Payment of Bonus Act, 1965
Bonus is really a reward for good work or share of profit of the unit where the employee is working. Often there were disputes between employer and employees about bonus to be paid. It was thought that a legislation will solve the problem and hence Bonus Act was passed. Unfortunately, in the process, bonus has become almost as deferred wages due to provision of payment of minimum 8.33% and maximum 20% bonus. Bonus Act has not in any way reduced the disputes.
The Act is applicable to (a) any factory employing 10 or more persons where any processing is carried out with aid of power (b) Other establishments (established for purpose of profit) employing 20 or more persons. Minimum bonus payable is 8.33% and maximum is 20%. Bonus is payable annually within 8 months from close of accounting year. Bonus is payable to all employees whose salary or wages do not exceed Rs 3,500 per month provided they have worked for at least 30 days in the accounting year. However, for calculation of bonus, maximum salary of Rs 2,500 is considered.
Once the Act is applicable, it continues to apply even if number of employees fall below 20. The Act is applicable to Government companies and corporations owned by Government which produces goods or renders services in competition with private sector. However, the Act is not applicable to Government employees, the employees of Municipal Corporation or Municipality, railway employees, university and employees of educational institutions, public sector insurance employees, employees of RBI and public sector financial institutions, charitable hospitals, social welfare organisations and defense employees. The Act does not apply to any institution established not for purposes of profit.
Establishments to which the Act is applicable - The Act applies to— (a) every factory; and (b) every other establishment in which twenty or more persons are employed on any day during an accounting year. [section 1(3)].
‘Factory’ has same meaning as per Factories Act. [section 2(17) of Bonus Act].
The words used are ‘number of persons employed’. Hence, all persons employed are to be considered, including those who are not eligible for bonus. Thus, all employees including those, whose salary or wages exceed Rs 3,500 per annum will have to be considered for purpose of deciding eligibility.
Meaning of ‘establishment’ - The word ‘establishment’ is not defined in the Act. Normally, ‘establishment’ is a permanently fixed place for business. The term ‘establishment’ is much wider than ‘factory’. It covers any office or fixed place where business is carried out.
Establishment in public sector covered only in certain cases - The Act applies to establishment in public sector only if the establishment in public sector sells the goods or renders services in competition with an establishment in private sector, and the income from such sale or services or both is not less than twenty per cent, of the gross income of the establishment in public sector for that year. [section 20(1)]. In other cases, the provisions of this Act do not apply to the employees employed by any establishment in public sector. [section 20(2)]. As per section 32(v)(c), the Act does not apply to any institution established not for purposes of profit.
Establishment in public sector means an establishment owned, controlled or managed by— (a) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) (b) a corporation in which not less than forty per cent of its capital is held (whether singly or taken together) by the Government; or the Reserve Bank of India; or a corporation owned by the Government or the Reserve Bank of India. [section 2(16)]. Establishment which is not in public sector is ‘establishment in private sector’ [section 2(15)].
“Corporation” means any body corporate established by or under any Central Provincial or State Act but does not include a company or a co-operative society. [section 2(11)].
Establishments to include departments, undertakings and branches - Where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act. [section 3]
Who are eligible for bonus - Employees drawing salary or wages upto Rs 3,500 per month are entitled to bonus, if he has worked for at least 30 working days in an accounting year. Even a worker working in seasonal factory is eligible if he has worked for at least 30 working days. Apprentices are not eligible for bonus.
Salary above Rs. 2,500 is not considered for calculation of Bonus. [section 12]. Employee drawing salary/wage exceeding Rs 3,500 is not entitled to any bonus under the Act.
Thus, minimum bonus @ 8.33% will be Rs 2,500 and maximum @ 20% will be Rs 6,000 for the year, when salary of employee exceeds Rs 2,500 but is less than Rs 3,500.
Eligibility for bonus if worked for minimum 30 days - Every employee shall be entitled to be paid be his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment for not less than thirty working days in that year. [section 8]
Computation of amount available for distribution as bonus - The establishment has to prepare a balance sheet and profit and loss account of the year and calculate the ‘gross profit’, ‘available surplus’ and ‘allocable surplus’ as per method and formula given in Bonus Act.
