How much statutory bonus must employers pay in India? Under the Payment of Bonus Act, 1965, every employer with 20 or more employees must pay a minimum bonus of 8.33% of wages (basic + DA) to all eligible employees earning up to Rs 21,000 per month. The bonus is calculated on a ceiling of Rs 7,000 or the applicable minimum wage, whichever is higher. Maximum bonus is 20% of wages. Non-payment carries criminal penalties including imprisonment.
Every Indian establishment with 20 or more employees must comply with the Payment of Bonus Act, 1965. Yet many SME owners treat bonus as a goodwill gesture rather than a statutory obligation, discovering the legal requirement only when an employee files a complaint with the Labour Commissioner or an inspector visits.
This guide covers every provision an employer must know: which establishments are covered, who qualifies, how to calculate bonus, the set-on and set-off mechanism, what registers to maintain, and the penalties for non-compliance.
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Which Establishments Must Pay Bonus?
The Act applies to:
- Factories: Every factory as defined under the Factories Act, 1948, employing 10 or more persons
- Other establishments: Every establishment employing 20 or more persons on any day during the accounting year
Once the Act applies to an establishment, it continues to apply even if the number of employees falls below the threshold later. There is no turnover exemption or industry carve-out.
Establishments Excluded
The following are excluded from the Act:
- Employees of the Life Insurance Corporation of India
- Seamen as defined under the Merchant Shipping Act
- Employees employed through contractors on building operations
- Employees of the Reserve Bank of India
- Employees of any corporation established under a Central or State Act where the government holds not less than 40% of the shares
- Employees of public-sector undertakings selling goods at controlled prices (where profit is nil or negative by design)
- Universities, educational institutions, and hospitals (unless notified by the government)
Which Employees Are Eligible?
An employee is eligible for bonus if:
- Salary does not exceed Rs 21,000 per month (basic + dearness allowance)
- Has worked for at least 30 days in the accounting year
- Is not an apprentice under the Apprentices Act, 1961
The Rs 21,000 ceiling was raised from Rs 10,000 by the Payment of Bonus (Amendment) Act, 2015. If an employee's basic + DA exceeds Rs 21,000 per month, the employer has no statutory obligation to pay them bonus under this Act.
Who Counts as an Employee?
Every person employed on a salary or wage, including:
- Permanent, temporary, and probationary staff
- Supervisory and managerial employees (if salary is within the ceiling)
- Contract workers engaged through a contractor
- Part-time employees who complete 30 working days
The term excludes apprentices under the Apprentices Act but includes casual and daily-wage workers who meet the 30-day threshold.
Bonus Calculation: Step by Step
Step 1: Determine the Wage Base
Wages for bonus calculation include only:
- Basic salary
- Dearness allowance (DA) / special allowance linked to cost of living
Excluded from the wage base: HRA, conveyance, travel allowance, overtime, commission, PF contribution, gratuity, retrenchment compensation, and any bonus already paid.
Step 2: Apply the Calculation Ceiling
Tax Rate Chart
Bonus Calculation Ceilings
After the 2015 Amendment
Eligibility ceiling (basic + DA)
Employees earning above this are excluded from the Act
Calculation ceiling (basic + DA)
Or applicable minimum wage, whichever is higher
Minimum bonus rate
Or Rs 100, whichever is higher; payable even in loss years
Maximum bonus rate
When allocable surplus exceeds minimum bonus payable
Source: Sections 10, 11, and 12 of the Payment of Bonus Act, 1965
If an employee's monthly basic + DA exceeds Rs 7,000, bonus is calculated on Rs 7,000 (or the minimum wage notified by the state government for that scheduled employment, whichever is higher), not on the actual salary.
Step 3: Calculate the Annual Bonus
Formula: Annual bonus = (Monthly calculation base x 12) x Bonus percentage
Example 1: Employee Earning Below the Calculation Ceiling
Employee monthly basic + DA = Rs 5,000 (below Rs 7,000 ceiling)
- Calculation base = Rs 5,000 x 12 = Rs 60,000
- Minimum bonus (8.33%) = Rs 60,000 x 8.33% = Rs 4,998 per year
Example 2: Employee Earning Above the Calculation Ceiling
Employee monthly basic + DA = Rs 18,000 (below Rs 21,000 eligibility ceiling but above Rs 7,000 calculation ceiling)
- Calculation base = Rs 7,000 x 12 = Rs 84,000 (capped at Rs 7,000)
- Minimum bonus (8.33%) = Rs 84,000 x 8.33% = Rs 6,997 per year
- Maximum bonus (20%) = Rs 84,000 x 20% = Rs 16,800 per year
Example 3: Employee Who Joined Mid-Year
Employee joined on October 1 and worked for 6 months. Monthly basic + DA = Rs 15,000.
