Bonus Calculation Under the Payment of Bonus Act: Complete Guide

The Payment of Bonus Act 1965 mandates the payment of annual bonus to eligible employees in India. Understanding the Act’s provisions is essential for every Indian employer to ensure compliance and avoid penalties. This guide covers eligibility, calculation methodology, and practical implementation.

Who Is Covered Under the Payment of Bonus Act?

The Act applies to every factory and establishment employing 20 or more persons. Once the Act becomes applicable, it continues to apply even if the number of employees falls below 20. Employees drawing wages up to ₹21,000 per month (basic + DA) are eligible for bonus.

Employees who have worked at least 30 working days in the accounting year are eligible. New employees, temporary employees, and contract workers meeting these criteria are all covered. Notably, apprentices and employees dismissed for misconduct (fraud, theft, riotous conduct) are excluded.

Minimum and Maximum Bonus

The minimum bonus is 8.33% of the salary or wages earned during the accounting year, or ₹100, whichever is higher. This minimum bonus must be paid regardless of whether the establishment has made profits or incurred losses.

The maximum bonus is 20% of the salary or wages earned during the accounting year. Even if the allocable surplus (available profit for bonus distribution) exceeds the 20% requirement, the payout is capped at 20%. Any excess surplus is carried forward using the set-on and set-off mechanism.

Bonus Calculation Methodology

The calculation follows these steps. First, determine gross profits for the accounting year. Then calculate available surplus by deducting depreciation, development rebates, investment allowances, direct taxes, and the employer’s prior claims. Next, apply the allocation percentage — 67% for non-banking companies (60% for banking companies) — to arrive at allocable surplus.

Divide the allocable surplus among all eligible employees in proportion to their salary or wages. If the resulting amount per employee is less than 8.33%, pay the minimum. If it exceeds 20%, cap at 20% and carry forward the excess. Use payroll management systems to automate these calculations accurately.

Salary Ceiling for Bonus Calculation

For employees earning above ₹7,000 per month (basic + DA), bonus is calculated on a deemed salary of ₹7,000 or the minimum wage for the scheduled employment (whichever is higher), not on the actual salary. This ceiling applies to the calculation, not to eligibility — an employee earning ₹18,000 is eligible for bonus but the bonus is calculated on the deemed salary.

Payment Timeline and Compliance

Bonus must be paid within 8 months from the close of the accounting year. For most companies following April-March accounting, this means bonus must be paid by November 30th. Maintain a bonus register in the prescribed format. Display an abstract of the bonus computation prominently in the establishment. Employee records and attendance data provide the foundation for accurate bonus calculations.