How much statutory bonus must employers pay in India? Every establishment with 20 or more employees must pay a minimum bonus of 8.33% of wages (or Rs 100, whichever is higher) to employees earning up to Rs 21,000 per month, calculated on a ceiling of Rs 7,000 or the applicable minimum wage, whichever is higher. Maximum bonus is 20% of wages. These rules came from the Payment of Bonus Act, 1965 and now sit in Chapter IV of the Code on Wages, 2019, which replaced the 1965 Act from 21 November 2025. Non-payment is punishable with fines up to Rs 50,000, and imprisonment for repeat offences.
Law change: The Code on Wages, 2019 came into force on 21 November 2025 and repealed the Payment of Bonus Act, 1965 (Section 69 of the Code). Bonus for FY 2025-26, payable by 30 November 2026, is governed by Chapter IV of the Code (Sections 26 to 41). The Ministry of Labour and Employment notified on 25 August 2026 that the eligibility ceiling stays at Rs 21,000 a month and the calculation ceiling at Rs 7,000 a month (or minimum wage, if higher). This guide explains the rules with references to both laws.
Every Indian establishment with 20 or more employees must pay statutory bonus, earlier under the Payment of Bonus Act, 1965 and now under the Code on Wages, 2019. 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?
Under Section 41(2) of the Code on Wages, the bonus chapter applies to every establishment in which 20 or more persons are employed, or were employed, on any day during an accounting year. (The 1965 Act also covered every factory, and allowed States to notify establishments with 10 to 20 employees.)
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
Section 41(1) of the Code on Wages excludes:
- Employees of the Life Insurance Corporation of India
- Seamen as defined under the Merchant Shipping Act, 1958
- Registered dock workers
- Employees of establishments under a Central or State Government department or a local authority
- Employees of the Indian Red Cross Society and similar institutions, universities and other educational institutions, and non-profit hospitals, chambers of commerce and social welfare institutions
- Employees of the Reserve Bank of India and notified public sector financial institutions
- Employees of inland water transport establishments operating on routes through another country
- Establishments exempted by notification because of a better profit-sharing scheme
Public sector establishments are covered only if at least 20% of their income comes from goods or services sold in competition with the private sector (Section 40).
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. Under the Code on Wages, the ceiling is set by government notification, and the Centre has kept it at Rs 21,000. If an employee's wages exceed Rs 21,000 per month, the employer has no statutory obligation to pay them bonus.
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
Code on Wages, 2019 (same limits as 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: Section 26, Code on Wages, 2019; earlier 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 29 of the Code on Wages (earlier Section 9 of the 1965 Act), an employee is disqualified from bonus if dismissed from service for:
- Fraud
- Riotous or violent behaviour while on the premises of the establishment
- Theft, misappropriation, or sabotage of any property of the establishment
- Conviction for sexual harassment (a ground added by the Code)
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 39 of the Code; earlier Section 19). The government can extend this on the employer's application, but not beyond 2 years in total.
For establishments following the April to March financial year: bonus for FY 2025-26 must be paid by November 30, 2026.
If a bonus dispute is pending before an authority, the bonus is payable within 1 month from the date the award becomes enforceable or the settlement comes into operation. Where the dispute is only about a higher rate, the minimum 8.33% must still be paid within the 8 months.
Registers and Returns
Under the Payment of Bonus Rules, 1975, employers maintained the following registers. After the repeal, registers and returns are prescribed by the Code on Wages rules (the Code on Wages (Central) Rules, 2026 for the Central sphere, and State rules elsewhere), so check the forms your State now prescribes:
| 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 | After bonus is paid, within the time allowed by the Rules |
Keep the bonus registers and computation working papers safely for inspection; the retention period and return format now follow the Code on Wages rules applicable to your establishment.
Penalties for Non-Compliance
Tax Rate Chart
Penalties Under the Payment of Bonus Act
Section 54, Code on Wages, 2019 (in force from 21 November 2025)
Paying less than the bonus due (first offence)
Section 54(1)(a)
Repeat offence within 5 years
Section 54(1)(b)
Other contraventions (first offence)
Repeat: up to 1 month or Rs 40,000, or both
Non-maintenance of records
Section 54(2)
Source: Section 54, Code on Wages, 2019; earlier Section 28, Payment of Bonus Act, 1965 (up to 6 months or Rs 1,000)
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 the annual bonus return: The return prescribed under the applicable rules must be filed after bonus is paid. Non-filing is a separate contravention.
The Code on Wages, 2019: What Changes?
The Code on Wages, 2019 subsumes the Payment of Bonus Act, 1965 into Chapter IV (Sections 26 to 41) and repeals the old Act. The Code received Presidential assent in August 2019 and came into effect on November 21, 2025, and the Code on Wages (Central) Rules, 2026 were notified in May 2026.
