Section 36 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 36 of the Code on Wages, 2019 smooths bonus across years. When the allocable surplus exceeds the maximum bonus, the excess is set on (carried forward) for use in later years. When there is not enough surplus even for the minimum bonus, the shortfall is set off (carried forward as a charge) against later surplus. The carry-forward runs for up to four years.
Set on (s.36(1)): where the allocable surplus exceeds the maximum bonus payable under s.26, the excess, limited to 20 per cent of the total salary or wage of the employees in that accounting year, is carried forward to the succeeding year and so on up to and inclusive of the fourth accounting year. Set off (s.36(2)): where there is no available surplus, or the allocable surplus falls short of the minimum bonus, and no sufficient set-on amount exists, the minimum or the deficiency is carried forward for set-off for up to the fourth year. Earliest year first (s.36(4)). The manner is as prescribed by the Central Government (Rules 27 and 28, Appendix A).
Sub-section (1): set on
Where for any accounting year the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under section 26 (20 per cent of wages), the excess shall:
- be subject to a limit of twenty per cent of the total salary or wage of the employees employed in the establishment in that accounting year;
- be carried forward for being set on in the succeeding accounting year, and so on up to and inclusive of the fourth accounting year; and
- be utilised for the payment of bonus in the manner prescribed by the Central Government.
Reading the "fourth accounting year": the text counts the year after the surplus arose as the first and the carry-forward runs until the fourth year inclusive. Appendix A of the Central Rules gives a worked table, discussed below, which should be used to confirm the count. Employers who carry forward amounts should keep a year-by-year ledger of set-on and set-off, and our payroll compliance audit service can prepare and review it.
Sub-section (2): set off
Where for any year there is no available surplus, or the allocable surplus falls short of the minimum bonus payable under s.26, and there is no amount or not sufficient amount carried forward and set on under sub-section (1) to pay that minimum, the minimum amount or the deficiency is carried forward for being set off in the succeeding accounting year, and so on up to and inclusive of the fourth accounting year, in the manner prescribed by the Central Government.
So the employer pays the minimum bonus in the loss year (s.26(1) applies whether or not there is a surplus), and the amount paid out of that gap is recovered from the surplus of the next years, up to four.
Sub-sections (3) and (4)
| Sub-section | What it says |
|---|---|
| (3) | The principle of set on and set off as provided in the Central Government's rules applies to all other cases not covered by sub-section (1) or (2) for payment of bonus |
| (4) | Where an amount has been carried forward and set on or set off, then in calculating bonus for the succeeding year, the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account |
Sub-section (3) is general and the text does not say which cases it has in mind. Sub-section (4) is the ordering rule: oldest first. Section 26(4) adds that the set-on or set-off amount is taken into account in computing the allocable surplus. The new-establishment rules in s.26(6) to (8) switch off section 36 for the first five years, apply it with modifications for years six and seven, and apply it normally from year eight; the Central Rules deal with years six and seven in rules 22 and 23.
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 27: restates s.36(1) and says the excess is carried forward for set-on up to and inclusive of the fourth year, "in the manner as illustrated in Appendix A".
- Rule 28: restates s.36(2) and says the minimum amount or deficiency is carried forward for set-off up to and inclusive of the fourth year, in the manner as illustrated in Appendix A.
- Rules 22 and 23: set on and set off for the sixth and seventh accounting years, also as illustrated in Appendix A.
See Rules 27 and 28 and the Appendices A to D.
Appendix A illustration
Appendix A assumes that the bonus at 8.33 per cent of annual wages for all employees is Rs 1,04,167 and the maximum bonus (20 per cent) is Rs 2,50,000. A few rows, in summary:
| Year | Allocable surplus | Bonus paid | Carry-forward |
|---|---|---|---|
| 1 | Rs 1,04,167 | Rs 1,04,167 (minimum) | Nil |
| 2 | Rs 6,35,000 | Rs 2,50,000 (maximum) | Set on Rs 2,50,000 |
| 3 | Rs 2,20,000 | Rs 2,50,000, including Rs 30,000 from year 2 | Nil new; Rs 2,20,000 of year 2 remains |
| 8 | Nil (loss) | Rs 1,04,167 (minimum), including Rs 35,000 from year 6 | Set off Rs 69,167 |
| 9 | Rs 10,000 | Rs 1,04,167 (minimum) | Set off Rs 94,167; total set off Rs 69,167 + Rs 94,167 carried |
| 10 | Rs 2,15,000 | Rs 1,04,167 after setting off Rs 69,167 (year 8) and Rs 41,666 (year 9) | Set off Rs 52,501 of year 9 remains |
A footnote to the Appendix records that a balance of Rs 1,10,000 set on from year 2 lapses. That figure shows the end of the four-year window. The table is the Rules' own illustration; read the full Appendix A for rows 4 to 7 and for the order of use. Employers should not treat this summary as a substitute for the Appendix.
Hypothetical example, simplified. In year 1 an employer's allocable surplus is Rs 3,00,000 against a maximum bonus of Rs 2,00,000. Total wages are Rs 10,00,000 so 20% is Rs 2,00,000. The excess is Rs 1,00,000, within the 20% limit, so Rs 1,00,000 is set on for the next years. In year 2 allocable surplus is Rs 1,50,000 against a minimum bonus of Rs 83,300; the surplus covers the minimum, and the set-on is used first for any bonus above it. The figures are invented only to show the arithmetic.
Need help with set-on and set-off ledgers?
Set-on and set-off ledgers are easy to lose track of over four years, and the lapse of an old balance matters. Our payroll compliance audit team can reconstruct the carry-forward from your past bonus workings and prepare the current-year computation.
Key takeaways
- Excess allocable surplus above the maximum bonus is set on, up to 20 per cent of total wages, for up to four years.
- A deficiency in the minimum bonus is set off against later surplus for up to four years.
- The earliest year's carry-forward is used first.
- Rules 27 and 28 and Appendix A of the Central Rules set the manner.
- A balance not used within the window lapses, as the Appendix A footnote shows.
Read next
- Section 26: eligibility for bonus
- Sections 37 and 38: customary or interim bonus and deductions from bonus
- Rules 27 and 28 of the Central Rules: carrying forward, set on and set off
- 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.