The first step is to calculate ‘Gross Profit’. As per section 4, the gross profit in respect of any accounting year is required to be calculated as per First Schedule to Act in case of banking company and as per second schedule in case of other establishments. After calculation of ‘Gross Profit’ as per section 4, next step is to calculate ‘Available Surplus’. As per section 5, ‘available surplus’ is calculated by deducting sums as specified in section 6 from ‘gross profit’ arrived at as per section 6 and adding difference equal to income tax on the bonus paid in the preceding year.
Thus, Available Surplus is equal to Gross Profit [as per section 4] less prior charges allowable as deduction u/s 6 plus amount equal to income tax on bonus portion calculated as per proviso (b) to section 5.
Allocable surplus is equal to 60% of ‘available surplus’ calculated as per provisions of section 5. [In case of company which does not deduct tax at source as per provisions of section 194 of Income Tax Act, ‘allocable surplus’ will be 67% of ‘available surplus’. Frankly, I am not able to visualise a situation where a company can legally ignore provisions of section 194 of Income Tax Act]. - - This ‘allocable surplus’ has to be distributed as bonus among employees in proportion to the salary or wages actually earned by each employee during the year. However, this is subject to minimum 8.33% and maximum 20% as explained below.
Set off and set on provisions - It may happen that in some years, the allocable surplus is more than the amount paid to employees as bonus calculating it @ 20%. Such excess ‘allocable surplus’ is carried forward to next year for calculation purposes. This is called ‘carry forward for being set on in succeeding years’. The ceiling on set on that is required to be carried forward is 20% of total salary and wages of employees employed in the establishment. In other words, even if actual excess is more than 20% of salary/wages, only 20% is required to be carried forward. The amount set on is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not utilised in that period, it lapses [section 15(1)].
Similarly, in a particular year, there may be lower ‘allocable surplus’ or no ‘allocable surplus’ even for payment of 8.33% bonus. Such shortfall is also carried to next year. This is called ‘carry forward for being set off in succeeding years’. Thus, in every year, ‘allocable surplus’ is calculated. To this amount, set on from previous years is added. Similarly, set off, if any, from previous years is deducted. This gives amount which is available for distribution as bonus. The amount set off is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not set off in that period, it lapses. [section 15(2)]
Minimum bonus - Every employer shall be bound to pay to every employee in respect of any accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year. Where an employee has not completed fifteen years of age at the beginning of the accounting year, the minimum bonus payable is 8.33% or Rs 60 whichever is higher. [section 10].
While computing number of working days, an employee shall be deemed to have worked in an establishment even on the days on which (a) He was laid off (b) He was on leave with salary/wages(c) He was absent due to temporary disablement caused by accident arising out of and in course of employment and (d) Employee was on maternity leave with salary/wages. [section 14].
Payment of maximum bonus - Where in respect of any accounting year, the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent of such salary or wage. [section 11(1)]. - - In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section. [section 11(2)].
Thus, maximum bonus payable to employee is 20% in any accounting year.
Salary or wages for calculating bonus - Where the salary or wage of an employee exceeds Rs 2,500 per month, the bonus payable to such employee under sections 10 or 11 shall be calculated as if his salary or wages were Rs 2,500 per month. [section 13]. In other words, employees drawing salary or wages between Rs 2,500 to Rs 3,500 per month, are entitled to bonus on the basis of Rs 2,500 per moth salary only
From India, Bahadurgarh
47Bonus is really a reward for good work or share of profit of the unit where the employee is working. Often there were disputes between employer and employees about bonus to be paid. It was thought that a legislation will solve the problem and hence Bonus Act was passed. Unfortunately, in the process, bonus has become almost as deferred wages due to provision of payment of minimum 8.33% and maximum 20% bonus. Bonus Act has not in any way reduced the disputes.
The Act is applicable to (a) any factory employing 10 or more persons where any processing is carried out with aid of power (b) Other establishments (established for purpose of profit) employing 20 or more persons. Minimum bonus payable is 8.33% and maximum is 20%. Bonus is payable annually within 8 months from close of accounting year. Bonus is payable to all employees whose salary or wages do not exceed Rs 3,500 per month provided they have worked for at least 30 days in the accounting year. However, for calculation of bonus, maximum salary of Rs 2,500 is considered.
