The payment of bonus is dealt by “Payment of Bonus Act, 1965”, read with “payment of Bonus Rules, 1975”, (central rules)B, the main purpose of the enactment is to impose a legal obligation on the employer to provide for payment of bonus. 

The Payment of Bonus Act applies to every factory and establishment employing not less than 20 persons on any day during the accounting year.

What is Bonus?

Bonus is considered as “reward” or any additional payment made to their monthly remuneration, given by the employer to the employee in any establishment. The basic objective to give the bonus is to share the profit earned by the organisation amongst the employees.

Any payment made in kind is perquisite, not a bonus.

The Minimum bonus will be provided 8.33% of the salary during the year, or one hundred rupees will be given in case of employees above 15 years and sixty rupees in case of employees below 15 years, whichever is higher. The maximum bonus is 20% of salary during the accounting year.

What are the Establishments/Industries/Factories to which the act is Applicable?

The act is extent to the whole of India, and the act is applicable to :

  • Every Factory
  • Other Establishments where 20 or more persons are employed on any day during the year
  • Any Establishment or Class of establishment notified in the Gazette by the Appropriate Government
  • Part-time Employees also included.

The Establishments covered under the Act Shall continue to pay the bonus even if the number of employees falls below subsequently.

What are the categories of Establishments to which the Act is not applicable?

  • Employees of General Insurance Business or LIC
  • Seamen defined under the Merchant Shipping Act
  • Employees of RBI
  • Employees of Unit Trust of India, IDBI, Deposit Insurance Corporation etc

What are the Eligibility criteria required to be fulfilled by the employees to receive Bonus?

Any person is eligible to receive a bonus under the act, on fulfilment of the following criteria:

  • The employee must receive salary/wage up to Rs. 21,000/- per month (By the Amendment of 2015)
  • The employee must have worked in the factory or establishment for not less than 30 days in a year

However, on the commission of certain acts, the employee gets disqualified from getting a bonus, such as any frauds, violent behaviour, riots, theft, misappropriation or sabotage of any property. (Section 9 of the Act)

What is the Maximum time for Payment of Bonus?

The bonus shall be paid within 8 months from the end of the accounting year, or within a month from the date of enforcement of the act.

How is the Amount of Bonus payable calculated?

The act prescribes for the minimum bonus, that is 8.33% of the employee’s Salary/wages, which is the least percent mandatorily to be paid by every establishment or organisation covered by the act, (Section 10 of the Act); on the other hand, the maximum amount of bonus shall not exceed, 20% of the salary/wages of the employees (Section 11 of the Act).

exceed, 20% of the salary/wages of the employees (Section 11 of the Act). The ceiling amount on which the bonus payable is calculated is Rs. 7,000 per month (amendment of 2015), earlier this amount was Rs 3,000. Therefore, if the employee receives Gross Salary up to of Rs 21,000 per month, the employee is eligible to receive bonus. 

For bonus calculation only employee’s Salary/Wages and Dearness allowance is considered.

Therefore, if the Basic Salary and Dearness Allowance is less than Rs. 7,000 (calculation ceiling), the Bonus will be calculated on the actual amount, and in case the Basic Salary and Dearness Allowance, exceeds Rs. 7,000; bonus will be calculated on Rs 7000 only.

Bonus Calculation:

  1. Basic Salary + DA < 7,000, then in such cases, Bonus Payable = (Basic Salary + DA) * Amount %, either 8.33% (establishment is supposed to give even in case of deficit) or could go up to 20%
  2. Basic Salary + DA > 7000, then in such cases, Bonus Payable= Rs. 7000, % either 8.33% (establishment is supposed to give even in case of deficit) or could go up to 20%.

What is the Statutory compliance on the part of Employer?

Considering the Act, there are certain obligations or the compliances on the part of the Employer which they are supposed to comply to, if not, they could be subjected to certain offences or penalties provided in the act. 

Several compliances that the employer needs to follow are:

  • The employer shall pay the amount of Bonus within 8 months, from the end of the accounting year, in cash
  • The employer shall prepare Registers such as:
    • Register having the entire computation of allocable surplus, in FORM A
    • Register showing set-on and set-off, in FORM B
    • Register containing details such as amount of bonus payable, deductions to be made, the amount disbursed, in FROM C
  • Employer shall upload details of Annual Returns in FORM D, on the Portal of Ministry of Labour and Employment, on or before 1st day of Feb, every year
  • Every employer is supposed to file Annual Return in FROM D, to the inspector on or before 1st Feb every year
  • In case of any disputes relating to the payment of bonus, and the case is before any authority, then in such cases, amount shall be paid within 1 month from the date the award passed becomes enforceable. 

