Key Takeaways
- Bonus from your employer is fully taxable as salary income under Section 17(1) of the Income Tax Act.
- Your employer deducts TDS on bonus at the average rate of tax on your estimated annual salary (Section 192), not at the flat 30% rate.
- Under the new tax regime (Section 115BAC) for AY 2026-27, income up to ₹4,00,000 is tax-free, and a rebate under Section 87A makes income up to ₹12,00,000 effectively zero-tax.
- If you receive bonus arrears relating to an earlier year, you can claim relief under Section 89(1) by filing Form 10E before your ITR.
- Statutory bonus under the Payment of Bonus Act is capped at 20% of salary; performance and ex-gratia bonuses have no legal cap but are taxed identically.
Is bonus from your employer taxable in India? Yes. Bonus is explicitly included in the definition of "salary" under Section 17(1) of the Income Tax Act, 1961. It is taxed at normal slab rates applicable to your total income for the financial year, not at any special or flat rate. Your employer deducts TDS on it under Section 192.
Your annual bonus, festival bonus, or performance incentive hits your bank account after TDS. But the deduction often looks higher than you expected, or sometimes lower than it should be. The confusion comes from how employers compute TDS on lump-sum payments versus monthly salary. Here's how the entire chain works: what counts as bonus, how it's taxed, how TDS is calculated, and what to do when filing your ITR.
Looking for expert help with income tax on bonus from employer India AY 2026-27? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
What Counts as "Bonus" Under Income Tax Law?
Section 17(1) of the Income Tax Act defines salary to include "any annuity or pension, any gratuity, any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages, any advance of salary, any payment received in respect of any period of leave not availed of, and any bonus or commission." (Section 17(1), Income Tax Act, 1961)
In practice, employers pay several types of bonus. All of them are taxed the same way:
| Type | What It Is | Taxable? |
|---|---|---|
| Statutory bonus | Minimum 8.33% of salary under Payment of Bonus Act, 1965 | Yes, fully |
| Performance bonus / incentive | Linked to KRAs, targets, or annual appraisal | Yes, fully |
| Festival / Diwali bonus | Ex-gratia payment around festivals | Yes, fully |
| Retention bonus | Paid to prevent attrition | Yes, fully |
| Joining / sign-on bonus | One-time payment on joining | Yes, fully |
| Referral bonus | Reward for referring a candidate | Yes, fully |
There is no exemption or deduction available specifically for bonus income. It is added to your gross salary and taxed at the applicable slab rate.
How Your Employer Calculates TDS on Bonus (Section 192)
This is where most confusion starts. Your employer does not deduct TDS on bonus at a flat 30% or at the "highest slab rate." Section 192 requires TDS at the average rate of tax computed on your estimated total salary for the year.
Step-by-Step Guide
TDS Calculation on Bonus: How Your Employer Does It
Section 192, Income Tax Act
Estimate total salary
Employer adds basic pay, DA, HRA, other allowances, and bonus for the full financial year
Step 1Subtract exemptions
Standard deduction ₹75,000 (new regime) or ₹50,000 (old regime), plus any declared deductions under Chapter VI-A
Step 2Compute tax on net taxable income
Apply the applicable slab rates for the regime you chose. Add 4% health and education cess
Step 3Calculate the average rate
Average rate = (Total tax / Total taxable salary) x 100. This is the rate applied to every payment including bonus
Step 4Deduct TDS at this average rate
When bonus is paid, TDS is deducted at this average rate on the bonus amount. It is not taxed separately at a higher slab
Step 5Source: Section 192, Income Tax Act, 1961; incometaxindia.gov.in
Worked example: Ravi earns ₹60,000/month basic salary (₹7,20,000/year) and receives a ₹1,80,000 annual bonus in March. His employer estimates total salary at ₹9,00,000. Under the new regime: standard deduction ₹75,000 brings taxable income to ₹8,25,000. Tax: nil on first ₹4,00,000, then 5% on next ₹4,00,000 (₹20,000), then 10% on ₹25,000 (₹2,500). Total tax: ₹22,500 + 4% cess = ₹23,400. Average rate: ₹23,400 / ₹8,25,000 = 2.84%. TDS on the ₹1,80,000 bonus: ₹1,80,000 x 2.84% = ₹5,112.
