Bonus Calculation Under Payment of Bonus Act: Formula, Eligibility & Examples
Introduction: How Is Bonus Calculated Under the Payment of Bonus Act in India?
Under the Payment of Bonus Act, 1965, bonus in India is calculated as 8.33% to 20% of an employee’s annual wages (basic + DA), subject to a calculation ceiling of ₹7,000/month or the minimum wage — whichever is higher. Eligibility: employees earning up to ₹21,000/month in establishments with 20+ workers. Even in loss-making years, employers must pay the minimum 8.33% bonus. For an employee with ₹7,000 calculation base: minimum annual bonus = ₹6,997, maximum = ₹16,800. Bonus must be paid within 8 months of the financial year end. SalaryBox auto-calculates statutory bonus with every payroll run, ensuring zero calculation errors and full compliance.
The Payment of Bonus Act remains one of the most litigated labour laws in India. According to the Ministry of Labour and Employment, over 12,000 bonus-related disputes were filed in 2024-25 alone, with incorrect calculations and delayed payments being the top two complaint categories. The 2015 amendment raised both the eligibility ceiling (from ₹10,000 to ₹21,000/month) and the calculation ceiling (from ₹3,500 to ₹7,000/month), bringing millions of additional employees under the Act’s coverage. For employers managing payroll manually, bonus calculation is especially error-prone because it involves multiple ceilings, surplus-based percentages, and multi-year set-on/set-off adjustments.
This comprehensive guide walks you through every aspect of bonus calculation: the step-by-step formula, worked examples with actual numbers, eligibility criteria, set-on and set-off rules, compliance timelines, and the most common mistakes employers make. Whether you run a 20-person factory or a 500-employee IT firm, understanding the Payment of Bonus Act is essential for staying compliant. SalaryBox simplifies the entire process by automatically computing bonus amounts, maintaining set-on/set-off registers, and generating Form C reports — so your HR team can focus on people, not paperwork.
What Is the Payment of Bonus Act, 1965?
The Payment of Bonus Act, 1965 is a central labour legislation enacted by the Indian Parliament to regulate the payment of bonus to employees in certain establishments. The Act was born out of the recommendations of the Bonus Commission (1961-64) and codifies the principle that workers who contribute to an organization’s prosperity should share in its profits. Before 1965, bonus payments were arbitrary — dependent entirely on employer discretion — and this caused widespread industrial unrest.
The Act applies to every factory as defined under the Factories Act, 1948, and to every establishment in which 20 or more persons are employed on any day during the accounting year. Once an establishment comes under the Act’s purview, it continues to be covered even if the headcount later falls below 20. State governments can extend coverage to establishments with fewer than 20 employees through official notification. The Act covers all employees whose basic salary plus dearness allowance does not exceed ₹21,000 per month, regardless of their designation or the nature of their work.
Certain categories are explicitly excluded from the Act’s coverage. Government employees, employees of the Reserve Bank of India, employees of corporations established by any Central or State Act, seamen covered by the Merchant Shipping Act, employees registered or listed under the Dock Workers Act, employees of the Indian Red Cross Society, employees of universities, employees employed by hospitals or educational institutions established not for profit, and employees employed through contractors on building operations are exempt. The Act is administered by the Chief Labour Commissioner at the central level and by state Labour Commissioners at the state level.
Who Is Eligible for Bonus Under the Act?
