Overview
The Payment of Bonus Act, 1965 is a labor law in India that mandates the payment of annual bonuses to employees of certain establishments. The Act was enacted to bridge the gap between wages and profits – essentially allowing employees to share in the prosperity of the establishment. It establishes a statutory right for eligible employees to receive a bonus, which is typically a certain percentage of their yearly salary, irrespective of whether such a bonus is part of their employment contract. The Act applies across India and has been amended a few times to adjust eligibility and calculation norms. Even though the Code on Wages, 2019 will subsume this Act in the future, until that comes into force, the Payment of Bonus Act remains applicable.
Applicability
The Act applies to factories (as defined under the Factories Act) and to other establishments with 20 or more employees. The term “establishment” here could include companies, firms, shops, etc., that have the specified number of employees. The government has the power to extend the Act to establishments with 10 or more employees (and indeed some states or sectors have done so), but generally the threshold is 20. Once the Act applies, it continues to apply even if the number of employees falls below 20 subsequently (until formally out of scope for a while).
However, not every employee of an establishment is eligible. Eligibility criteria for employees: The Act covers employees who draw a salary (basic + dearness allowance) of up to a certain limit – currently ₹21,000 per month (this ceiling was raised from ₹10,000 by an amendment in 2015). Employees earning above that amount are not entitled to statutory bonus under this Act. Also, the employee must have worked at least 30 days in that financial year to qualify for bonus.
The Act excludes some categories of employees: e.g., apprentices are not eligible; also, employees employed in certain capacities like managerial or supervisory with wages above the threshold are outside the ambit (the Act primarily targets workers and lower management).
Calculation of Bonus
The Act specifies that the bonus is payable as a percentage of the employee’s wage or salary (basic + DA) earned during the accounting year (typically the financial year). Key points of calculation include:
• Minimum and Maximum Bonus: The law stipulates a minimum bonus of 8.33% of the eligible earnings of the year or ₹100 (₹60 in some states) whichever is higher, to be paid to every eligible employee, regardless of the company’s profit situation (provided the company is not newly set-up and exempt due to initial losses). This is effectively equivalent to one month’s salary (8.33% is 1/12) as the minimum. The maximum bonus is 20% of the annual wages. The exact percentage in a given year depends on the allocable surplus (profit) of the establishment – if profits are high, bonus can go up to 20%; if profits are low or there is a loss, the minimum 8.33% still must be paid (with some allowances for exemptions if there are no profit at all and prior years’ losses exist, in which case only the minimum may apply and that too can be deferred with government permission).
• Allocable Surplus and Set-off/Set-on: For calculation, companies compute their gross profit as per schedules of the Act (there are specific add-backs and deductibles from financial profit to arrive at gross profit for bonus purposes). Then they subtract prior years’ losses and depreciation to get available surplus. 60% of that (67% for companies that aren’t banking) is “allocable surplus” for bonus. If allocable surplus is enough to pay more than minimum bonus, then bonus % is increased accordingly, capped at 20%. If the allocable surplus is not even enough to pay 8.33%, the minimum bonus still must be paid (but the shortfall can be carried as a “set-off” to next years meaning future surpluses can first cover past deficit). Conversely, if in a year the allocable surplus would allow a bonus above 20%, the excess is carried forward as a “set-on” which can be used to pay bonus in lean years. These provisions smooth out bonus payments over good and bad years. While the technical calculation is usually done by finance departments, HR should understand the outcome in terms of percentage to inform employees.
• Wage Calculation for Bonus: The salary to consider for bonus is capped. Even if an employee’s salary is, say, ₹18,000 (which is under ₹21k limit, so eligible), the bonus is calculated on a maximum considered salary of ₹7,000 or the minimum wage for the scheduled employment, whichever is higher (this ₹7,000 cap was introduced in the 2015 amendment). For most, ₹7,000 or applicable minimum wage (often higher than 7k for many skilled categories) is the base. So, an employee with ₹18,000 salary would effectively get bonus as if their salary was ₹7,000 (if no higher min wage applicable) – so min bonus = 7,000 * 8.33% = ~₹583 per year per month of service (if full year, ~₹7,000 * 8.33% * 12 = ₹7,000). This cap effectively limits the absolute amount of bonus payable to higher earners, ensuring the benefit is more skewed towards lower-paid employees.
Compliance Obligations
Employers need to follow certain compliance steps for the Bonus Act:
• Payment Timeline: Bonus should be paid within 8 months from the close of the accounting year (the Act says within 8 months of year end, i.e., by 30th November for the financial year ending March 31st). Often employers pay the bonus around Diwali festival which roughly coincides with this timeline, hence it’s colloquially called “Diwali Bonus” in many companies. Delays beyond this period can attract interest liability and penal action.
• Annual Returns and Records: Employers must maintain a register showing the computations of allocable surplus and bonus for each accounting year (Form A – shows gross profit calc, Form B – set-on/set-off calc, Form C – bonus paid details to each employee). Some states require an annual return to be filed with the labor department on bonus payments. Records of bonus payments (receipts or bank transfer proof) and how each employee’s bonus was calculated (days worked, wages considered, percentage) should be kept. These can be inspected by labor authorities.
• Communication: Employers typically communicate the bonus percentage or amount to employees through payslips or a separate statement. Even though statutory bonus is law, it’s good for morale and transparency to explain how it was determined, especially if the bonus is only the minimum due to losses (so employees know it’s not arbitrary).
• Coverage of Contract Workers: There have been cases and clarifications that contract workers (employed through contractors) are entitled to bonus from the contractor as their employer if the Act applies to the contractor’s establishment. Principal employers should ensure that their contractors are paying bonus to contract labor if eligible, as occasionally disputes arise trying to push liability.
• Adjustment of Customary Bonus: If a company already pays some production bonus or customary festival bonus, that might be adjusted towards the statutory bonus requirement provided it meets the conditions. But an employer cannot waive the statutory bonus by citing other incentives unless those are appropriately accounted for under the Act’s provisions.
Benefits and Impact
For employees, the bonus received under this Act is a significant annual monetary benefit, especially for those in the lower wage brackets – it can feel like a 13th month salary if 8.33% is paid. For employers, it’s an additional labour cost that must be budgeted. Many companies, of course, pay performance bonuses or ex-gratia beyond the statutory requirements for managerial staff, but the Act ensures a minimum bonus floor for all eligible workers.
Non-compliance with the Payment of Bonus Act can lead to penal consequences: the Act provides for fines (up to ₹1000) or imprisonment (up to 6 months) for contraventions like not paying bonus, not maintaining records, etc. Employees (or trade unions) can raise disputes under the Industrial Disputes Act if bonus is unjustly withheld.
In practice, since the Act’s financial thresholds (like ₹21,000 eligibility) cover a large portion of non-supervisory staff, most businesses make it a point to comply and treat bonus payment as a routine part of annual payroll. The Act has also been a subject of discussion in labor reforms – the new Wage Code will unify it. But importantly, under the Wage Code, the concept of bonus remains, and companies will continue to have to share profits with employees to some extent.
HR and payroll departments must coordinate with finance to calculate and disburse the bonus correctly. Often, if profits are not finalized, companies at least pay the minimum 8.33% and then may give an additional amount later if accounts confirm a higher percentage is due (sometimes as an interim and final bonus). All these details need clear communication to employees to manage expectations and compliance.