If the same bonus pushed his income above ₹12,00,000, the Section 87A rebate would not apply and the effective TDS rate would jump.
New Tax Regime Slab Rates for AY 2026-27
Your bonus is combined with your regular salary and taxed at these slab rates under the new regime (Section 115BAC):
Tax Rate Chart
Income Tax Slabs: New Regime AY 2026-27
Section 115BAC, applicable to all individuals by default
Up to ₹4,00,000
No tax
₹4,00,001 to ₹8,00,000
Tax: ₹20,000 at slab top
₹8,00,001 to ₹12,00,000
Tax: ₹40,000 at slab top
₹12,00,001 to ₹16,00,000
Tax: ₹60,000 at slab top
₹16,00,001 to ₹20,00,000
Tax: ₹80,000 at slab top
₹20,00,001 to ₹24,00,000
Tax: ₹1,00,000 at slab top
Above ₹24,00,000
No upper limit
Source: incometax.gov.in: Salaried Individuals AY 2026-27
Section 87A rebate of ₹60,000 applies if total income is up to ₹12,00,000 under the new regime, effectively making income up to ₹12,75,000 (after ₹75,000 standard deduction) tax-free for salaried employees.
The ₹12 Lakh Threshold: When Bonus Breaks the Rebate
Here's where bonus creates a real tax impact. If your salary without bonus keeps you under ₹12 lakh taxable income, you pay zero tax thanks to Section 87A. Add a ₹2 lakh bonus, and you're at ₹14 lakh: the rebate vanishes entirely, and tax jumps from ₹0 to ₹90,000 (before marginal relief).
Say your basic salary is ₹11,50,000 after standard deduction. Tax: nil (87A rebate covers the ₹37,500 liability). Now add a ₹2,50,000 bonus. Taxable income becomes ₹14,00,000. Tax before rebate: ₹20,000 + ₹40,000 + ₹30,000 = ₹90,000. No 87A rebate available because income exceeds ₹12,00,000. Add 4% cess: ₹93,600.
That ₹2,50,000 bonus cost ₹93,600 in tax. Marginal relief under Section 87A limits tax so the tax payable does not exceed the income above ₹12 lakh (here ₹2,00,000), but the jump is still steep.
Payment of Bonus Act: Statutory Minimums
Not all bonuses are discretionary. If your employer has 20 or more employees, the Payment of Bonus Act, 1965 applies:
Comparison
Statutory Bonus vs Performance Bonus
Payment of Bonus Act, 1965 (as amended in 2015)
| Parameter | Statutory Bonus | Performance / Ex-Gratia |
|---|---|---|
| Legal basis | Payment of Bonus Act, 1965 | Employment contract or company policy |
| Eligibility salary cap | ₹21,000/month | No cap |
| Calculation ceiling | ₹7,000/month (bonus computed on this even if actual salary is higher) | Based on actual salary or KRAs |
| Minimum rate | 8.33% of salary (or ₹100, whichever is higher) | No minimum, discretionary |
| Maximum rate | 20% of salary | No cap |
| Minimum working days | 30 working days in the accounting year | As per company policy |
| Income tax treatment | Fully taxable as salary | Fully taxable as salary |
Source: Payment of Bonus Act, 1965; Payment of Bonus (Amendment) Act, 2015; labour.gov.in
The calculation ceiling of ₹7,000 means: if you earn ₹21,000/month, your minimum statutory bonus is 8.33% of ₹7,000 x 12 = ₹6,997 per year. Your maximum statutory bonus is 20% of ₹7,000 x 12 = ₹16,800 per year (Payment of Bonus (Amendment) Act, 2015; labour.gov.in).
Section 89(1) Relief: When Bonus Relates to Earlier Years
If your employer pays a bonus that was due in a previous financial year (back-dated incentive, arrears of statutory bonus, deferred performance payout), the entire amount is taxed in the year of receipt. This can push you into a higher slab than you would have been in had the bonus been received on time.
Section 89(1) provides relief in this situation. You compute the tax difference between:
- Tax in the current year with the arrears included
- Tax in the current year without the arrears, plus the additional tax that would have been payable in the earlier year(s) had the bonus been received then
If the current-year tax is higher, the excess is allowed as relief. You must file Form 10E on incometax.gov.in before filing your ITR, or the relief will be disallowed during processing (Section 89(1); Rule 21A, Income Tax Rules).
