Payment of Bonus Act 1965: Eligibility, Calculation, Minimum and Maximum Bonus

Payment of Bonus Act explained: this guide covers what Payment of Bonus Act means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

The Payment of Bonus Act 1965 makes it mandatory for covered employers to pay annual bonus to eligible employees. It also prescribes the minimum and maximum bonus rates and the formula for calculating allocable surplus.

Applicability

• Every factory (Schedule I of Factories Act) and every other establishment where 20 or more persons are employed on any day
• Once applicable, continues even if employee count drops below 20
• Applies to employees drawing wages/salary up to Rs.21,000 per month (effective from 2016)

Calculation Salary Cap

Bonus is computed on a notional salary cap:

• If actual salary ≤ Rs.7,000/month (or minimum wage): Bonus on actual salary
• If actual salary > Rs.7,000/month (but ≤ Rs.21,000): Bonus computed on Rs.7,000 OR applicable minimum wage (whichever is higher)
• If actual salary > Rs.21,000: Not entitled to bonus under the Act (but company can pay ex-gratia)

Allocable Surplus

Bonus is funded from the "allocable surplus" of the employer:

• Available surplus = Net profits per Act + depreciation added back + development rebate + investment allowance (as computed under Sections 4-5 of the Act)
• Allocable surplus = 67% of available surplus (non-banking companies) / 60% (banking companies)

Bonus Rates

Set-On and Set-Off (Section 15)

Set-On

If the allocable surplus in any year exceeds the maximum bonus payable (20% of total wages), the excess is "set on" for future years (carried forward for up to 4 accounting years) to supplement future bonus payments during lean years.

Set-Off

If allocable surplus is insufficient to pay minimum bonus (8.33%), the minimum is still paid, and the deficit is "set off" — carried forward as a charge against the employer's future allocable surplus for up to 4 years.

Eligibility for Bonus

• Must have worked for 30 working days in the accounting year
• Proportionate bonus if worked more than 30 days but less than full year
• Not eligible: employees who have been dismissed for fraud, violence, riotous behavior, sabotage, or are engaged on casual basis

Payment Timeline

• Within 8 months from close of accounting year
• E.g., for FY April-March: by 30 November
• If dispute exists: amount payable deposited with labour authorities before due date

Non-Compliance Penalties

• Section 28: Failure to comply — imprisonment up to 6 months + fine Rs.1,000
• Officers of the company (directors, managers) can be personally prosecuted