Eligibility for bonus under the Payment of Bonus Act is determined by a combination of establishment type, salary level, and service duration. The 2015 amendment significantly expanded coverage by raising the salary ceiling from ₹10,000 to ₹21,000 per month. Understanding who qualifies — and who does not — is critical for accurate payroll processing. The following table summarizes the complete eligibility criteria as of 2026.
| Criteria | Requirement |
| Establishment Type | Factory OR establishment with 20+ employees |
| Employee Salary Limit | Basic + DA ≤ ₹21,000/month |
| Minimum Service | 30 working days in the accounting year |
| Disqualification | Dismissed for fraud, violent behavior, theft |
| Apprentices | Not eligible under the Act |
| Temporary/Contract Workers | Eligible if 30+ days served and salary ≤ ₹21,000 |
| Probationary Employees | Eligible if 30+ working days served |
Several important nuances apply. First, the 30 working days requirement does not need to be continuous — aggregate service during the accounting year counts. Second, an employee who is terminated (not for misconduct) before completing 30 days is still ineligible. Third, employees who resign mid-year after completing 30 days remain entitled to proportionate bonus for the period worked. Fourth, the salary ceiling of ₹21,000 is checked against basic salary plus dearness allowance only — HRA, conveyance, and other allowances are excluded from this computation. SalaryBox automatically flags eligible employees and tracks their service days, eliminating manual eligibility checks.
How Is Bonus Calculated? Step-by-Step Formula
Bonus calculation under the Payment of Bonus Act follows an eight-step process that starts with determining the calculation wage and ends with applying the statutory minimum and maximum limits. Each step must be executed in sequence, and errors at any stage cascade through the entire calculation. Here is the complete formula breakdown.
Step 1: Determine the Calculation Wage
The calculation wage is the base on which bonus is computed. It is the higher of ₹7,000 per month or the minimum wage for the scheduled employment as fixed by the appropriate government. If the employee’s actual basic + DA is less than ₹7,000, the actual amount is used. This two-tier approach ensures that bonus calculations reflect a reasonable wage floor even for low-paid workers.
Step 2: Compute Annual Calculation Wage
Multiply the monthly calculation wage by 12 (or by the number of months worked, for employees who joined or left mid-year). For a full-year employee with a calculation wage of ₹7,000: Annual Calculation Wage = ₹7,000 × 12 = ₹84,000. This is the base figure on which minimum and maximum bonus percentages are applied.
Step 3: Calculate Gross Profit
The employer must calculate gross profit from the profit and loss account as per the First Schedule of the Act. For banking companies, gross profit is calculated as per the Second Schedule. The First Schedule prescribes specific adjustments to the net profit shown in the P&L account — adding back certain provisions and deducting certain incomes that are not derived from the business operations.
Step 4: Deduct Permitted Deductions
From the gross profit, the employer deducts items specified in the Second Schedule (Third Schedule for banking companies). Permitted deductions include: depreciation admissible under the Income Tax Act, development rebate or investment allowance, direct taxes (income tax, super tax) calculated on gross profit, sums paid to shareholders as dividends, and prior year set-off amounts. These deductions ensure that only the truly distributable profit is considered for bonus.
Step 5: Available Surplus
Available Surplus = Gross Profit minus Permitted Deductions. If the available surplus is negative or zero, the employer still must pay the minimum bonus of 8.33%. The available surplus represents the actual distributable profit pool from which bonus is to be allocated.
Step 6: Allocable Surplus
Allocable Surplus = 67% of Available Surplus for non-banking companies, or 60% for banking companies. This percentage was set by Parliament to balance profit-sharing with capital reinvestment needs. Only the allocable surplus is used for determining the actual bonus percentage.
Step 7: Compute Bonus Percentage
Bonus Percentage = (Allocable Surplus / Total Annual Wages of all eligible employees) × 100. This calculation tells the employer what percentage of wages should be distributed as bonus. If allocable surplus is large enough, the percentage could exceed 20% — but the Act caps actual payment at 20%.
Step 8: Apply Minimum and Maximum Limits
The Act mandates a minimum bonus of 8.33% and a maximum of 20%. If the calculated percentage falls below 8.33%, the employer must still pay 8.33%. If it exceeds 20%, the employer pays only 20%, and the excess is carried forward as set-on. Individual employee bonus = Annual Calculation Wage × Applicable Bonus Percentage.
