The Core Narrative

The Payment of Bonus Act, 1965 is one of the most unique labor laws in India. It mandates that every eligible employee must receive a minimum annual bonus of 8.33% of their salary (or ₹100, whichever is higher), regardless of whether the company made a profit. The maximum bonus is capped at 20% of salary.

The Act applies to every establishment with 20 or more employees and covers all employees earning up to ₹21,000 per month. For bonus calculation purposes, even if an employee earns more than ₹7,000 per month, the bonus is calculated on a ceiling of ₹7,000 (or the minimum wage, whichever is higher).

The timing is significant—bonus is typically paid during the festival season (Diwali in most of India, Puja in Bengal, Onam in Kerala), and the Act requires payment within 8 months of the close of the accounting year. For a company with a March year-end, the bonus must be paid by November.

For the payroll team, bonus processing involves calculating the eligible amount based on days worked (pro-rated for employees who joined or left mid-year), deducting any interim bonus or advance already paid, applying the correct tax treatment, and ensuring the payout is made within the statutory deadline.

7.7.2

Key Takeaways

Eligibility: All employees earning up to ₹21,000/month who have worked at least 30 days in the accounting year.

Calculation Base: Bonus is calculated on salary or ₹7,000 per month, whichever is higher. 'Salary' here means Basic + DA.

Minimum 8.33%, Maximum 20%: Even loss-making companies must pay 8.33%. The maximum is 20%, which can be paid from 'Available Surplus' or 'Set-on' from profitable years.

Allocable Surplus: Companies in profit must calculate 'Available Surplus' and 'Allocable Surplus' to determine if bonus above the minimum is payable.

7.7.3

Practical Scenarios

"A garment factory paying only 4% bonus to its workers, resulting in a labor dispute where the union demanded the statutory minimum of 8.33%—the company had to pay the difference plus interest."

"An HR team processing bonus for 1,000 employees with varying joining dates, attendance records, and interim advances—the automated system handled the pro-rata calculation and advance adjustment in a single run."

Academy Pro-Tips

Process statutory bonus through the payroll system with proper TDS deduction—ad-hoc cash payments create compliance risks and audit trail gaps.

Maintain a 'Bonus Calculation Sheet' that shows the Available Surplus, Allocable Surplus, and per-employee computation—this is the first document a labor inspector will ask for.

Communicate the bonus timeline to employees early (by September) to manage expectations—delays in bonus payment are a leading cause of labor unrest.

Points to Remember

Employees who have been dismissed for fraud, riotous behavior, or theft are not eligible for bonus under the Act.
The concept of 'Set-on' and 'Set-off' allows companies to carry forward excess allocable surplus (set-on) or deficit (set-off) for up to 4 years to smoothen bonus payments.

7.7.1