28 Payment of Bonus Act

Learning Objectives

By the end of this chapter, the reader will be able to:

Explain the conceptual rationale of the Payment of Bonus Act, 1965, including the historical recognition of bonus as a share of productivity gains rather than as ex gratia payment.
Identify the applicability of the Act and the eligibility criteria for employees, including the wage ceiling and the qualifying days of work.
Apply the bonus calculation formula, including the computation of available surplus, allocable surplus, and the minimum (8.33 per cent) and maximum (20 per cent) bonus rates.
Identify the timing and mode of bonus payment, the set-on and set-off of allocable surplus, and the application of the Act to newly established and loss-making establishments.
Apply the disqualifications, deductions, and recovery mechanisms, including the right to claim bonus and the role of the Labour Court.

28.1 Introduction

This chapter takes up the Payment of Bonus Act, 1965, the third of the four principal Indian wage statutes. The Act addresses the conceptual problem of sharing productivity gains between capital and labour, providing a statutory formula for the calculation and payment of bonus to workers as a share in the surplus of the enterprise.

flowchart TD
    A["Payment of Bonus <br> Act, 1965"] --> B[Applicability]
    A --> C[Eligibility]
    A --> D[Formula]
    A --> E[Timing]
    A --> F[Disqualifications]

    D --> D1[Available Surplus]
    D --> D2[Allocable Surplus]
    D --> D3["Set-On / Set-Off"]
    D --> D4[Min 8.33%]
    D --> D5[Max 20%]

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    class A,B,C,D,E,F,D1,D2,D3,D4,D5 dark;

28.2 Conceptual Rationale

The Indian conception of bonus has evolved through three historical phases. In the first phase, bonus was treated as an ex gratia payment by the employer, dependent on the employer’s discretion and not enforceable as a matter of right. In the second phase, bonus was recognised as a deferred wage, a part of the worker’s compensation that had been deferred to a later date. In the third phase, captured in the Payment of Bonus Act, 1965, bonus was recognised as a share of the surplus of the enterprise, reflecting the contribution of labour to the productivity gains.

The 1965 Act drew on the recommendations of the Bonus Commission (1961), chaired by M.R. Meher, which had been constituted to formulate a statutory bonus framework after years of contested industrial dispute litigation on bonus claims. The Commission’s formula, with refinements, became the operative statutory framework.

The Three Historical Conceptions of Bonus

The three historical conceptions are not mutually exclusive but represent successive layers of justification:

Ex gratia — bonus is a discretionary gift of the employer, paid at the employer’s pleasure;
Deferred wage — bonus is a deferred portion of the worker’s compensation, with the deferral providing a savings or contingency function;
Share of surplus — bonus is the worker’s share of the productivity gains of the enterprise, reflecting the joint contribution of capital and labour.

The Act adopts the third conception while preserving elements of the first two through the minimum bonus (8.33% even where there is no profit) and the linkage of bonus to wages.

28.3 Applicability and Eligibility

28.3.1 Applicability of the Act

Section 1(3): Applicability

The Act applies to:

every factory; and
every other establishment in which twenty or more persons are employed on any day during an accounting year.

The appropriate government may, by notification, apply the Act to any establishment in which less than twenty but more than ten persons are employed.

The Act does not apply to certain establishments, including LIC, the Indian Red Cross Society, universities and educational institutions, hospitals, chambers of commerce, social welfare institutions, and certain charitable establishments.

The 20-person threshold and the factory inclusion are the principal jurisdictional gates. The Act applies to substantially all organised-sector industrial and commercial establishments.

28.3.2 Newly Established Establishments

Section 16 provides for the application of the Act to newly established establishments. For the first five accounting years following the year in which the employer first sells the goods produced or renders the services, the Act applies only in respect of any year in which the employer derives profit from the establishment. From the sixth year onwards, the Act applies on the standard basis. The provision recognises the typical period of unprofitability following the establishment of a new operation.

28.3.3 Eligibility of Employees

Section 8: Eligibility for Bonus

Every employee shall be entitled to be paid bonus by his employer in an accounting year, in accordance with the provisions of this Act, provided that he has worked in the establishment for not less than thirty working days in that year.

The 30-working-day qualifying period is the principal eligibility criterion. The Act also defines “employee” by reference to a wage ceiling, currently ₹21,000 per month (raised from ₹10,000 in 2015). Employees earning above the wage ceiling are not entitled to bonus under the Act, although their employers may pay ex gratia amounts on a discretionary basis.

