Payment of Bonus Act: Eligibility and Calculation

Short answer: The Payment of Bonus Act, 1965, mandates an annual bonus for eligible employees in most establishments with 20 or more workers. Employees earning up to ₹21,000 per month who have worked for at least 30 days are eligible. The bonus is calculated on a wage ceiling of ₹7,000 per month (or the relevant minimum wage), ranging from a minimum of 8.33% to a maximum of 20% of this wage, based on the company's profits.

Which establishments must pay a bonus?

The Payment of Bonus Act, 1965, applies to every factory and every other establishment in which 20 or more persons are employed on any day during an accounting year. The government can also notify its application to establishments employing between 10 and 19 employees. The Act applies even if the number of employees later falls below the threshold. Certain entities like the LIC, public sector banks, and institutions established not for profit (e.g., hospitals, universities) are excluded.

Who is eligible for a bonus under the Act?

An employee is eligible for a statutory bonus if they meet two conditions. First, their salary or wage must not exceed ₹21,000 per month. Second, they must have worked in the establishment for not less than 30 working days in that accounting year. The term 'salary or wage' includes Basic Salary and Dearness Allowance (DA) but excludes other allowances like HRA, overtime, and travel concessions. If an employee's salary exceeds ₹21,000 per month, they are not covered by the Act.

How is the bonus amount calculated?

The bonus payable is determined by the company's profit, but it is calculated based on the employee's salary, subject to a ceiling. Even if an eligible employee's salary is between ₹7,000 and ₹21,000 per month, their bonus is calculated as if their salary were ₹7,000 per month (or the minimum wage for their scheduled employment, if it's higher). The bonus must be between a minimum of 8.33% and a maximum of 20% of this calculated annual wage. This is based on the 'allocable surplus,' a concept related to the company's gross profits as defined in the Act.

Can an employee be disqualified from receiving a bonus?

Yes, an employee can be disqualified from receiving the bonus for a specific accounting year. Under Section 9 of the Act, an employee can be disqualified if they are dismissed from service for reasons of fraud, riotous or violent behaviour on the premises, or theft, misappropriation, or sabotage of the establishment's property. Disqualification only applies if the misconduct is proven and results in dismissal. The bonus for previous years, if unpaid, cannot be withheld.

What is the deadline for paying the bonus?

The bonus must be paid within eight months from the end of the accounting year. For most companies in India, the accounting year ends on 31st March, so the bonus for that year must be paid by 30th November. If there is a dispute regarding the bonus pending before any authority, the employer must pay the bonus within one month from the date the award becomes enforceable or the settlement comes into effect.

What are the employer's compliance requirements?

Employers must maintain specific records and file an annual return to comply with the Act. Failure to do so can lead to penalties, including fines and imprisonment. It is crucial for businesses to maintain these records meticulously.

Compliance Task	Form	Deadline	Key Purpose
Maintain Register of Allocable Surplus	Form A	Annually	To compute the total bonus pool available from profits.
Maintain Register of Set-on and Set-off	Form B	Annually	To carry forward surplus or deficit for bonus calculation in future years.
Maintain Register of Bonus Paid	Form C	As and when paid	To record bonus disbursed to each employee.
File Annual Return	Form D	By 31st December	To inform the Inspector of the bonus details for the preceding accounting year.

Worked example

Let's consider ABC Tech Solutions Pvt. Ltd., a software company in Bengaluru, and its employee, Priya. The company's accounting year ends on 31st March 2026.

• Employee: Priya, a Tester.
• Priya's Salary: Basic + DA = ₹18,000 per month.
• Eligibility Check: Since her salary of ₹18,000 is below the ₹21,000 per month threshold, she is eligible for the statutory bonus.
• Wage for Calculation: The bonus is calculated on a maximum wage of ₹7,000 per month (assuming this is higher than the notified minimum wage for her role in Karnataka).
• Annual Calculation Base: ₹7,000 per month x 12 months = ₹84,000.