Worked Examples with Calculations
Theory becomes clear with numbers. Below are three detailed examples covering the most common scenarios employers face when calculating bonus. Each example shows the complete calculation chain from salary to final bonus amount.
Example 1: Minimum Bonus Calculation
Employee profile: Mr. Sharma earns Basic ₹12,000 + DA ₹3,000 = ₹15,000 per month. Since ₹15,000 is below the ₹21,000 eligibility ceiling, he qualifies for bonus. The calculation wage is ₹7,000 per month (since the state minimum wage of ₹6,500 is lower than ₹7,000). The company had losses this year, so only the minimum 8.33% bonus is payable.
| Parameter | Value |
| Monthly Basic + DA | ₹15,000 |
| Eligible? | Yes (below ₹21,000) |
| Calculation Wage (Monthly) | ₹7,000 (higher of ₹7,000 and min wage ₹6,500) |
| Annual Calculation Wage | ₹7,000 × 12 = ₹84,000 |
| Bonus Rate | 8.33% (minimum) |
| Annual Bonus Amount | ₹84,000 × 8.33% = ₹6,997 |
Even though Mr. Sharma earns ₹15,000 per month, his bonus is calculated on the ₹7,000 ceiling, not on his actual salary. This distinction between the eligibility ceiling (₹21,000) and the calculation ceiling (₹7,000) is one of the most misunderstood aspects of the Act.
Example 2: Higher Bonus from Allocable Surplus
Same employee, Mr. Sharma. This year the company’s allocable surplus permits a 15% bonus payout. All other parameters remain the same.
| Parameter | Value |
| Monthly Basic + DA | ₹15,000 |
| Calculation Wage (Monthly) | ₹7,000 |
| Annual Calculation Wage | ₹84,000 |
| Bonus Rate | 15% (from surplus) |
| Annual Bonus Amount | ₹84,000 × 15% = ₹12,600 |
The company pays ₹12,600 as bonus this year, which is ₹5,603 more than the minimum. The bonus rate of 15% falls between the statutory minimum (8.33%) and maximum (20%), so it is applied directly. If the surplus had indicated 25%, the company would cap at 20% and carry forward the excess as set-on.
Example 3: When State Minimum Wage Exceeds ₹7,000
Ms. Priya works in Delhi where the minimum wage for her category is ₹9,750 per month. Her Basic + DA is ₹18,000 (eligible, below ₹21,000). Since the minimum wage (₹9,750) exceeds the statutory floor of ₹7,000, the calculation wage is ₹9,750.
| Parameter | Value |
| Monthly Basic + DA | ₹18,000 |
| State Minimum Wage | ₹9,750/month |
| Calculation Wage | ₹9,750 (higher of ₹7,000 and ₹9,750) |
| Annual Calculation Wage | ₹9,750 × 12 = ₹1,17,000 |
| Minimum Bonus (8.33%) | ₹1,17,000 × 8.33% = ₹9,746 |
| Maximum Bonus (20%) | ₹1,17,000 × 20% = ₹23,400 |
This example is crucial for employers operating in high minimum-wage states like Delhi, Kerala, or Karnataka. The calculation wage is not always ₹7,000 — it is the higher of ₹7,000 and the applicable minimum wage. Failing to check the state minimum wage is one of the most common compliance errors. SalaryBox automatically picks the correct calculation wage based on your establishment’s registered state, eliminating this risk entirely.
What Is Set-On and Set-Off in Bonus Calculation?
The Payment of Bonus Act includes a carry-forward mechanism called set-on and set-off that smooths bonus payments across profitable and loss-making years. This mechanism is codified in Section 15 of the Act and applies for a maximum of four accounting years. Understanding set-on and set-off is essential for multi-year bonus planning.
