Payment of Bonus Act: Who Qualifies and How Much

The Payment of Bonus Act, 1965 gives employees a statutory right to an annual bonus, separate from any discretionary performance bonus a company may also pay. Here is exactly who qualifies, how the amount is calculated, and when it must be paid.

Key facts at a glance

• Statutory bonus applies to employees earning up to Rs 21,000/month, provided they worked at least 30 days in the accounting year.
• The Act generally covers establishments with 20 or more employees.
• The minimum bonus is 8.33% of eligible salary or wages, payable even without profit.
• The maximum bonus is 20%, payable when allocable surplus supports it.
• Bonus is calculated on wages up to Rs 7,000/month or the applicable minimum wage, whichever is higher - not on the full eligible salary.
• Bonus must generally be paid within 8 months of the close of the accounting year.

Who Is Covered by the Act

The Payment of Bonus Act applies to:

• Factories, as defined under the Factories Act.
• Other establishments employing 20 or more persons on any day during the accounting year.

State governments have the power to extend coverage to establishments with fewer employees, so it is worth checking your specific state's position rather than assuming the 20-employee threshold is universal.

Who Qualifies as an Employee for Bonus

Two conditions determine individual eligibility, separate from whether the establishment itself is covered:

1. Wage ceiling - the employee's salary or wages must be Rs 21,000 per month or less.
2. Minimum service - the employee must have worked at least 30 days in the accounting year.

Employees earning above Rs 21,000/month fall outside the Act's mandatory coverage entirely, though employers can choose to pay a discretionary bonus to such employees.

How Much Bonus Is Payable

This is where the Act gets confused most often, because there are two different ceilings at play: one for eligibility, and a separate, lower one for calculation.

In practice, this means an employee earning Rs 18,000/month is eligible for bonus (since it's below Rs 21,000), but the bonus itself is calculated as if they earned Rs 7,000/month or the applicable minimum wage, whichever is higher - not the full Rs 18,000. This calculation ceiling is a major reason statutory bonus amounts often look smaller than employees expect.

An Example Calculation

For an employee whose calculation wage works out to Rs 7,000/month (assuming this exceeds the applicable minimum wage):

• Minimum bonus (8.33%): Rs 7,000 x 12 months x 8.33% = approximately Rs 6,997 for the year.
• Maximum bonus (20%): Rs 7,000 x 12 months x 20% = Rs 16,800 for the year.

The actual percentage within this range depends on the establishment's allocable surplus for that accounting year, calculated as per the formula set out in the Act.

When Bonus Must Be Paid

Bonus is generally payable within 8 months from the close of the accounting year, though the appropriate government can extend this period in specific circumstances. Employers should track their accounting year end date carefully, since this deadline is a hard compliance requirement, not a guideline.

Exemptions and Special Cases

Newly set-up establishments typically get relief from the full bonus obligation for an initial period, subject to specific conditions in the Act, such as limiting the bonus obligation to years in which the establishment actually earns profit during that early phase. Employers starting a new business should check the exact conditions that apply rather than assuming automatic exemption, since the relief is conditional, not blanket.

Certain categories of establishments, such as some public sector undertakings and specific government-notified categories, may also have different treatment under the Act.

Employer Compliance Checklist

1. Check whether your establishment crosses the 20-employee threshold (or your state's applicable threshold).
2. Identify eligible employees - those earning Rs 21,000/month or less who worked at least 30 days in the year.
3. Apply the correct calculation ceiling - Rs 7,000/month or the applicable minimum wage, whichever is higher.
4. Calculate allocable surplus correctly to determine the bonus percentage between 8.33% and 20%.
5. Pay within 8 months of the close of the accounting year.
6. Maintain bonus registers and records as required under the Act.

If you are not sure whether your business is correctly calculating and paying statutory bonus, ComplianceCheck's Statutory Health Check gives you a clear picture in a few minutes.

Sources

• Ministry of Labour and Employment, Payment of Bonus Act, 1965 - labour.gov.in
• Relevant state labour department, for minimum wage figures used in bonus calculation

This guide is general information, not legal advice. Requirements vary by state, sector and headcount - confirm specifics with a compliance professional or the relevant authority.