What is the Payment of Bonus Act?

What sectors does the Act not cover?

The Payment Bonus Act 1965 does not apply to:

• Non-profit organizations
• Employees of the Indian Red Cross Society
• Establishments like life insurance companies (LIC) and hospitals
• Organizations where employees have agreed to forego their bonus right
• Units classified as ‘’sick’’ or exempt from the appropriate government, such as financially distressed or rehabilitating establishments
• Employers of any sector controlled by the State or Central Government of India
• Employees registered or listed under the Dock Workers Act 1948
• Employees of the Reserve Bank Of India (RBI) 
• Financial corporations governed by Section 3 or Section 3a of the State Financial Corporation Act (SFC) 1951
• Inland Water Transport Establishment

According to the Industrial Disputes Act, if the Payment of Bonus Act does not apply to a particular employee, they are not entitled to raise disputes related to statutory bonuses with the employer. 

Eligibility criteria for statutory bonus 

Criteria qualifying an employee for a statutory bonus include:

• Monthly earnings up to Rs. 21,000
• Having worked at least 30 days in an accounting year

Days when an employee is dismissed, on paid leave (including maternity leave or temporarily disabled due to a work-related accident) count as working days for bonus eligibility.

Under the provisions of the Act, there is a time limit within which employers must pay the bonuses to ensure legal compliance and avoid disputes. An employer must pay out a bonus in cash within a month starting the date of the enforcement of the award or within eight months after the end of the accounting year, whichever is earlier.

Disqualification of bonus

An employee can be disqualified from receiving a bonus if they act in misconduct while on duty, which can lead to disciplinary actions by management. Additionally, if the worker’s actions cause financial loss to the employer, the employer has the right to make deductions from the bonus to recover the lost amount. However, the employee is still entitled to the remaining portion of the bonus. 

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Computation of bonuses under the Payment of Bonuses Act

Calculation of bonuses is, aside from employees’ earnings, based on the establishment’s profit, specifically the part of the gross profits referred to as “available surplus,” a remaining amount after necessary deduction. 

Available surplus is calculated as: Available Surplus = Gross profit - Deductions  

• Gross profit is the revenue remaining after the cost of goods sold (COGS) but before any deductions.
• Deductions are sums deductible from gross profit, including direct taxes like income tax, depreciation, and allowances for investments or development as per the Income Tax Act.
• Available surplus is the remaining amount an employer can use to pay bonuses.

Companies (registered corporate entities) are required to use 67% of the available surplus to pay bonuses. In contrast, other establishments, such as factories, shops, and other non-corporate establishments, must use at least 60% of their surplus to pay bonuses. 

Bonus calculations for different departments, undertakings, and branches

Employers must use the same formula when calculating bonuses across all units, as they are treated as part of the same entity under the Act, regardless of their location. The only exception is when a unit within an establishment prepares its own profit and loss statement. In that case, it can be considered a separate establishment for bonus calculations. 

Minimum and maximum bonus

Guidelines for calculating minimum and maximum bonus are:

• Minimum bonus: Employers must ensure the payment of minimum bonus is equal to 8.33% of the employee’s salary or wage during the accounting year or Rs. 100, whichever is higher. 
• Maximum bonus: Maximum bonus is capped at 20% of the employee’s salary or wage earned during the accounting year.

Bonus calculations and ceiling amount

The Payment of Bonus Act includes a ceiling amount for bonus calculations. Before the Payment of Bonus (Amendment) Act 2015 was enacted, it was set at Rs. 3,500. However, after the amendment, the ceiling is capped at Rs. 7,000 (base salary + dearness allowance) or the minimum wage under the Minimum Wage Act 1948 (whichever is greater). 

How to calculate bonuses:

• If salary + dearness allowance is less than Rs. 7,000: For instance, if an employee’s gross monthly salary is Rs. 4,000, the minimum bonus is calculated as follows: 4,000 x 8.33 /100 = Rs.333,2 

• If an employee’s salary + dearness allowance exceeds Rs. 7,000, the bonus is calculated as follows: Rs. 7,000 x 8,33 / 100 = 583,1 

When employees’ earnings don’t exceed the ceiling amount, bonuses are paid based on their actual earnings. However, if their earnings exceed the ceiling amount, the bonus is calculated using the Rs. 7,000 ceiling.

Set on or set off of allocable surplus

After making necessary deductions from gross profit, two scenarios can arise. The allocable surplus can exceed the maximum bonus payable to employees or insufficiently cover the minimum bonus.

In the first case, when a surplus exceeds the bonus payable to employees in that accounting year, the remaining amount can be carried over (set on) to the next year and used to pay bonuses in years to come. This carryover can be done for up to four years from the date of carrying over the surplus, and it must not exceed 20% of the employee’s total salary/wage for that year.

In the other scenario, if the employer doesn’t have enough to cover the minimum bonus in a given accounting year, they can use (set off) the previously accumulated surplus to cover the difference.

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Employer’s rights and responsibilities 

To ensure compliance with the Act, employers in India are required to:

• Pay the bonus amount in cash within a prescribed time frame
• Keep required documentation such as registers of allocable surplus, set-ons, set-offs, deductions records, etc.
• Upload details on annual returns using Form D on the Ministry of Labour and Employment Portal, maintained by the National Informatics Centre (NIC), on or before Feb. 1 each year

The Payment of Bonuses Act also protects employers’ rights, such as:

• The right to bring any disputes about the Act’s application or interpretation to the Labour Court or Tribunal
• The right to make valid deductions from an employee’s bonus, such as for a festival bonus paid in advance or for financial loss caused by the employee’s misconduct
• The right to withhold a bonus if an employee is dismissed for misbehaviour, violence, fraud, misappropriation, or sabotage

Employees’ rights

Under the Payment of Bonus Act, employees have the right to:

• Claim any unpaid bonus and request government involvement to recover the amount within one year of it being due
• Raise disputes with the Labour Court or Tribunal.
• Seek clarification and information regarding any item in the establishment’s account

FAQs about the Payment of Bonus Act

What payments are included when calculating bonuses?

Basic salary and dearness allowance are considered bonus calculations. The calculation does not include other payments such as overtime, travel allowance, or gratuity. 

What is the difference between available and allocable surplus?

Available surplus is the remaining amount after deducting necessary expenses (taxes and depreciation) from a company’s gross profit. Allocable surplus is typically a set percentage of the available surplus that a company uses to calculate and distribute bonuses to employees.

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