The 2015 Wage Ceiling Amendment Doubled the Coverage

A practitioner observation worth emphasising is that the 2015 amendment to the wage ceiling, raising it from ₹10,000 to ₹21,000 per month, substantially expanded the coverage of the Act. The amendment was notified retrospectively to include the financial year 2014-15, leading to substantial litigation on the retrospective application that was ultimately resolved in favour of the workers.

28.4 The Bonus Formula

The calculation of bonus under the Act involves several steps, each defined by specific provisions. The principal steps are summarised below.

28.4.1 Step 1: Calculation of Gross Profits (Sections 4 and 5)

Section 4 prescribes the manner of calculation of gross profits. For banking companies, gross profits are calculated under the First Schedule. For other establishments, gross profits are calculated under the Second Schedule. The calculation starts from the net profit as per the audited profit and loss account and applies specified additions and deductions.

28.4.2 Step 2: Calculation of Available Surplus (Section 5)

Section 5 prescribes the calculation of available surplus by deducting from the gross profits:

depreciation admissible under the Income Tax Act;
any development rebate, investment allowance, or development allowance admissible under the Income Tax Act;
any direct tax payable on the gross profits;
such further sums as may be specified in the Third Schedule.

The available surplus represents the financial surplus from which bonus can be paid.

28.4.3 Step 3: Calculation of Allocable Surplus (Section 2(4))

Section 2(4): Allocable Surplus

“Allocable surplus” means:

in relation to an employer, being a company (other than a banking company) which has not made the arrangements prescribed under the Income Tax Act, 1961 for the declaration and payment within India of the dividends payable out of its profits, sixty-seven per cent of the available surplus in an accounting year;
in any other case, sixty per cent of such available surplus.

The allocable surplus is the portion of the available surplus that is available for distribution as bonus. The 67/60 per cent split reflects the historical compromise between worker and employer interests in the productivity gains.

28.4.4 Step 4: Determination of Bonus Rate

The bonus payable is calculated as a percentage of the wages of each eligible employee, with the percentage determined by the available allocable surplus subject to statutory minimum and maximum.

Sections 10 and 11: Minimum and Maximum Bonus

Minimum bonus (Section 10) — Every employer shall be bound to pay every employee a minimum bonus of 8.33 per cent of the salary or wage earned by the employee during the accounting year, or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year.

Maximum bonus (Section 11) — Where the allocable surplus exceeds the amount of minimum bonus payable, the employer shall be bound to pay bonus calculated at the rate that is higher than 8.33 per cent but not exceeding 20 per cent of the salary or wage earned by the employee during the accounting year.

The 8.33 per cent floor is approximately equivalent to one month’s wages. The 20 per cent ceiling is approximately equivalent to two and a half months’ wages. The actual rate within this range depends on the available allocable surplus.

28.4.5 Wage Ceiling for Calculation

For the purpose of calculation of bonus, the wages of an employee earning above ₹7,000 per month (or the minimum wage for the scheduled employment, whichever is higher) are deemed to be ₹7,000 per month or the minimum wage. The deeming provision caps the bonus calculation base, ensuring that the bonus on high wages is calculated on the deemed lower base.

28.4.6 Step 5: Set-On and Set-Off (Section 15)

Section 15: Set-On and Set-Off

Where for any accounting year the allocable surplus exceeds the amount of maximum bonus payable (20%), the excess shall, subject to a limit of twenty per cent of the total salary or wage of the employees in that year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year, to be utilised for the purpose of payment of bonus.

Where for any accounting year there is no available surplus or the allocable surplus is less than the amount of minimum bonus payable, the deficit shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year.

The set-on and set-off mechanism smooths the bonus payment over time, allowing surplus from good years to support bonus in lean years and ensuring that the minimum bonus is paid even when current-year surplus is inadequate.

28.5 Timing and Mode of Payment (Section 19)

Section 19: Time-Limit for Payment

“All amounts payable to an employee by way of bonus under this Act shall be paid by the employer:

in cases where there is a dispute regarding payment of bonus pending before any authority under this Act, within one month from the date on which the award becomes enforceable or the settlement comes into operation;
in any other case, within a period of eight months from the close of the accounting year:

Provided that the appropriate Government may, on application by the employer and for sufficient reasons, by order, extend the said period of eight months to such further period or periods as it thinks fit; so however, that the total period so extended shall not in any case exceed two years.”

The 8-month payment window from the close of the accounting year is the standard timing. The window is calibrated to allow for the audit of the financial accounts (typically completed within three to six months of year-end) plus the calculation and disbursement of bonus.

