The Payment of Bonus Act: Eligibility, Calculation, and Common Disputes

The Payment of Bonus Act: Eligibility, Calculation, and Common Disputes

The Payment of Bonus Act, 1965 establishes the right of employees to share in the profits of the establishment in which they are employed. It remains a source of frequent confusion — partly because its financial calculations are complex, and partly because the interaction between minimum bonus, maximum bonus, and allocable surplus is not always straightforward. This guide covers the Act's provisions as they stand following the 2015 amendment.

Applicability

The Act applies to every factory and every other establishment employing 20 or more persons on any day during an accounting year. Once applicable, it continues to apply even if headcount falls below 20 subsequently. The Act covers employees drawing salary or wages up to Rs 21,000 per month. Employees of LIC, seamen, RBI employees, and certain other categories specified in Section 32 are excluded.

Eligibility

Every employee who has worked for at least 30 working days in an accounting year is eligible. An employee dismissed for fraud, riotous or violent behaviour, theft, misappropriation, or sabotage is disqualified for that year under Section 9.

Minimum and Maximum Bonus

• Minimum bonus (Section 10): 8.33 per cent of salary or wage earned during the accounting year, or Rs 100, whichever is higher. This is payable regardless of whether the establishment has profits or allocable surplus.
• Maximum bonus (Section 11): 20 per cent of salary or wage earned during the year. The employer cannot be compelled to pay beyond this ceiling.

For calculation purposes, where salary exceeds Rs 7,000 per month (or the minimum wage for the scheduled employment, whichever is higher), bonus is calculated as if the salary were Rs 7,000 or the minimum wage. This ceiling was established by the 2015 amendment.

Allocable Surplus

Bonus above 8.33 per cent depends on the allocable surplus:

1. Gross profits: Calculated per the First Schedule (banking companies) or Second Schedule (other establishments).
2. Available surplus: Gross profits minus prior charges — depreciation, development rebate, direct taxes, and other specified sums.
3. Allocable surplus: 67 per cent of available surplus for companies, 60 per cent for other establishments.

Set-On and Set-Off Provisions

The Fourth Schedule provides for smoothing bonus payments across years:

• If allocable surplus exceeds maximum bonus payable (20 per cent), the excess is carried forward for set-on in succeeding years, up to four years.
• If allocable surplus falls below minimum bonus payable (8.33 per cent), the deficiency is carried forward for set-off, also up to four years.
• Adjustments are made on a first-in-first-out basis.

Common Disputes

• Applicability: Whether an establishment is covered, particularly for service sector and startups near the 20-employee threshold.
• Salary components: What constitutes "salary or wage" — disputes arise over allowances, commissions, and variable pay.
• Gross profit computation: Disagreements on treatment of specific expenses and prior charges.
• Adjustment of ex-gratia payments: Section 17 permits adjusting customary or contractual bonus against statutory bonus, but only if paid under a settlement, award, or contract with explicit declaration.
• Timely payment: Section 19 requires payment within eight months from the close of the accounting year.

The Payment of Bonus Act reflects a fundamental principle — that employees have a right to share in the prosperity they help create. Compliance is not merely about avoiding penalties; it is about honouring a statutory commitment the workforce rightfully expects.

Practical Compliance Tips

• Maintain records of gross profit calculations, allocable surplus, and set-on/set-off balances for at least five years.
• Pay within the eight-month deadline — for April-March accounting years, this means by 30th November.
• Issue bonus slips showing the computation basis to every eligible employee.
• Document clearly whether ex-gratia payments are intended as adjustments against statutory bonus.
• Track the Rs 21,000 eligibility threshold and update payroll systems after wage revisions.