Once the Act is applicable, it continues to apply even if number of employees fall below 20. The Act is applicable to Government companies and corporations owned by Government which produces goods or renders services in competition with private sector. However, the Act is not applicable to Government employees, the employees of Municipal Corporation or Municipality, railway employees, university and employees of educational institutions, public sector insurance employees, employees of RBI and public sector financial institutions, charitable hospitals, social welfare organisations and defense employees. The Act does not apply to any institution established not for purposes of profit.
Establishments to which the Act is applicable - The Act applies to— (a) every factory; and (b) every other establishment in which twenty or more persons are employed on any day during an accounting year. [section 1(3)].
‘Factory’ has same meaning as per Factories Act. [section 2(17) of Bonus Act].
The words used are ‘number of persons employed’. Hence, all persons employed are to be considered, including those who are not eligible for bonus. Thus, all employees including those, whose salary or wages exceed Rs 3,500 per annum will have to be considered for purpose of deciding eligibility.
Meaning of ‘establishment’ - The word ‘establishment’ is not defined in the Act. Normally, ‘establishment’ is a permanently fixed place for business. The term ‘establishment’ is much wider than ‘factory’. It covers any office or fixed place where business is carried out.
Establishment in public sector covered only in certain cases - The Act applies to establishment in public sector only if the establishment in public sector sells the goods or renders services in competition with an establishment in private sector, and the income from such sale or services or both is not less than twenty per cent, of the gross income of the establishment in public sector for that year. [section 20(1)]. In other cases, the provisions of this Act do not apply to the employees employed by any establishment in public sector. [section 20(2)]. As per section 32(v)(c), the Act does not apply to any institution established not for purposes of profit.
Establishment in public sector means an establishment owned, controlled or managed by— (a) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) (b) a corporation in which not less than forty per cent of its capital is held (whether singly or taken together) by the Government; or the Reserve Bank of India; or a corporation owned by the Government or the Reserve Bank of India. [section 2(16)]. Establishment which is not in public sector is ‘establishment in private sector’ [section 2(15)].
“Corporation” means any body corporate established by or under any Central Provincial or State Act but does not include a company or a co-operative society. [section 2(11)].
Establishments to include departments, undertakings and branches - Where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act. [section 3]
Who are eligible for bonus - Employees drawing salary or wages upto Rs 3,500 per month are entitled to bonus, if he has worked for at least 30 working days in an accounting year. Even a worker working in seasonal factory is eligible if he has worked for at least 30 working days. Apprentices are not eligible for bonus.
Salary above Rs. 2,500 is not considered for calculation of Bonus. [section 12]. Employee drawing salary/wage exceeding Rs 3,500 is not entitled to any bonus under the Act.
Thus, minimum bonus @ 8.33% will be Rs 2,500 and maximum @ 20% will be Rs 6,000 for the year, when salary of employee exceeds Rs 2,500 but is less than Rs 3,500.
Eligibility for bonus if worked for minimum 30 days - Every employee shall be entitled to be paid be his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment for not less than thirty working days in that year. [section 8]
Computation of amount available for distribution as bonus - The establishment has to prepare a balance sheet and profit and loss account of the year and calculate the ‘gross profit’, ‘available surplus’ and ‘allocable surplus’ as per method and formula given in Bonus Act.
The first step is to calculate ‘Gross Profit’. As per section 4, the gross profit in respect of any accounting year is required to be calculated as per First Schedule to Act in case of banking company and as per second schedule in case of other establishments. After calculation of ‘Gross Profit’ as per section 4, next step is to calculate ‘Available Surplus’. As per section 5, ‘available surplus’ is calculated by deducting sums as specified in section 6 from ‘gross profit’ arrived at as per section 6 and adding difference equal to income tax on the bonus paid in the preceding year.
Thus, Available Surplus is equal to Gross Profit [as per section 4] less prior charges allowable as deduction u/s 6 plus amount equal to income tax on bonus portion calculated as per proviso (b) to section 5.
