Section 40 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 40 of the Code on Wages, 2019 says when the bonus chapter reaches the public sector. The general position is that nothing in Chapter IV applies to employees of a public sector establishment. The exception is a public sector establishment that sells goods or renders services in competition with a private sector establishment, where that income is at least 20 per cent of its gross income for the year.
The bonus provisions apply to a public sector establishment as they apply to a like private sector establishment if, in an accounting year, it sells goods it produced or manufactured, or renders services, in competition with a private sector establishment, and the income from such sale or services, or both, is not less than twenty per cent of its gross income for that year (s.40(1)). Save as that, nothing in the bonus chapter applies to employees of a public sector establishment (s.40(2)). The test is applied year by year.
Sub-section (1): the two conditions
For the chapter to apply to a public sector establishment, both conditions must be met in the accounting year:
| Condition | What the text requires |
|---|---|
| 1. Competition | The establishment sells any goods produced or manufactured by it, or renders any services, in competition with an establishment in the private sector |
| 2. Weight of that income | The income from such sale or services or both is not less than twenty per cent of the gross income of the public sector establishment for that year |
If both are met, "the provisions of this Chapter shall apply in relation to such establishment in public sector as they apply in relation to a like establishment in private sector". That means the same rules on eligibility (section 26), allocable surplus (section 31), set on and set off and the time limit of section 39 apply to the public sector establishment for that year.
Public bodies that think they may be within the test can have the position reviewed through our legal consultation service before the year closes.
Hypothetical example. A public sector undertaking has gross income of Rs 200 crore in an accounting year. It sells products in the market against private manufacturers and earns Rs 50 crore from those sales. Rs 50 crore is 25% of Rs 200 crore, which is not less than twenty per cent, so the bonus chapter applies to it for that year. Had the figure been Rs 30 crore (15%), it would not. The figures are invented only to show the arithmetic.
Reading the test
- Only sales or services in competition count. Income from a monopoly activity, or from grants or other sources, is not part of the numerator. The text counts "such sale or services", meaning sales of goods produced or manufactured by it and services rendered in competition.
- Goods must be produced or manufactured by the establishment. Resale of goods bought in is not described by the words "produced or manufactured by it". The text is silent on traders; services are separately covered.
- Gross income is the denominator. The Code does not define "gross income" for this section, and the s.2 definitions read for this series do not define it. The meaning must be taken from the establishment's accounts, and the text does not state how.
- "In competition". The text does not say how to decide that goods or services are sold in competition, for example whether it is enough that private players exist in the same market. The text also does not say who decides in case of doubt.
- Year by year. The conditions are tested "in any accounting year", so an establishment can fall in one year and out of the chapter in the next.
Sub-section (2): the default exclusion
"Save as otherwise provided in sub-section (1), nothing in this Chapter shall apply to the employees employed by any establishment in public sector." So the default is exclusion. Two connected points:
- "Public sector" is not defined here. The text does not define the term. Which bodies are public sector establishments, such as companies, corporations and authorities, has to be worked out from the establishment's own constitution and from any definition elsewhere in the Code or other law.
- Other exclusions. Section 41 separately lists employees to whom the chapter does not apply, including employees of an establishment under the authority of a department of the Central or State Government or a local authority, employees of the Life Insurance Corporation of India and of the Reserve Bank of India, and employees of certain public sector financial institutions that the Central Government notifies. A body can therefore be outside the chapter under s.41 even if it passes the 20 per cent test in s.40; the relationship between the two sections is not spelt out. See section 41.
Section 41(2) also says that, subject to s.41(1), the chapter applies to an establishment in which twenty or more persons are employed or were employed on any day during an accounting year. Check that threshold alongside s.40.
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. In the Rules text read for this article, there is no rule that defines "in competition" or "gross income" for s.40, or prescribes a process to decide whether an establishment meets the test. For the computation inputs that apply once the chapter is attracted, see Rules 24 to 26. For the old-law comparison, see our guide on bonus under the Payment of Bonus Act, 1965.
Need help deciding whether bonus applies?
Public sector status and the 20 per cent test turn on facts and definitions the Code leaves open. Our legal consultation team can examine the establishment's constitution, income mix and the other exclusions in section 41, and give a written view.
Key takeaways
- The bonus chapter applies to a public sector establishment only if it sells goods or services in competition with the private sector and that income is at least 20 per cent of its gross income.
- Otherwise, nothing in the chapter applies to its employees.
- The test is applied for each accounting year.
- The Code does not define "in competition", "gross income" or "public sector" in this section.
- Section 41 lists further exclusions that may apply regardless of the 20 per cent test.
Read next
- Section 39: time limit for payment of bonus
- Section 41: establishments and employees outside the bonus chapter
- 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.