Section 26 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.
Section 26 of the Code on Wages, 2019 is the core bonus provision. It says who gets bonus (employees within a notified wage ceiling who have worked at least thirty days in the accounting year), how much (a minimum of 8.33 per cent or Rs 100, whichever is higher, and a maximum of 20 per cent of wages), and how new establishments are treated.
Every employee drawing wages not above the amount per month notified by the appropriate Government, with at least thirty days' work in the accounting year, gets an annual minimum bonus of 8.33 per cent of wages earned or Rs 100, whichever is higher, whether or not there is an allocable surplus (s.26(1)). If the allocable surplus is higher, bonus is paid in proportion to wages, up to 20 per cent (s.26(3)). Higher demands based on production or productivity need an agreement or settlement, with the total capped at 20 per cent (s.26(5)). The wage ceiling is notified, not stated in the Code; check the current notification.
Sub-section (1): the minimum bonus
The employer must pay to every employee who:
- draws wages not exceeding the amount per mensem determined by notification by the appropriate Government; and
- has put in at least thirty days' work in an accounting year,
an annual minimum bonus calculated at the rate of eight and one-third per cent of the wages earned by the employee or one hundred rupees, whichever is higher. It is payable whether or not the employer has any allocable surplus during the previous accounting year.
Employers who pay bonus across several establishments or categories of staff can have the working checked through our payroll compliance audit service. Three points:
- No figure in the Code for the ceiling. The text says "such amount per mensem, as determined by notification". This article does not give a number. Employers must check the figure notified by the Central or State Government for their establishment, and also note whether the notification is stated against "wages" as the Code defines them in section 2(y).
- Thirty days is a floor on days worked. For days counted as worked, such as leave with wages or lay-off, see sections 27 and 28; those sections affect the proportionate reduction of the minimum bonus.
- Accounting year is a defined term in s.2(a); see our article on the definitions of accounting year and direct tax.
The Chapter applies to establishments with twenty or more persons (s.41(2)); see section 41.
Sub-section (2): when wages exceed the ceiling
Where an employee's wages exceed the notified amount per month, the bonus under sub-sections (1) and (3) is calculated as if his wage were that notified amount, or the minimum wage fixed by the appropriate Government, whichever is higher. Note that bonus eligibility depends on being within the ceiling, yet this sub-section speaks of employees whose wages exceed it; the text does not explain how the two sit together, so read s.26(1) and (2) with the notification.
Sub-sections (3) to (5): minimum, maximum and productivity bonus
| Position of the allocable surplus | What the employer pays | Reference |
|---|---|---|
| No surplus, or surplus below the minimum bonus | Minimum bonus: 8.33% of wages earned or Rs 100, whichever is higher | s.26(1) |
| Allocable surplus exceeds the minimum bonus | Bonus in proportion to wages earned during the accounting year, maximum 20% of such wages | s.26(3) |
| Demand above minimum on production or productivity | Determined by agreement or settlement; total bonus including minimum not above 20% of wages earned | s.26(5) |
Sub-section (4) says the amounts set on or set off under section 36 are taken into account in computing the allocable surplus.
Hypothetical example. An employee within the notified ceiling earns Rs 200,000 in the accounting year and has worked more than thirty days. The 8.33% minimum is about Rs 16,660, which exceeds Rs 100, so the minimum bonus is about Rs 16,660. If the allocable surplus is large, the maximum bonus is 20% of Rs 200,000 = Rs 40,000. The actual bonus lies between these two, in proportion to wages. The figures are invented only to show the arithmetic, and the ceiling is for illustration only.
Sub-sections (6) to (9): new establishments
These sub-sections apply to the year the employer first sells goods produced or manufactured, or renders services, from the establishment.
| Period | Treatment |
|---|---|
| First five accounting years after that year | Bonus only for a year in which the employer derives profit, calculated under the Code but without applying s.36 (s.26(6)) |
| Sixth accounting year | Set on or set off applies in the manner prescribed by the Central Government, taking into account the fifth and sixth years' excess or deficiency (s.26(7)(i)) |
| Seventh accounting year | As above, taking into account the fifth, sixth and seventh years (s.26(7)(ii)) |
| Eighth accounting year onward | s.36 applies as to any other establishment (s.26(8)) |
Explanation 1 says that for sub-section (6) the employer is not deemed to have derived profit in a year unless (a) provision has been made for the depreciation to which he is entitled under the Income-tax Act or the agricultural income tax law, and (b) arrears of depreciation and previous years' losses have been fully set off against profits. The Income-tax Act, 1961 has been replaced by the Income-tax Act, 2025 from 1 April 2026; the Code text, as enacted, still refers to the old Act. Explanation 2 excludes sales during the trial running of a factory or the prospecting stage of a mine or oil-field. Sub-section (9) applies (6) to (8), so far as may be, to new departments, undertakings or branches set up by existing establishments.
What the Central Rules add
The Code on Wages (Central) Rules, 2026 (G.S.R. 343(E), 8 May 2026) apply only where the Central Government is the appropriate Government. Where the State Government is the appropriate Government, the State's own wage rules apply.
- Rule 21: where employees are employed through a contractor and the contractor fails to pay bonus under s.26, the company, firm, association or other person referred to in the proviso to s.43 must, on written information of the failure from the employees or a registered trade union they belong to, and on confirming it, pay the minimum bonus.
- Rules 22 and 23: set on and set off for the sixth and seventh accounting years, in the manner illustrated in Appendix A.
See Rules 21 to 23. For the old-law comparison see our guides on eligibility for bonus, minimum bonus and maximum bonus under the Payment of Bonus Act, 1965.
Need help with bonus eligibility and calculation?
Bonus errors usually come from the wrong wage ceiling, the wrong wage base or a missed set-on carry-forward. Our payroll compliance audit team can check who qualifies, recompute the minimum and maximum, and prepare a bonus working for the accounting year.
Key takeaways
- Employees within the notified monthly wage ceiling with at least thirty days' work are entitled to bonus.
- Minimum bonus is 8.33% of wages earned or Rs 100, whichever is higher, whether or not there is a surplus.
- Maximum bonus is 20% of wages, including any productivity-linked bonus agreed by settlement.
- The wage ceiling is notified, not fixed in the Code; check the current notification.
- New establishments follow a five-year profit-only rule, then set-on and set-off phase-in in years six and seven.
Read next
- Sections 27 and 28: proportionate reduction in bonus and working days
- Section 36: set on and set off of allocable surplus
- Rules 21 to 23 of the Central Rules: bonus to contractual employees and sixth and seventh accounting years
- Bonus under the new Labour Codes: Code on Wages 2019
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.