Set-On Explained
Set-on occurs when the allocable surplus in a given year exceeds the maximum bonus payable (20% of total wages). The excess amount is carried forward to the next year(s) and can be used to supplement the surplus in deficit years. Set-on amounts can be carried forward for up to four accounting years. If not utilized within four years, the set-on lapses. For example, if allocable surplus is ₹5,00,000 but maximum bonus payable is ₹3,50,000, the set-on for the year is ₹1,50,000.
Set-Off Explained
Set-off occurs when the allocable surplus falls short of the minimum bonus payable (8.33% of total wages). The employer must still pay the minimum bonus, and the shortfall is carried forward as set-off for up to four accounting years. In future years when surplus exceeds minimum bonus, the set-off amount is first deducted from the excess before calculating the actual bonus. This protects employers from perpetually subsidizing bonus during extended loss periods.
Four-Year Carry-Forward Example
The following table illustrates how set-on and set-off work across four consecutive years for a company with total annual wages of ₹17,50,000 (making minimum 8.33% bonus = ₹1,45,833 and maximum 20% bonus = ₹3,50,000).
| Year | Allocable Surplus | Max Bonus Payable | Set-On | Set-Off | Actual Bonus Paid |
| 2023-24 | ₹5,00,000 | ₹3,50,000 | ₹1,50,000 | — | ₹3,50,000 (20%) |
| 2024-25 | ₹1,00,000 | ₹3,50,000 | — | ₹1,00,000 | ₹2,00,000 (from set-on) |
| 2025-26 | ₹0 (loss) | ₹1,45,833 (min 8.33%) | — | ₹1,45,833 | ₹1,45,833 (min) |
| 2026-27 | ₹6,00,000 | ₹3,50,000 | ₹1,04,167 | — | ₹3,50,000 (20%) |
In 2023-24, surplus exceeded the max bonus, creating a ₹1,50,000 set-on. In 2024-25, surplus was only ₹1,00,000, but the set-on from the previous year added ₹1,00,000, making the total pool ₹2,00,000. In 2025-26 (loss year), the company paid the minimum from reserves, creating a set-off. In 2026-27, strong surplus absorbed the prior set-off and created fresh set-on. Employers must maintain a set-on/set-off register (Form D) throughout this process. SalaryBox tracks set-on and set-off balances automatically across financial years, generating audit-ready Form D reports.
Bonus Calculation Salary vs Eligibility Salary: What Is the Difference?
The Payment of Bonus Act uses two distinct salary ceilings that serve completely different purposes. Confusing these two ceilings is the single most common error in bonus calculation across Indian businesses. The eligibility ceiling determines who gets bonus, while the calculation ceiling determines how much bonus is paid. The table below clarifies both.
| Parameter | Eligibility Ceiling | Calculation Ceiling |
| Amount | ₹21,000/month | ₹7,000/month or minimum wage (whichever is higher) |
| Purpose | Determines WHO gets bonus | Determines HOW MUCH bonus is paid |
| Components Included | Basic + DA | Basic + DA (capped at ceiling) |
| If Salary Exceeds Ceiling | Employee is NOT eligible for bonus | Bonus is calculated on ₹7,000/min wage only |
| Amendment Year | 2015 (raised from ₹10,000) | 2015 (raised from ₹3,500) |
Consider an employee earning Basic + DA of ₹18,000 per month. Since ₹18,000 is less than ₹21,000, the employee is eligible. However, the bonus is not calculated on ₹18,000 — it is calculated on the lower calculation ceiling of ₹7,000 (or the applicable minimum wage, if higher). This means the employee’s minimum annual bonus is ₹84,000 × 8.33% = ₹6,997, not ₹2,16,000 × 8.33% = ₹17,993. The difference of nearly ₹11,000 per employee can result in massive overpayments if the wrong ceiling is applied.
Another common confusion arises with the 2015 amendment. Before 2015, the eligibility ceiling was ₹10,000 and the calculation ceiling was ₹3,500. The amendment nearly doubled both ceilings, but the ratio between them changed. The eligibility ceiling increased by 110% while the calculation ceiling increased by 100%. Employers who updated one ceiling but forgot to update the other in their payroll systems faced compliance issues. SalaryBox embeds both ceilings in its calculation engine and updates them automatically whenever amendments take effect.
