The Payment of Bonus Act, 1965: Eligibility, Calculation & Compliance

The Payment of Bonus Act, 1965 ensures that eligible employees receive a fair share of their company’s profits, providing them with additional income beyond their basic salary. This law mandates that employers reward their workforce based on the organisation’s financial performance. The Act applies to both skilled and unskilled workers nationwide, covering employees in factories, railways, and certain contract roles.

Read this guide to understand the key provisions of the Payment of Bonus Act, including its eligibility criteria, calculation methods, and payment rules.

Introduction to the Payment of Bonus Act

The Payment of Bonus Act, 1965, applies to factories and companies with 20 or more employees during a fiscal year. Under this Act, employers are required to award bonuses based on the company's profits or individual productivity. Even if the number of employees falls below 20 in subsequent years, the company is still obligated to pay bonuses for the year in which the employee count was 20 or more.

The bonus percentage can range from 8.33% to 20% of an employee's salary.

Applicability of the Payment of Bonus Act

The applicability of the Payment of Bonus Act is as follows:

• It covers any factory or establishment with 20 or more employees at any time during the financial year.
• The act does not apply to non-profit organisations and certain establishments, such as the Life Insurance Corporation (LIC), Reserve Bank of India (RBI), and others specified in Section 32 of the act.
• The act does not apply where employees have a signed agreement with the employer that explicitly states that they will not be entitled to bonuses.
• Establishments that are exempted by the appropriate government, such as sick units, are also not covered under this act.

Employees eligible for bonuses

Employees are eligible for a bonus if they meet the following conditions:

1. They have worked for at least 30 days in the year.
2. Their monthly salary or wages are up to ₹21,000.
3. They are engaged in any type of work, whether skilled, unskilled, supervisory, or managerial.
4. They have worked for at least 30 days during the financial year.

Employees not eligible for bonuses

The act outlines specific situations where employers are exempt from paying bonuses:

1. Companies or organisations with fewer than 20 employees do not need to pay bonuses.
2. Employees earning more than ₹21,000 per month.
3. Apprentices, workers hired through contractors, and public sector employees are excluded.
4. Employees who violate company policies or disclose confidential information are not entitled to bonuses and may face penalties.
5. Employees of institutions such as LIC, docks, NGOs, universities, financial institutions, RBI, NABARD, UTI, and IDBI are exempt from bonuses.

Minimum bonus according to the Payment of Bonus Act

Employers are required to pay each eligible employee a minimum bonus of 8.33% of their salary or wages for the year, or ₹100, whichever is higher. This minimum bonus must be paid even if the employer has no allocable surplus—the portion of a company’s profits set aside for bonus distribution after accounting for certain financial obligations.

For employees under 15 years of age at the start of the accounting year, the minimum bonus is 8.33% of their salary or wages, or ₹60, whichever is higher.

How to calculate a bonus in salary

When calculating the bonus, consider only the employee's basic salary and dearness allowance (DA). If the sum of monthly basic salary and DA is below ₹7,000, the bonus is calculated on the actual amount. If this sum exceeds ₹7,000, the bonus calculation is capped at ₹7,000.

The formula for calculating a salary bonus is as follows:

Case 1: If monthly basic salary + monthly DA is more than ₹7,000

Case 2: If monthly basic salary + monthly DA is less than ₹7,000

Calculate accurate bonuses for your employees using Zoho Payroll’s free statutory bonus calculator.

Bonus calculation example

Example 1

Consider an employee earning a monthly basic salary of ₹5,000 and a dearness allowance of ₹1,500, receiving a 10% bonus.

The bonus payable will be: (Monthly basic salary + dearness allowance) X 10%

Bonus = ₹6,500 X 10%
Bonus =  ₹650

Example 2

Now, consider an employee earning a basic salary of ₹10,000 and a dearness allowance of ₹4,000 per month who is set to receive a 15% bonus. The sum of their basic pay and DA exceeds the ₹7,000 limit set by the government. Therefore, assume ₹7,000 as the value for calculating the bonus.

The bonus payable will be: (Monthly basic salary + dearness allowance) X 15%

Bonus = ₹7,000 X 15%
Bonus = ₹1,050

Bonus payment due date

Applicable employers must pay the bonus to employees in cash within eight months from the end of the financial year. Employers have the option to pay the bonus as a lump sum or to distribute it monthly along with the employee’s salary.

Bonus registers and return filing

Employers must adhere to the following compliance requirements under the Payment of Bonus Act, 1965:

• Record keeping

Employers need to maintain three registers: Form A, detailing the computation of surplus; Form B, showing set-on and set-off details; and Form C, containing information on the bonus payable, deductions made, and the amount disbursed.

• Annual returns

Employers must also file annual returns in FORM D on the Ministry of Labour and Employment portal by February 1st of each year.

• Dispute resolution

If a dispute arises regarding the bonus payment and is under review by any authority, the bonus amount must be paid within 1 month from when the award becomes enforceable.

Offences and penalties

Employers are required to calculate and distribute bonuses in adherence to the rules set forth in the Payment of Bonus Act. Non-compliance can result in legal consequences, including fines, imprisonment, or both.

Quick summary of the Payment of Bonus Act

The Payment of Bonus Act, 1965, provides a structured and equitable approach to bonus distribution across various organisations. By setting legal guidelines, it ensures that employees receive fair bonuses tied to company performance and productivity. The Act allows consistent bonus calculations across diverse establishments. Understanding and applying these guidelines not only fosters compliance but also strengthens employer-employee trust, contributing to a more motivated and engaged workforce.

Frequently asked questions