What are the Offences and Penalties provided by the Act?

  • If any person contravenes any provision of the act or rules, then such person shall be punished with “imprisonment” which may extend up to 6 months; or “fine” which may extend up to Rs 1,000; or both
  • If any person receives any direction under the Act, and fails to comply with it, such person shall be punished with “imprisonment” which may extend up to 6 months; or “Fine” up to Rs 1000 or both
  • In case the offence under the act is committed by the company, then every person responsible for the business of the company (Managing Director, CEO, CFO, Managerial Head), will be punished accordingly

What are the Recent updates/Changes under the Act?

In recent years, there has been an amendment in the year 2015, which is Payment of Bonus (Amendment) Act, 2015, came into force on 1st April 2014, the calculation ceiling for payment of bonus was increased to Rs.7,000.

Furthermore, the Payment of Bonus (Amendment) Rules, 2016 was published in the official gazette, which made an amendment to the central rules of 1975.

Frequently Asked Questions (FAQs)

Does a person under 15 years of age entitled to receive a bonus under the act?

In case the employee has not completed 15 years, in such case, the minimum amount of bonus received by him/her will be Rs. 60/-, and for other employees the minimum bonus amount is Rs 100/-.

How to calculate the number of working days under the Act?

The employee will be considered to work even in the following cases:

  • Employee laid off under an agreement
  • On paid leave
  • Absent due to temporary disablement (caused by accident in course of employment)
  • If the employee is on maternity leave

How is gross profit calculated?

In case the of a banking company, it will be calculated in the manner specified in the First Schedule of the Payment of Bonus Act, 1965. In any other case, in the manner specified in Second Schedule of the Payment of Bonus Act, 1965.

What is an Accounting Year? Is it different for different establishments?

In case of a Corporation: The day on which the books and accounts of the corporation is closed and balanced.

In case of a Company: The period for which the profit or loss account of the company is laid before the annual general meeting.

In any Other case: The year commencing from 1st April, or in case the employer closes and balances the accounts of the establishments at any day other than 31st March, then the day on which the Books and Accounts are closed and balanced is considered to be the accounting year.

What is Available surplus and how is it calculated?

Available surplus = gross profit – (depreciation under sec 32 of the Income Tax Act + any amount of development rebate or investment allowance + any direct tax which employer is liable to pay + any other sums specified in third schedule)

Do overtime, HRA, Travel allowances form part of salary in calculating bonus?

No. in calculating bonus, only the Basic Salary and Dearness Allowance are included. Rest HRA, Overtime salary, Travelling Concessions, bonus, Employees Contribution to PF, Gratuity are not considered for Bonus calculation.

Are “Available Surplus” and “Allocable Surplus” two different thing or are the same?

The employer at first calculates his gross profit, and then makes certain deductions specified under section 6 of the Act, after this the amount so received is “Available Surplus”. Now from the available surplus, the employer calculates a certain percentage in accordance to sec 2(4), the amount so received is “Allocable Surplus”.

If the allocable surplus exceeds the minimum amount of bonus, then in such case what amount shall be paid as bonus?

In case the allocable surplus is more than the amount payable as bonus to the employees as a minimum bonus, then in such case, the employer shall pay bonus on the salary/wage earned by the employee in that year to a maximum 20%

What amount can be deducted from bonus by the employer?

There are certain cases where the employer has the right to make deductions from the amount of bonus payable to the employees, such as

  • If employer made any payment of “customary bonus” in the year
  • If the employee caused any financial loss to the employer

What is the safeguard provided under the act in case of non-payment of bonus?

If the employee is entitled to receive a bonus under any agreement, award and has not yet received within the due date, then in such cases, the employee has the right to make an application to the central/state govt., and the govt issues certificate to the collector having jurisdiction to recover such amount.

Could there be different rates for payment of bonus for different employees in an establishment?

No. the rates cannot be different, it has to be equal for all the eligible employees. According to the Act, it is supposed to be between 8.33% to 20%. However, the percentage may vary from one accounting year to another, as it depends upon profits earned by the company.