- Calculation base = Rs 7,000 x 6 = Rs 42,000 (capped, pro-rated)
- Minimum bonus (8.33%) = Rs 42,000 x 8.33% = Rs 3,499 per year
Step 4: Check Minimum Wage Override
If the minimum wage notified by the state government for the scheduled employment is higher than Rs 7,000 per month, use the minimum wage as the calculation ceiling instead. For example, if the state minimum wage is Rs 9,000, bonus is calculated on Rs 9,000 (not Rs 7,000).
Allocable Surplus, Set-On, and Set-Off
The bonus percentage (between 8.33% and 20%) depends on the employer's allocable surplus for the accounting year.
Computing Allocable Surplus
- Gross profit: Calculated as per the First Schedule (for banking companies) or Second Schedule (for other establishments) of the Act
- Available surplus = Gross profit minus prior charges (depreciation, development rebate, direct taxes, dividends at specified rates)
- Allocable surplus = 67% of available surplus (for companies) or 60% (for other establishments)
How Set-On and Set-Off Work
| Scenario | What Happens | Carry Forward Period |
|---|---|---|
| Allocable surplus > maximum bonus (20%) | Excess carried forward as set-on | Up to 4 years |
| Allocable surplus < minimum bonus (8.33%) | Deficiency carried forward as set-off | Up to 4 years |
| Allocable surplus between 8.33% and 20% | Bonus paid at actual allocable surplus rate | No carry forward needed |
Set-on protects employees: surplus from a profitable year supplements bonus in a lean year. Set-off protects employers: loss-year deficiency reduces the bonus obligation in a subsequent profitable year.
Both set-on and set-off expire after 4 years. Amounts not utilised within the 4-year window lapse permanently.
Practical Impact
Even in a year of losses with zero allocable surplus, the employer must pay the minimum bonus of 8.33%. The deficit is recorded as a set-off and can be recovered from allocable surplus in any of the next 4 years.
Disqualification from Bonus
Under Section 9, an employee forfeits the entire bonus for the accounting year if dismissed for:
- Fraud committed in connection with the establishment
- Riotous or violent behaviour on the premises of the establishment
- Theft, misappropriation, or sabotage of any property of the establishment
The disqualification requires that the employee was actually dismissed for one of these specific grounds. A mere allegation without formal dismissal does not trigger forfeiture.
When Must Bonus Be Paid?
Bonus must be paid within 8 months from the close of the accounting year (Section 19).
For establishments following the April to March financial year: bonus for FY 2025-26 must be paid by November 30, 2026.
If there is a dispute pending before a tribunal or authority, the employer gets an additional period of 1 month from the date of the award or settlement to pay the bonus.
Registers and Returns
Employers must maintain the following registers under the Payment of Bonus Rules, 1975:
| Form | Purpose | When to Update |
|---|---|---|
| Form A | Computation of allocable surplus | At the end of each accounting year |
| Form B | Set-on and set-off of allocable surplus | At the end of each accounting year |
| Form C | Bonus payable to each employee and deductions | Before bonus payment |
| Form D | Annual return of bonus paid | Filed by February 1 each year |
Form D must be submitted to the Inspector appointed under the Act within 30 days of bonus payment. Most states now accept electronic filing through the Ministry of Labour portal.
All registers must be maintained for a minimum of 8 years after the last entry.
Penalties for Non-Compliance
Tax Rate Chart
Penalties Under the Payment of Bonus Act
Section 28
Non-payment of bonus or contravention of any provision
Under the Payment of Bonus Act, 1965
First offence under Code on Wages, 2019
Code on Wages Central Rules 2026 now in effect
Subsequent offence under Code on Wages
Imprisonment only for repeat violations
Source: Section 28, Payment of Bonus Act, 1965; Chapter V, Code on Wages, 2019
Key enforcement points:
- Any employee, trade union, or Inspector can file a complaint
- The Inspector has powers to enter premises, examine records, and examine witnesses under oath
- If the employer fails to maintain registers, the burden of proof shifts to the employer to show that bonus was correctly computed and paid
- The complaint can be filed with the Labour Commissioner or directly with a Magistrate
Common Compliance Mistakes
1. Not paying bonus because the company made a loss: The 8.33% minimum bonus is mandatory regardless of profit or loss. Only the surplus-based component (above 8.33%) depends on allocable surplus.
2. Including all allowances in the calculation base: Only basic salary and DA count. Including HRA, travel, or other allowances inflates the bonus calculation beyond what the Act requires.
3. Calculating bonus on actual salary instead of the ceiling: If an employee earns Rs 15,000 basic + DA, bonus must be calculated on Rs 7,000 (or minimum wage), not Rs 15,000. Paying more is allowed but not required.
