Rules 21 to 23 explained: this guide covers what it 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.
Rule 21 says what happens when a contractor fails to pay bonus: on written information and confirmation of the failure, the proprietor pays the minimum bonus to the contractor's employees. Rules 22 and 23 give the manner of set on and set off for the sixth and seventh accounting years of a new establishment, by pointing to the worked illustration in Appendix A. If you engage contract labour or run a newly set-up unit, a payroll compliance audit will show where these rules touch your bonus calculation.
Rule 21: if a contractor fails to pay bonus under section 26, the company, firm, association or other person referred to in the proviso to section 43 pays the minimum bonus to the employees, on written information of the failure given by the employees or any registered trade union of which they are members, and on confirming the failure. Rules 22 and 23: set on or set off for the sixth and seventh accounting years is made under section 26(7)(i) and (ii) in the manner illustrated in Appendix A, taking into account the excess or deficiency of allocable surplus set on or set off in the fifth and sixth (and, for rule 23, seventh) years. The Rules apply where the Central Government is the appropriate Government; otherwise the State's own wage rules apply.
Rule 21: bonus where the contractor fails
The sections behind this rule
Section 26(1) requires an employer to pay every eligible employee who has put in at least thirty days' work in an accounting year an annual minimum bonus at eight and one-third per cent of the wages earned or one hundred rupees, whichever is higher, whether or not there is allocable surplus. The wage ceiling for eligibility is "as determined by notification" by the appropriate Government, and no figure is printed in the Code. Section 43 makes every employer responsible for paying amounts due under the Code, and its proviso makes "the company or firm or association or any other person who is the proprietor of the establishment" responsible where the employer fails to pay. See section 26 and sections 43 and 44.
What rule 21 says
| Element | Text of the rule |
|---|---|
| Situation | employees employed in an establishment through a contractor; the contractor fails to pay the bonus under section 26 |
| Who must pay | the company, firm, association or other person referred to in the proviso to section 43 |
| Trigger | written information of the failure, given by the employees or by any registered trade union(s) of which they are members |
| Condition | confirming such failure |
| What is paid | minimum bonus |
Three points. First, the rule makes the proprietor pay minimum bonus, not the higher bonus that section 26(3) or an agreement under section 26(5) might yield; the higher amount stays a matter between the contractor and the employees. Second, it says nothing on time limits: how soon after the written information the proprietor must confirm and pay is not stated. Third, it does not say whether the proprietor can recover the amount from the contractor; commercial contracts should provide for that. The Rules do not.
"Registered trade union" has the meaning in rule 2(1)(q): a trade union registered under the Industrial Relations Code, 2020.
Illustration (hypothetical). A contractor supplies forty workers who each worked more than thirty days in the accounting year. The contractor pays no bonus. The workers' union sends written information to the proprietor. After confirming that no bonus was paid, the proprietor pays the minimum bonus, calculated on the wages earned as section 26(1) provides. The proprietor should keep the written information, the confirmation and proof of payment on file.
Rules 22 and 23: sixth and seventh accounting years
The section behind these rules
Section 26(6) to (8) deals with a new establishment. In the first five accounting years after the year in which the employer sells goods or renders services from the establishment, bonus is payable only for the year in which the employer derives profit, without applying the set on and set off of section 36. For the sixth and seventh years, section 36 applies with modifications:
- (i) sixth year: set on or set off "in the manner as may be prescribed by the Central Government", taking into account the excess or deficiency of allocable surplus set on or set off for the fifth and sixth years;
- (ii) seventh year: the same, for the fifth, sixth and seventh years.
From the eighth year, section 36 applies as to any other establishment. See section 36.
What the rules say
- Rule 22 (sixth year): set on or set off, as the case may be, shall be made under clause (i) of section 26(7), "in the manner illustrated in Appendix A", taking into account the excess or deficiency of the allocable surplus set on or set off in respect of the fifth and sixth accounting years.
- Rule 23 (seventh year): the same under clause (ii) of section 26(7), taking into account the fifth, sixth and seventh accounting years.
The Rules do not repeat a formula. The manner is the illustration in Appendix A, headed "See rules 22, 23, 27 and 28". Its assumptions are printed in the Appendix itself: a total bonus equal to 8.33 per cent of the annual salary or wage payable to all employees is assumed to be Rs 1,04,167, and the maximum bonus (twenty per cent) is therefore Rs 2,50,000. These figures belong to the Appendix's illustration only; they are not rates.
| What Appendix A shows (illustration) | Where |
|---|---|
| Year 1: allocable amount equals the minimum, paid as minimum, no set on or off | row 1 |
| Years 2 and 4: allocable surplus above the maximum; excess set on | rows 2 and 4 |
| Years 3 and 5: allocable surplus short of the maximum; earlier set on used | rows 3 and 5 |
| Year 6: surplus above the maximum, so Rs 60,000 is set on; the balance of Rs 1,10,000 set on from year 2 lapses (the Appendix's footnote) | row 6 |
| Year 7: shortfall met from set on of year 4 (Rs 1,25,000) and year 6 (Rs 25,000) | row 7 |
| Years 8, 9 and 10: no or small surplus; minimum paid, deficiency set off, and set off amounts later adjusted against surplus | rows 8 to 10 |
See the fuller walk-through in our article on the Appendices and the carry-forward rules in rules 27 and 28.
What the text leaves open
The rules do not say how the Appendix's ten numbered years map to the establishment's accounting years counted from the first year of sale. The Appendix is a general illustration of set on and set off mechanics; applying it to the sixth and seventh years of a new unit means taking only the carry-forward and use of earlier amounts as shown. If your numbers are material, have the workings checked by a professional.
Need help with bonus for contract labour or a new unit?
Bonus errors are costly in contractor chains and in the early years of a new establishment, where set on and set off affects what is due. Our payroll compliance audit team can review contractor bonus clauses, trace set on and set off across years and prepare the working papers.
Key takeaways
- If the contractor fails to pay bonus, the proprietor pays the minimum bonus after written information and confirmation (rule 21).
- The written information may come from the employees or a registered trade union they belong to.
- Sixth and seventh year set on or set off follows Appendix A (rules 22 and 23).
- Rule 22 looks at the fifth and sixth years; rule 23 at the fifth, sixth and seventh.
- The Rules give no time limit for rule 21 payment.
- Appendix A's Rs 1,04,167 and Rs 2,50,000 are its own assumed figures.
Read next
- Rules 24 to 26: computation of gross profits and further deductions
- Rules 27 and 28: carrying forward, set on and set off
- Section 26: eligibility for bonus
- Payment of Bonus Act 1965: eligibility, calculation, minimum and maximum bonus
Disclaimer: Based on the Code on Wages, 2019 (as enacted) and, where noted, the Code on Wages (Central) Rules, 2026 (G.S.R. 343(E), 8 May 2026), as on 1 October 2026. The Code is in force from 21 November 2025; State Governments make their own rules for establishments where the State is the appropriate Government, and wage rates are notified separately. Verify the current position before acting.