Sections 32 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.
Sections 32 and 33 of the Code on Wages, 2019 are the first two steps in the bonus calculation. Section 32 says gross profits are computed in the manner prescribed by the Central Government. Section 33 says the available surplus is the gross profits less the sums in section 34, with an extra direct-tax adjustment for accounting years after the Code's commencement.
Gross profits from an establishment for the accounting year are calculated in the prescribed manner, one for a banking company and one for any other case (s.32). The available surplus is gross profits after deducting the sums in section 34 (s.33). For accounting years commencing after the Code's commencement, the available surplus is that figure plus the difference between the direct tax on the previous year's gross profits and the direct tax on those gross profits after deducting the bonus paid or payable for that year (proviso to s.33).
Section 32: gross profits
Section 32 does not itself list the heads of gross profit. It says the gross profits derived by an employer from an establishment in respect of the accounting year shall be:
- (a) in the case of a banking company, calculated in the manner as may be prescribed by the Central Government; and
- (b) in any other case, calculated in the manner as may be prescribed by the Central Government.
Both limbs are worded identically. The text does not explain why they are separate; the Central Rules supply two separate tables. Our payroll compliance audit service can prepare the working from your accounts and check it against the text.
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. Because s.32 delegates the method to the Central Government in both limbs, the Rules' tables are the method to follow.
- Rule 24 and Appendix B: gross profits of a banking company.
- Rule 25 and Appendix C: gross profits of an employer other than a banking company.
See Rules 24 to 26 and the Appendices A to D.
The shape of the computation in Appendices B and C
Both appendices follow the same ladder, starting from the net profit in the profit and loss account:
| Step | Item |
|---|---|
| 1 | Net profit as shown in the profit and loss account (Appendix B: after usual and necessary provisions) |
| 2 | Add back provisions for bonus to employees, depreciation, development rebate reserve or similar, and other reserves (Appendix C also adds back direct taxes including previous-year provision) |
| 3 | Add back also items such as bonus paid for previous years, gratuity charged above the approved-fund and actual-payment aggregate, donations above the income-tax admissible amount, capital expenditure and capital losses (with an exception), and losses of or expenditure on any business outside India |
| 4 | Add income, profits or gains credited directly to reserves, with exceptions (capital receipts, foreign business profits, foreign income of foreign concerns) |
| 5 | Total of items 1 to 4 |
| 6 | Deduct capital receipts and profits (other than on depreciated assets), profits of any business outside India, foreign income, expenditure or losses debited directly to reserves, head-office overheads of foreign concerns in the Indian proportion, refunds of excess tax and written-back excess provisions, and cash subsidy reserved for specified purposes |
| 7 | Gross profits for purposes of bonus = item 5 minus item 6 |
The appendices carry footnotes on whether an item is added or deducted "if, and to the extent" it was charged or credited to the profit and loss account. A company's accounts team should work through the appendix line by line, not from this summary. The appendix texts still refer to the Income-tax Act, 1961; that Act has been replaced by the Income-tax Act, 2025 from 1 April 2026, and this article gives no new section references.
Section 33: available surplus
Section 33 states the base rule: the available surplus for any accounting year is the gross profits for that year after deducting the sums referred to in section 34. Those sums are depreciation, direct tax and such further sums as the Central Government prescribes (Appendix D).
The proviso: the previous year's tax adjustment
For the accounting year commencing on any day in a year after the commencement of this Code, and for every subsequent accounting year, the available surplus is the aggregate of:
- (a) the gross profits for that accounting year after deducting the sums in section 34; and
- (b) an amount equal to the difference between:
- (i) the direct tax, calculated in accordance with section 35, on an amount equal to the gross profits of the employer for the immediately preceding accounting year; and
- (ii) the direct tax, calculated under section 35, on an amount equal to the gross profits of the preceding year after deducting the bonus the employer has paid or is liable to pay for that year.
In plain terms: bonus paid is a cost that lowers the tax the employer would otherwise pay. The proviso credits back that tax saving into the next year's available surplus, so that employees share in it.
Hypothetical example. Preceding-year gross profits: Rs 1,00,000. Bonus paid or payable for that year: Rs 10,000. Assume, only for the arithmetic, a flat tax rate of 25% (the real rate is worked out under section 35). Tax on Rs 1,00,000 is Rs 25,000. Tax on Rs 90,000 is Rs 22,500. The difference, Rs 2,500, is added to this year's gross profits after section 34 deductions, to give the available surplus. The figures and the rate are invented only to show the arithmetic.
A drafting point: the phrase "commencing on any day in a year after the commencement of this Code" is not tied to a stated date in the text. The Code is in force from 21 November 2025, but how a particular accounting year is treated, for example one that began before that date, is not spelt out. Treat the first accounting year that begins after the Code's commencement as the first year to which the proviso applies, and check any later clarification.
The available surplus then goes into section 31: the allocable surplus is 67 per cent of it (60 per cent for a banking company).
Need help with bonus workings?
Gross profit and available surplus involve dozens of add-backs and deductions, and the proviso to s.33 adds a second-year-forward step. Our payroll compliance audit team can build and review these workings with your finance team.
Key takeaways
- Section 32 leaves the gross profit method to the Central Government; the Central Rules give Appendix B (banking company) and Appendix C (others).
- Available surplus is gross profits after the section 34 deductions.
- For years commencing after the Code's commencement, a previous-year direct tax adjustment is added.
- The adjustment equals the tax on last year's gross profits less the tax on the same figure after deducting the bonus paid or payable.
- Allocable surplus under section 31 is then taken from the available surplus.
Read next
- Section 31: payment of bonus out of allocable surplus
- Sections 34 and 35: sums deductible from gross profits and direct tax
- Rules 24 to 26 of the Central Rules: computation of gross profits and further deductions
- How to calculate bonus: step by step with an example
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.