Now, let's calculate her bonus range:

1. Minimum Bonus: This is payable regardless of whether the company made a profit or loss (unless exempted).

   • Calculation: 8.33% of ₹84,000 = ₹6,997.20.

2. Maximum Bonus: This is payable if the company has a sufficient 'allocable surplus'.

   • Calculation: 20% of ₹84,000 = ₹16,800.

Result: Priya will receive a bonus between ₹6,997.20 and ₹16,800 for the financial year 2025-26. The exact amount depends on the company's profit and the resulting allocable surplus calculation. ABC Tech Solutions must pay this bonus by 30th November 2026.

Common mistakes

1. Calculating Bonus on Gross Salary: Many employers mistakenly calculate the bonus on an employee's total CTC or gross salary. The Act specifies it must be calculated only on Basic + DA, and that too is capped at ₹7,000 per month for calculation purposes.
2. Not Paying Minimum Bonus: Assuming that a loss in the business means no bonus is due. The minimum 8.33% bonus is a statutory obligation even during a loss, unless the company has obtained a specific exemption.
3. Ignoring the 30-Day Rule: Denying a bonus to employees who have left the organisation. If they worked for at least 30 days in the financial year, they are eligible for a pro-rata bonus.
4. Missing the Payment Deadline: Failing to pay the bonus within 8 months of the financial year's closure (e.g., by November 30th for a March year-end), which can lead to penalties and employee disputes.
5. Improper Record-Keeping: Not maintaining the mandatory registers (Forms A, B, and C) and failing to file the annual return (Form D), which are statutory requirements.

How SP & SC helps

Navigating the Payment of Bonus Act requires careful calculation and meticulous compliance. SP & SC Legal and Taxation Services provides end-to-end labour law compliance support for businesses. We help you accurately compute the 'allocable surplus', calculate the correct bonus for each employee, maintain the statutory registers (Forms A, B, C), and prepare and file the annual return (Form D). Our goal is to ensure you are fully compliant, avoiding penalties and fostering positive employee relations. For comprehensive assistance, see our Labour Law Compliance services.

Frequently asked questions

H3: Is the statutory bonus taxable?

Yes, any bonus received by an employee, whether under the Act or as an ex-gratia payment, is fully taxable in the hands of the employee. It is treated as 'Profits in lieu of salary' and added to their income for the year, taxed at their applicable slab rate.

H3: What if an employee leaves before the bonus is paid?

An employee who resigns or is terminated is still entitled to a pro-rata bonus for the period they worked in that accounting year, provided they worked for at least 30 days. The employer is obligated to pay this amount to the former employee.

H3: Are trainees or apprentices eligible for a bonus?

Apprentices engaged under the Apprentices Act, 1961 are specifically excluded from the provisions of the Payment of Bonus Act. For other 'trainees', eligibility depends on whether they are considered 'employees' under the terms of their employment agreement and the definition in the Industrial Disputes Act, 1947.

H3: What is 'set on' and 'set off'?

These are accounting mechanisms under the Act to ensure fairness over several years. If the 'allocable surplus' in a year is more than the amount needed to pay the maximum 20% bonus, the excess amount is 'set on' (carried forward) to be used for bonus payments in subsequent years (up to four years). Conversely, if the surplus is insufficient to pay the minimum 8.33% bonus, the shortfall is 'set off' against profits of subsequent years.

H3: Do the new Labour Codes change this Act?

The Code on Wages, 2019, is set to subsume the Payment of Bonus Act, 1965, along with three other laws. While the core principles of bonus payment are expected to remain similar, there will be changes in definitions and procedures once the Code is fully implemented. You can follow the latest updates here: /blog/labour-code-status-2026.

Get a fixed-fee quote

Ensuring compliance with the Payment of Bonus Act can be complex. To avoid errors and potential disputes, it's best to have your calculations and registers reviewed by a professional. Share your company's payroll data and previous compliance documents with us, and we will provide a written fixed-fee quote for handling your bonus compliance end-to-end.

Contact SP & SC or WhatsApp us at +91 90356 74566 to get started.