PAYMENT OF BONUS
Topic Overview
Eligibility & Computations
Detailed provisions regarding eligibility criteria, minimum/maximum bonus, and computation of working days.
Surplus & Adjustments
Rules for calculating allocable/available surplus, set-on and set-off mechanisms, and time limits for payment.
Detailed Concepts
· PAYMENT OF BONUS
- Section 26 – Eligibility for Bonus
1. An employee is entitled to bonus if:
- · He/She earns wages below the notified limit.
- · Has worked for at least 30 working days in the accounting year.
Minimum Bonus
- · 8.33% of wages/salary or ₹100, whichever is higher.
- · Payable even if the employer has no profit.
2. If employee’s salary exceeds the notified limit, bonus is calculated as if salary were:
- · The notified limit, or
- · The minimum wage,
whichever is higher Maximum wage
3. If employer has allocable surplus, bonus is payable proportionately subject to a maximum of 20% of wages.
4. Set-on and Set-off used while calculating allocable surplus, adjustments are made under Section 36.
5. Productivity bonus -Bonus based on production/productivity may be paid through agreement or settlement, but total bonus cannot exceed 20% of wages.
6. Bonus in First Years of Establishment
| Year | Rule |
|---|---|
| 1st–5th year | Bonus only if there is profit; no set-on/set-off |
| 6th–7th year | Modified set-on/set-off applies |
| 8th year onwards | Normal bonus rules fully apply |
Explanation
Employer is considered to have profit only after:
- · Proper depreciation is accounted for.
- · Prior losses are fully set off.
7. Goods produced during trial runs are not considered for bonus calculation. The same rules apply to departments, branches, and undertakings.
- Section 27 – Proportionate Reduction in Certain Cases
If an employee has not worked for all working days in the accounting year, the minimum bonus (8.33%) may be reduced proportionately.
- Section 28 – Computation of Working Days
An employee is deemed to have worked on days of:
- Lay-off under law/agreement/standing orders
- Paid leave
- Temporary disablement due to employment injury
- Maternity leave
- Section 29 – Disqualification for Bonus
An employee is disqualified if dismissed for:
- · Fraud
- · Riotous or violent behavior
- · Theft, misappropriation, or sabotage
- · Conviction for sexual harassment
- Section 30 – Departments, Branches and Undertakings
All departments, branches, and undertakings are treated as one establishment for bonus computation.
Purpose
- Prevent artificial splitting of units.
- Avoid bonus liability.
Separate establishment when
- Separate balance sheet is prepared.
- Separate profit and loss account is maintained.
- Section 31 – Payment of Bonus from Allocable Surplus
Bonus is payable only out of allocable surplus.
60% of profits in banking companies.
67% of profits in other establishments.
Important
- Audited accounts cannot normally be questioned.
- In a dispute, Government may ask for balance sheet.
- Financial information cannot be disclosed without employee consent.
- Section 32 – Computation of Gross Profit
Gross profit is calculated for each accounting year according to the method prescribed by Central Government for:
- Banking companies
- Other establishments
- Section 33 – Computation of Available Surplus
For the first and subsequent accounting years, available surplus includes:
- Current year gross profit minus deductions
- Adjustment relating to tax and bonus payable
- Section 34 – Sums Deductible from Gross Profit
Deductible prior charges:
- Depreciation
- Direct taxes
- Other prescribed deductions
- Section 35 – Calculation of Direct Tax
While calculating direct tax:
- · Past losses are not set off.
- · Unabsorbed depreciation is not set off.
- · Religious/charitable institutions are treated as normal employers for this purpose.
- · HUF or individual employers are taxed under the Income-tax Act.
- · Export rebates and other rebates are ignored.
- Section 36 – Set-on and Set-off
1. Set-on (Excess surplus)
If allocable surplus exceeds the amount needed for maximum bonus (20%):
- · Excess is carried forward.
- · Can be carried forward for 4 years.
2. Set-off (Deficiency)
If: There is no surplus, or
Surplus is less than minimum bonus (8.33%),
the deficiency is carried forward for 4 years.
3. The principal of Set off and Set On as provided by central govt. does not fit, apply rules prescribed
4. Where in any accounting year – when amount has been forwarded and set-off and set-on while adjusting oldest year is adjusted first
- Section 37 – Adjustment of Customary or Interim Bonus
If employer has already paid:
- · Puja or festival bonus
- · Interim/statutory bonus in advance
Such amount can be deducted from the final bonus payable.
- Section 38 – Reduction of Bonus for Misconduct
If employee’s misconduct causes loss to the employer, the employer may deduct the amount of loss from the bonus payable.
- Section 39 – Time Limit for Payment of Bonus
Bonus must be credited to the employee’s bank account within 8 months from the close
of the accounting year.
If dispute is pending -Pay within 1 month of award or settlement.
If dispute is only about higher bonus -Employer must still pay minimum 8.33% within 8 months.
- Section 40 – Public Sector Establishments
Special provisions apply to certain public sector establishments.
Non-Applicability of Bonus Chapter
This chapter does not apply to employees of:
- · Life Insurance Corporation of India (LIC)
- · Reserve Bank of India (RBI)
- · Certain public sector financial institutions
- · Seamen under merchant shipping law
- · Dock workers
- · Inland water transport crossing other countries
- · Central, State, or Local Government departments
- · Red Cross Society
- · Universities and educational institutions
- · Hospitals, chambers of commerce, and social welfare institution