Key Changes Under the Code
| Parameter | Payment of Bonus Act, 1965 | Code on Wages, 2019 |
|---|---|---|
| Applicability | Every factory, and other establishments with 20+ | Establishments with 20+ persons on any day of the year |
| Eligibility ceiling | Rs 21,000/month | Set by notification: Rs 21,000/month (notified 25 August 2026) |
| Calculation ceiling | Rs 7,000/month or minimum wage | Set by notification: Rs 7,000/month or minimum wage, if higher |
| Minimum bonus | 8.33% or Rs 100 | 8.33% or Rs 100 (unchanged) |
| Maximum bonus | 20% | 20% (unchanged) |
| Penalty (first offence, underpayment) | Up to 6 months or Rs 1,000, or both | Fine up to Rs 50,000 |
| Penalty (repeat within 5 years) | Same as first | Up to 3 months or Rs 1,00,000, or both |
| Disqualification grounds | Fraud, violence, theft/sabotage | Same, plus conviction for sexual harassment |
The substantive bonus provisions (minimum 8.33%, maximum 20%, set-on/set-off up to the fourth accounting year, calculation ceiling) remain unchanged. The major shifts are:
- Higher monetary penalties (Rs 50,000 vs Rs 1,000)
- A fourth disqualification ground (conviction for sexual harassment)
- Government power to revise ceilings by notification without legislative amendment
Transition Compliance
Employers should:
- Keep computing allocable surplus and set-on/set-off records (the old Forms A, B and C are a sound working format until your State's forms are confirmed)
- File the bonus return prescribed under the Code on Wages rules applicable to you
- Monitor Central and State notifications for revised ceilings and rules
- Treat the Code's penalty framework as applicable, since the Code is in force
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, 1961 (Section 32(a) of the Income-tax Act, 2025), subject to the actual-payment rule in Section 43B (Section 37 of the 2025 Act)
- 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: bonus provisions of the Code on Wages apply
- 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
- Annual bonus return filed as prescribed under the Code on Wages rules
- Bonus registers and working papers retained for inspection
Frequently Asked Questions
What is the minimum bonus an employer must pay under the Payment of Bonus Act?
Every employer covered under the Act must pay a minimum bonus of 8.33% of the salary (basic + DA) earned by the employee during the accounting year, or Rs 100, whichever is higher. This minimum bonus is payable even if the employer has no allocable surplus or has incurred a loss.
What is the salary ceiling for bonus eligibility?
An employee earning up to Rs 21,000 per month (basic + DA) is eligible for bonus. If the employee's salary exceeds Rs 21,000, they are not covered under the Act and the employer has no statutory obligation to pay bonus to them.
How is statutory bonus calculated when salary exceeds the calculation ceiling?
If the employee's monthly salary exceeds Rs 7,000 (or the applicable minimum wage, whichever is higher), bonus is calculated on Rs 7,000 (or minimum wage) and not on the actual salary. For example, an employee earning Rs 18,000 gets minimum bonus calculated as Rs 7,000 x 12 x 8.33% = Rs 6,997 per year.
What is the maximum bonus an employer can pay?
The maximum bonus under the Act is 20% of the salary or wage earned during the accounting year. This applies when the employer has sufficient allocable surplus to pay beyond the minimum 8.33%.
When must bonus be paid to employees?
Bonus must be paid within 8 months from the close of the accounting year. For most establishments following the April-March financial year, this means bonus must be paid by November 30 of the same calendar year.
What is set-on and set-off in bonus calculation?
Set-on is when allocable surplus exceeds maximum bonus payable: the excess is carried forward up to 4 years. Set-off is when allocable surplus falls short of minimum bonus: the deficiency is carried forward for set-off against future surplus, also up to 4 years. This mechanism smooths bonus payments across profitable and loss-making years.
What are the penalties for not paying bonus under the Act?
The Payment of Bonus Act, 1965 was repealed when the Code on Wages, 2019 came into force on 21 November 2025, so penalties now follow Section 54 of the Code: paying less than the bonus due is punishable with a fine up to Rs 50,000, and a repeat offence within 5 years with imprisonment up to 3 months, or a fine up to Rs 1 lakh, or both. Other contraventions carry a fine up to Rs 20,000 (repeat: up to 1 month or Rs 40,000), and improper records a fine up to Rs 10,000. The old Section 28 penalty (up to 6 months or Rs 1,000) applies only to offences before the repeal.
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Summary
Statutory bonus, first under the Payment of Bonus Act, 1965 and now under the Code on Wages, 2019, is 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 IV (Sections 26 to 41), Section 54 and Section 69; Ministry of Labour and Employment notifications dated 25 August 2026 on bonus ceilings; Code on Wages (Central) Rules, 2026; Chief Labour Commissioner official circulars; Ministry of Labour and Employment notifications.