What Is the Payment Timeline and Compliance Framework for Bonus?
The Payment of Bonus Act prescribes strict timelines for bonus payment and imposes penalties for non-compliance. Employers must pay bonus within 8 months of the close of the accounting year. For companies following the April-March financial year, this means bonus must be paid by November 30 of the same calendar year. For companies following the January-December accounting year, bonus must be paid by August 31 of the following year.
Non-compliance attracts both criminal and civil penalties. An employer who fails to pay bonus within the prescribed timeline can face imprisonment for a term up to 6 months, or a fine up to ₹1,000, or both. While the fine amount may seem small (it has not been revised since 1965), the imprisonment provision makes this a serious compliance risk. Additionally, employees can file complaints with the Labour Commissioner, and the employer may be required to pay the bonus amount along with interest.
Employers must maintain four statutory registers under the Act. Form A is the computation of allocable surplus. Form B is the set-on and set-off register. Form C is the bonus calculation sheet showing individual employee bonus amounts. Form D is the annual bonus return filed with the Labour Department. These registers must be preserved for a minimum of 8 years and produced on demand during labour inspections. SalaryBox auto-generates Form A, Form B, Form C, and Form D with every payroll cycle, ensuring your bonus compliance records are always inspection-ready.
Employees who believe they have been underpaid or denied bonus can file a complaint with the appropriate authority within one year of the bonus becoming due. The authority can then summon the employer, examine records, and order payment of the due amount. Appeals against the authority’s order can be filed within 30 days before the Labour Court. Given these timelines and legal risks, proactive compliance is far more cost-effective than reactive dispute resolution.
What Are the Most Common Mistakes in Bonus Calculation?
Despite the Act being over 60 years old, employers across India continue to make calculation errors that lead to compliance notices, employee disputes, and financial penalties. Based on data from labour department audits and common payroll processing errors, here are the six most frequent mistakes and how to avoid them.
- Mistake 1: Using gross salary instead of Basic + DA. Many employers mistakenly include HRA, conveyance allowance, special allowance, and other components when determining eligibility. The Act clearly states that only basic salary plus dearness allowance are considered. An employee earning ₹25,000 gross but with Basic + DA of ₹18,000 is eligible for bonus. An employee earning ₹22,000 gross with Basic + DA of ₹22,000 is not eligible. Always isolate Basic + DA before checking against the ₹21,000 ceiling.
- Mistake 2: Applying the ₹21,000 ceiling to calculation instead of ₹7,000. This is the costliest error. The ₹21,000 ceiling only determines eligibility. Bonus amount is always calculated on the ₹7,000 ceiling or minimum wage (whichever is higher). Applying the ₹21,000 ceiling to calculation results in overpayment of up to 200%, which cannot be recovered from employees.
- Mistake 3: Not checking the state minimum wage. The calculation wage is the higher of ₹7,000 or the applicable minimum wage. In states like Delhi (₹9,750+), Kerala (₹8,500+), and Karnataka (₹8,200+), the minimum wage exceeds ₹7,000. Employers who default to ₹7,000 without checking the state minimum wage end up underpaying bonus, which invites employee complaints and penalties.
- Mistake 4: Forgetting to pay bonus to employees who left mid-year. Employees who resign, are retrenched, or are terminated (not for misconduct) after completing 30 working days are entitled to proportionate bonus. Many employers skip bonus for separated employees, which is a direct violation of Section 8 read with Section 14 of the Act.
- Mistake 5: Not maintaining the set-on/set-off register. The set-on and set-off mechanism requires meticulous year-over-year tracking in Form D. Employers who fail to maintain this register cannot claim set-off in deficit years and may end up paying higher bonus than legally required. The register must be preserved for 8 years.