28.6 Disqualifications (Section 9)

Section 9: Disqualification for Bonus

“Notwithstanding anything contained in this Act, an employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for:

fraud; or
riotous or violent behaviour while on the premises of the establishment; or
theft, misappropriation or sabotage of any property of the establishment.”

The disqualifications are narrow and apply only on dismissal for the specified misconduct. Disqualification is for the year of the dismissal and does not extend to future bonus claims if the employee is subsequently re-employed.

28.7 Deductions from Bonus (Section 18)

Section 18 permits the employer to deduct from the bonus payable to an employee:

any amount of customary or interim bonus paid to the employee in respect of the same accounting year;
any financial loss caused to the employer by the misconduct of the employee.

The deduction for misconduct under (ii) is subject to limits and procedural requirements similar to those for damage or loss deductions under Section 10 of the Payment of Wages Act, 1936 examined in Chapter 26.

28.8 Enforcement and Recovery (Sections 21 and 22)

28.8.1 Recovery of Bonus

Section 21: Recovery of Bonus from an Employer

“Where any money is due to an employee by way of bonus from his employer under a settlement or an award or agreement, the employee himself, or any other person authorised by him in writing in this behalf, or in the case of the death of the employee, his assignee or heirs may, without prejudice to any other mode of recovery, make an application to the appropriate Government for the recovery of the money due to him.

If the appropriate Government is satisfied that any money is due, it shall issue a certificate for that amount to the Collector who shall proceed to recover the same in the same manner as an arrear of land revenue.

The recovery as arrear of land revenue is a powerful enforcement mechanism, allowing the employee to bypass civil litigation and obtain recovery through the administrative machinery of land revenue collection.

28.8.2 Reference to Disputes

Section 22: Reference of Disputes

Where any dispute arises between an employer and his employees with respect to the bonus payable under this Act or with respect to the application of this Act to an establishment in public sector, then, such dispute shall be deemed to be an industrial dispute within the meaning of the Industrial Disputes Act, 1947, and the provisions of that Act shall, save as otherwise expressly provided, apply accordingly.

The deeming of bonus disputes as industrial disputes channels them through the industrial dispute machinery (conciliation, adjudication by labour court or tribunal), examined in Chapter 34 in connection with the Industrial Disputes Act, 1947.

28.9 Case Studies

28.9.1 Case Study 1: Calculation of Bonus in a Profitable Year

A manufacturing company with 800 employees and an annual wage bill of ₹15 crore has an available surplus of ₹3 crore in the accounting year ended 31 March 2025. The company is not a banking company and has not made the arrangements for declaration and payment of dividends in India.

The allocable surplus is 67% of ₹3 crore = ₹2.01 crore.

The minimum bonus payable is 8.33% × ₹15 crore = ₹1.25 crore (approximately).

The maximum bonus payable is 20% × ₹15 crore = ₹3 crore.

Since the allocable surplus (₹2.01 crore) exceeds the minimum bonus (₹1.25 crore) but is less than the maximum bonus (₹3 crore), the bonus rate is determined by the allocable surplus. The rate is approximately 13.4% (₹2.01 crore / ₹15 crore), within the 8.33%-20% band.

The 8-month payment window from 31 March 2025 expires on 30 November 2025.

Discussion Questions

How should the company allocate the bonus among employees with different wages, given the ₹7,000 wage ceiling for calculation?
What features of the company’s bonus communication should support transparency and worker confidence?
How does the calculation interact with any applicable productivity-linked or performance-linked variable pay schemes?

28.9.2 Case Study 2: A Loss Year and the Set-Off Mechanism

A textile company with 300 employees and an annual wage bill of ₹8 crore has no available surplus in the accounting year ended 31 March 2025 due to demand decline and inventory write-downs.

Despite the loss, the company is bound by Section 10 to pay the minimum bonus of 8.33% × ₹8 crore = ₹0.67 crore.

The deficit for set-off purposes is the entire ₹0.67 crore (since there was no allocable surplus to offset). The deficit is carried forward to the succeeding four accounting years and may be set off against allocable surplus in those years.

The 8-month payment window applies regardless of the loss; the company must pay the minimum bonus by 30 November 2025.

Discussion Questions

What features of the company’s financial planning should accommodate the minimum bonus obligation in loss years?
How does the set-off mechanism interact with the company’s broader financial reporting and dividend policy?
To what extent should the minimum bonus obligation be revisited where the loss is sustained over multiple years?