For a detailed walkthrough, see our Section 89(1) relief and Form 10E guide.
How to Show Bonus in Your ITR
Bonus is not reported as a separate line item in the ITR. It is part of your gross salary:
- Check Form 16 Part B: Your employer includes bonus in "Gross Salary" under Section 17(1). Verify the amount matches your payslips.
- Cross-check with AIS: The Annual Information Statement on incometax.gov.in should reflect the same gross salary figure. If there is a mismatch, raise it with your employer before filing.
- ITR-1 or ITR-2: Most salaried employees receiving only salary and bonus use ITR-1 (Sahaj) if total income is under ₹50 lakh. If you have capital gains or foreign assets, use ITR-2.
- Schedule Salary: Enter gross salary (inclusive of bonus) under "Income from Salary." The form auto-computes standard deduction.
- If claiming 89(1) relief: Enter the relief amount in the designated field after filing Form 10E.
For a step-by-step Form 16 walkthrough, see our guide to reading Form 16.
Common Mistakes with Bonus Taxation
Not verifying TDS on bonus against Form 26AS. Employers sometimes deposit TDS for one quarter late, causing a mismatch. If your Form 26AS does not reflect the TDS deducted from bonus, your refund will be held up. Check before filing.
Assuming bonus TDS is at 30%. This leads employees to expect a large refund that never comes. TDS is at the average rate, and if your employer estimated correctly, there may be zero refund.
Ignoring the 87A threshold. If your salary is near ₹12,75,000 (gross) and you receive any bonus, the rebate disappears. Plan investments and regime selection before the financial year ends: compare old vs new regime for your situation.
Not filing Form 10E for arrear bonus. If the bonus relates to a previous year and you claim Section 89(1) relief in your ITR without filing Form 10E first, the relief is reversed during CPC processing and you receive a demand notice.
Tax Garden Handles Your Bonus ITR
If you received a large bonus, performance incentive, or arrear payment this year, your ITR needs careful handling: regime comparison, Section 89(1) relief calculation, Form 10E filing, and AIS reconciliation. Tax Garden does all four. See how it works or check pricing.
Frequently Asked Questions
Is Diwali bonus taxable?
Yes. A Diwali bonus, festival bonus, or any ex-gratia payment from your employer is fully taxable as salary income under Section 17(1) of the Income Tax Act. There is no exemption for festival bonuses.
What is the TDS rate on bonus?
TDS on bonus is not deducted at a flat rate. Under Section 192, your employer calculates TDS at the average rate of tax on your estimated total annual salary (including bonus). The average rate depends on your total income and the applicable slab rates.
Can I claim any deduction on bonus received?
No specific deduction exists for bonus income. However, bonus is part of gross salary, so the standard deduction of ₹75,000 (new regime) applies to your total salary including bonus. Under the old regime, Chapter VI-A deductions (80C, 80D, etc.) reduce your overall taxable income.
Is statutory bonus and performance bonus taxed differently?
No. Both statutory bonus under the Payment of Bonus Act and performance or ex-gratia bonus are taxed identically as salary income. The only difference is the legal entitlement: statutory bonus is mandatory for eligible employees, while performance bonus is discretionary.
I received last year's bonus this year. Can I reduce tax on it?
Yes. If bonus relates to an earlier financial year but was received this year, you can claim relief under Section 89(1). File Form 10E on incometax.gov.in before filing your ITR. The relief equals the excess tax caused by clubbing the arrears in the current year.
Where does bonus appear in Form 16?
Bonus is included in Gross Salary under Section 17(1) in Part B of Form 16. It is not shown as a separate line. Cross-check the gross salary figure in Form 16 with your payslips to confirm your bonus was included.
My bonus pushed me over the ₹12 lakh 87A rebate limit. What can I do?
If your total income exceeds ₹12 lakh under the new regime, the Section 87A rebate is not available. Consider whether the old tax regime gives a better outcome if you have significant deductions (80C, 80D, HRA). Salaried employees can switch regime each year when filing the ITR. Compare both regimes before choosing.