- Mistake 6: Paying bonus after the deadline of November 30. The 8-month window after the financial year ends is not a suggestion — it is a legal mandate. Late payment can result in imprisonment up to 6 months. Some employers push bonus payment to December or January citing cash flow constraints. The Act does not recognize cash flow as a valid reason for delay. Plan your cash reserves accordingly.
SalaryBox eliminates all six of these mistakes through automated compliance checks: it isolates Basic + DA for eligibility, applies the correct calculation ceiling (including state minimum wages), tracks separated employee entitlements, maintains the set-on/set-off register digitally, and sends payment deadline reminders starting 60 days before November 30.
Frequently Asked Questions About Bonus Calculation in India
How is bonus calculated under the Payment of Bonus Act?
Bonus is calculated as a percentage (8.33% to 20%) of the employee’s annual calculation wage. The calculation wage is the higher of ₹7,000 per month or the applicable minimum wage. The employer determines the actual percentage based on allocable surplus (67% of available surplus). Even if the company makes no profit, the minimum 8.33% bonus must still be paid to all eligible employees.
What is the minimum and maximum bonus payable in India?
The minimum bonus under the Payment of Bonus Act is 8.33% of the annual calculation wage, payable irrespective of the company’s profit or loss. The maximum bonus is capped at 20% of the annual calculation wage. For an employee with a ₹7,000 monthly calculation wage, the minimum annual bonus is ₹6,997 and the maximum is ₹16,800. These limits have remained unchanged since the 2015 amendment.
Is bonus calculated on basic salary or gross salary?
Bonus eligibility is determined based on basic salary plus dearness allowance (DA) only — not gross salary. HRA, conveyance, special allowance, and other components are excluded. However, the actual bonus amount is calculated on the calculation wage (₹7,000 or minimum wage), not on the employee’s actual basic + DA. This two-tier approach separates eligibility from computation.
What is the ₹7,000 ceiling in bonus calculation?
The ₹7,000 ceiling is the statutory calculation base for bonus computation, introduced by the 2015 amendment (previously ₹3,500). Regardless of how much an eligible employee actually earns, bonus is calculated on ₹7,000 per month or the applicable state minimum wage — whichever is higher. This ceiling ensures uniform bonus amounts across salary levels while the separate ₹21,000 eligibility ceiling determines who qualifies.
Are contract employees eligible for bonus under the Act?
Yes, contract employees and temporary workers are eligible for bonus under the Payment of Bonus Act, provided they meet two conditions: they must have worked for at least 30 days during the accounting year, and their basic salary plus dearness allowance must not exceed ₹21,000 per month. The nature of employment contract — permanent, temporary, or contractual — does not affect eligibility.
What is the deadline for paying bonus in India?
The deadline for paying bonus is within 8 months of the close of the accounting year. For companies following the standard April-March financial year, the deadline is November 30. Failure to pay within this period can result in imprisonment up to 6 months, a fine up to ₹1,000, or both. The appropriate government can extend this period in certain circumstances.
What is set-on and set-off in bonus calculation?
Set-on is the excess allocable surplus carried forward when surplus exceeds maximum bonus payable (20%). Set-off is the deficit carried forward when surplus falls below minimum bonus (8.33%). Both can be carried forward for up to four accounting years. Set-on supplements deficit years, while set-off is deducted from future surplus. Employers must maintain a set-on/set-off register in Form D.
Does SalaryBox calculate statutory bonus automatically?
Yes, SalaryBox automatically calculates statutory bonus as part of every payroll run. The platform applies the correct eligibility ceiling (₹21,000), calculation ceiling (₹7,000 or state minimum wage), and bonus percentage (8.33% to 20%). It also maintains digital set-on/set-off registers, generates Form C bonus calculation sheets, and sends compliance deadline reminders — ensuring zero manual errors and full Payment of Bonus Act compliance.