28.9.3 Case Study 3: A Bonus Dispute and Industrial Adjudication

A workers’ union and an employer disagree on the bonus rate for an accounting year. The union contends that the rate should be 18%, based on its calculation of allocable surplus from the company’s audited accounts. The employer contends that the rate should be 12%, based on its calculation that includes additional deductions for development rebate and depreciation. The dispute is referred to the Labour Court under Section 22, deemed an industrial dispute under the Industrial Disputes Act, 1947.

The Labour Court examines the audited accounts, the additions and deductions claimed, the calculation of available surplus and allocable surplus, and the application of the formula. The Court issues an award fixing the bonus rate at 15%, between the union’s and employer’s positions, on the basis of its independent calculation.

Discussion Questions

To what extent should the Labour Court rely on the audited accounts versus conducting an independent inquiry into the company’s financials?
How does the bonus dispute resolution interact with the company’s broader industrial relations practice?
What lessons does the case offer for the design of bonus calculation and disclosure practices to minimise dispute?

Summary

Concept	Description
Conceptual Foundation
Three Conceptions of Bonus	Ex gratia (employer's discretion); deferred wage (deferred portion of compensation); share of surplus (worker's share of productivity gains)
Bonus Commission, 1961	M.R. Meher Commission whose recommendations informed the Payment of Bonus Act, 1965 with the statutory formula
Payment of Bonus Act, 1965	Statute implementing the share-of-surplus conception, providing the formula for calculation and payment of bonus to workers
Applicability and Eligibility
20-Person Threshold	Act applies to every factory and to every other establishment with 20 or more persons employed on any day during an accounting year
Newly Established Five-Year Period	For first 5 accounting years from sale of goods or services, Act applies only in years where employer derives profit; standard application from 6th year
30-Day Qualifying Period	Employee must have worked in the establishment for not less than 30 working days in the accounting year to be eligible for bonus
Wage Ceiling for Eligibility	Currently ₹21,000 per month, raised from ₹10,000 in 2015; employees above this ceiling are not entitled to bonus under the Act
2015 Amendment to Wage Ceiling	Substantially expanded coverage by raising the eligibility ceiling, with retrospective application leading to litigation resolved in favour of workers
Bonus Calculation Formula
Section 4 Gross Profits	Manner of calculation of gross profits; First Schedule for banking companies, Second Schedule for others, starting from net profit per audited P&L
Section 5 Available Surplus	Calculated by deducting from gross profits the depreciation, development rebate, direct tax, and Third Schedule sums
Section 2(4) Allocable Surplus	67% of available surplus for non-banking companies without dividend arrangements; 60% in any other case
67% / 60% Split	Reflects historical compromise between worker and employer interests in productivity gains; 67/60 split based on company type
Section 10 Minimum Bonus	Every employer must pay every eligible employee minimum bonus of 8.33% of annual wages, or ₹100, whichever higher, even with no surplus
8.33% Floor	Approximately equivalent to one month's wages; the floor below which bonus may not fall regardless of allocable surplus
Section 11 Maximum Bonus	Where allocable surplus exceeds minimum bonus, employer must pay calculated rate higher than 8.33% but not exceeding 20% of annual wages
20% Ceiling	Approximately equivalent to two and a half months' wages; the cap above which bonus may not be paid as statutory bonus
Wage Ceiling for Calculation	Wages above ₹7,000 per month (or minimum wage, whichever higher) deemed to be ₹7,000 (or minimum wage) for bonus calculation
Set-On, Set-Off, and Timing
Section 15 Set-On	Where allocable surplus exceeds maximum bonus, excess (subject to 20% wage cap) carried forward for set-on in subsequent four years
Section 15 Set-Off	Where there is no surplus or allocable surplus is less than minimum bonus, deficit carried forward for set-off in subsequent four years
Four-Year Carry-Forward	Both set-on and set-off operate over a four-year horizon, smoothing bonus payment across years and supporting minimum bonus in lean years
Section 19 Eight-Month Window	Bonus must be paid within 8 months from close of accounting year, extendable by appropriate government on application up to total of two years
Disqualifications, Deductions, Recovery
Section 9 Disqualifications	Employee disqualified from bonus if dismissed for fraud, riotous or violent behaviour on premises, or theft, misappropriation, or sabotage
Section 18 Deductions	Employer may deduct customary or interim bonus paid in same year, and any financial loss caused by employee's misconduct subject to limits
Section 21 Recovery	Recovery of bonus due under settlement, award, or agreement through application to appropriate government, certificate to Collector, recovery as arrear of land revenue
Section 22 Industrial Dispute	Bonus disputes deemed industrial disputes, channelled through Industrial Disputes Act, 1947 conciliation and adjudication machinery