specific exemption provisions and interacts with customary bonus practices.
Government exemptions
The central government can exempt any establishment or class of establishments from all or any provisions of the Act, subject to conditions. Several categories have been exempted: employees of LIC, RBI, UTI, IFCI, and certain other financial institutions. Seasonal establishments may receive modified treatment. New establishments can apply for exemption during their initial unprofitable years, though the minimum 8.33% generally remains applicable.
Customary and contractual bonus
Many Indian employers pay bonuses beyond the statutory requirement, either as a contractual obligation (specified in the employment contract or collective agreement) or as a customary practice (Diwali bonus, performance bonus). These are separate from the statutory bonus under the Act. However, if a customary bonus has been paid consistently for several years, it may become a "term of employment" that can't be unilaterally withdrawn. Courts have held that a bonus paid for 10 or more consecutive years creates a reasonable expectation that amounts to a binding practice.
Year-End Bonus Compliance Checklist
Steps HR and finance teams should follow to ensure compliant bonus processing.
- Identify all eligible employees: those earning up to Rs 21,000 per month who have worked at least 30 days during the accounting year.
- Calculate each employee's bonus on Rs 7,000 per month (or the applicable minimum wage, whichever is higher), regardless of their actual salary, for the period they were employed during the year.
- Determine the allocable surplus using the prescribed formula. Factor in set-on and set-off amounts carried forward from the previous four years.
- Calculate the bonus percentage: minimum 8.33%, maximum 20%, based on the allocable surplus available per employee.
- Pay the bonus within 8 months of the accounting year's close. For April-March year companies, this means payment by November 30.
- Maintain Form A (computation of gross profit), Form B (computation of available surplus), Form C (computation of set-on and set-off), and Form D (register of bonus paid to employees).
- Submit the annual return in Form D to the Labour Commissioner within 30 days of paying the bonus.
- Keep separate records of statutory bonus and any ex-gratia or performance bonus to avoid confusion during audits or disputes.
Bonus Payment Data in India
Key numbers related to bonus payments and compliance.
Frequently Asked Questions
Is bonus mandatory even if the company is making losses?
Can an employer pay bonus to employees earning above Rs 21,000?
How is bonus treated for income tax purposes?
Does the 30-day working requirement include notice period?
Can an employee waive their right to bonus?
Written by Adithyan RK