4. Paying bonus to employees above the eligibility ceiling: Employees earning above Rs 21,000 basic + DA are outside the Act. Paying them bonus is voluntary and cannot be claimed as a statutory obligation by the employee.
5. Not maintaining set-on/set-off records (Form B): Many SMEs pay the flat 8.33% every year without tracking surplus. In a highly profitable year, employees may be entitled to more than 8.33% based on allocable surplus.
6. Missing the 8-month payment deadline: Bonus for FY 2025-26 must be paid by November 30, 2026. Late payment is a contravention even if the full amount is eventually paid.
7. Not filing Form D annual return: The return must be filed by February 1 each year. Non-filing is a separate offence under the Act.
The Code on Wages, 2019: What Changes?
The Code on Wages, 2019 subsumes the Payment of Bonus Act, 1965 into Chapter V. The Code received Presidential assent in August 2019 and came into effect on November 21, 2025, with the Code on Wages (Central) Rules, 2026 notified on May 8, 2026.
Key Changes Under the Code
| Parameter | Payment of Bonus Act, 1965 | Code on Wages, 2019 |
|---|---|---|
| Applicability | Factory 10+, others 20+ | To be notified by government |
| Eligibility ceiling | Rs 21,000/month | To be notified (currently Rs 21,000) |
| Calculation ceiling | Rs 7,000/month or minimum wage | To be notified (currently Rs 7,000) |
| Minimum bonus | 8.33% or Rs 100 | 8.33% or Rs 100 (unchanged) |
| Maximum bonus | 20% | 20% (unchanged) |
| Penalty (first offence) | 6 months + Rs 1,000 | Fine up to Rs 50,000 |
| Penalty (repeat) | Same as first | 3 months + Rs 1,00,000 |
| Contractor default | Contractor liable | Principal employer must pay if contractor defaults |
The substantive bonus provisions (minimum 8.33%, maximum 20%, set-on/set-off, calculation ceiling, disqualification grounds) remain unchanged. The major shifts are:
- Higher monetary penalties (Rs 50,000 vs Rs 1,000)
- Principal employer liability for contractor defaults (previously ambiguous)
- Unified registration under one code instead of separate registrations
- Government power to revise ceilings by notification without legislative amendment
Transition Compliance
Until state governments issue their own rules under the Code on Wages, many provisions continue to operate under the old Act's framework. Employers should:
- Continue maintaining Forms A, B, C, and D
- File annual returns as before
- Monitor state notifications for revised ceilings and rules
- Apply the higher penalty framework (Code on Wages) since the Central Rules are now in effect
Income Tax Treatment of Bonus
Statutory bonus paid to employees is:
- Deductible as a business expense for the employer under Section 36(1)(ii) of the Income Tax Act (Section 37 under the IT Act, 2025)
- Taxable as salary income for the employee in the year of receipt
- Subject to TDS under Section 192 (Section 392 under IT Act, 2025) as part of salary
The employer must deduct TDS on bonus at the time of payment. Bonus is added to the employee's total salary for the month and TDS is computed on the aggregate. Employers cannot claim the bonus as a business expense if it is paid after the due date for filing the income tax return.
Employer Compliance Checklist
Use this checklist to verify your establishment's compliance:
- Establishment employs 20+ persons: Payment of Bonus Act applies
- All employees earning up to Rs 21,000 basic + DA identified
- Bonus calculated on Rs 7,000 ceiling (or state minimum wage, whichever is higher)
- Minimum 8.33% bonus computed for all eligible employees
- Allocable surplus calculated using First/Second Schedule
- Set-on and set-off register (Form B) maintained and updated
- Form A (computation of surplus) prepared for each accounting year
- Form C (individual bonus computation) prepared before payment
- Bonus paid within 8 months of closing of accounting year
- TDS deducted on bonus at the time of payment
- Form D (annual return) filed with Inspector by February 1
- All bonus registers retained for minimum 8 years
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Summary
The Payment of Bonus Act, 1965 makes bonus a legal entitlement, not a discretionary reward. The 8.33% minimum is payable even in loss-making years. With the Code on Wages, 2019 now in effect, penalty amounts have increased significantly (Rs 50,000 for first offence vs the old Rs 1,000), making non-compliance more expensive.
For SME employers, the key numbers to remember are: 20 employees (Act applies), Rs 21,000 (eligibility ceiling), Rs 7,000 (calculation ceiling), 8.33% (minimum), 20% (maximum), and 8 months (payment deadline from year-end).
Sources: Payment of Bonus Act, 1965 (as amended by the Payment of Bonus (Amendment) Act, 2015); Payment of Bonus Rules, 1975; Code on Wages, 2019 Chapter V; Code on Wages (Central) Rules, 2026; Chief Labour Commissioner official circulars; Ministry of Labour and Employment notifications.