Allocable surplus is equal to 60% of ‘available surplus’ calculated as per provisions of section 5. [In case of company which does not deduct tax at source as per provisions of section 194 of Income Tax Act, ‘allocable surplus’ will be 67% of ‘available surplus’. Frankly, I am not able to visualise a situation where a company can legally ignore provisions of section 194 of Income Tax Act]. - - This ‘allocable surplus’ has to be distributed as bonus among employees in proportion to the salary or wages actually earned by each employee during the year. However, this is subject to minimum 8.33% and maximum 20% as explained below.
Set off and set on provisions - It may happen that in some years, the allocable surplus is more than the amount paid to employees as bonus calculating it @ 20%. Such excess ‘allocable surplus’ is carried forward to next year for calculation purposes. This is called ‘carry forward for being set on in succeeding years’. The ceiling on set on that is required to be carried forward is 20% of total salary and wages of employees employed in the establishment. In other words, even if actual excess is more than 20% of salary/wages, only 20% is required to be carried forward. The amount set on is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not utilised in that period, it lapses [section 15(1)].
Similarly, in a particular year, there may be lower ‘allocable surplus’ or no ‘allocable surplus’ even for payment of 8.33% bonus. Such shortfall is also carried to next year. This is called ‘carry forward for being set off in succeeding years’. Thus, in every year, ‘allocable surplus’ is calculated. To this amount, set on from previous years is added. Similarly, set off, if any, from previous years is deducted. This gives amount which is available for distribution as bonus. The amount set off is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not set off in that period, it lapses. [section 15(2)]
Minimum bonus - Every employer shall be bound to pay to every employee in respect of any accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year. Where an employee has not completed fifteen years of age at the beginning of the accounting year, the minimum bonus payable is 8.33% or Rs 60 whichever is higher. [section 10].
While computing number of working days, an employee shall be deemed to have worked in an establishment even on the days on which (a) He was laid off (b) He was on leave with salary/wages(c) He was absent due to temporary disablement caused by accident arising out of and in course of employment and (d) Employee was on maternity leave with salary/wages. [section 14].
Payment of maximum bonus - Where in respect of any accounting year, the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent of such salary or wage. [section 11(1)]. - - In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section. [section 11(2)].
Thus, maximum bonus payable to employee is 20% in any accounting year.
Salary or wages for calculating bonus - Where the salary or wage of an employee exceeds Rs 2,500 per month, the bonus payable to such employee under sections 10 or 11 shall be calculated as if his salary or wages were Rs 2,500 per month. [section 13]. In other words, employees drawing salary or wages between Rs 2,500 to Rs 3,500 per month, are entitled to bonus on the basis of Rs 2,500 per moth salary only
From India, Bahadurgarh
If an employee has worked for 9 months and 8 days in an financial year and has resigned, then for how many months have we got to pay Bonus. Can it be for 10 months or can we make it to 9 months and for 8 days on prorata basis payment or only for 9 months can we pay the bonus.
From India, Madras
From India, Madras
I have been reading up on this topic online and i am very confused, as some other article ( <link no longer exists - removed> ) on the net says that the act was amended in 2014/2015 and the limits have been increase for bonus payment. Further, as per kerala high court, it adds that the Amendment shall be implemented from Financial Year 2015-16 - is this true and correct or was it from 2014/15?
From India, New Delhi
From India, New Delhi
In my factory bonus paying 12% for workers but in settlement we pay in 12% or 8.33% Kindly clarify Thanks, Vinitha
From India, Vellore
From India, Vellore
The painstaking efforts by our learned friend Mr.Arun Mishra in presenting the essential features of the Payment of Bonus Act,1965 in a nutshell deserves our sincere appreciation. However, since the post was made way back in 2006 and lots of amendments were carried out to the Act subsequently, it needs updation as desired by some of the members.
As per the Payment of Bonus (Amendment) Act,2015 which takes retrospective effect from 01-04-2014 the following are the position as of now:
Section 2(13): The salary limit for the definition of the term "employee" stands revised from the existing Rs.10,000-00 to that of Rs.21000-00.
Section 12: Calculation of bonus with respect to certain employees- the existing notional limit of the salary of those employees falling within the maximum salary mentioned in section 2(13) has been revised from Rs.3500-00 p.m to Rs.7000-00 p.m or the minimum wages for the scheduled employment as fixed by the appropriate Government, whichever is higher.
To the query of Pranay, as far as I know that so far the High Courts of Kerala,Karnataka,Allahabad,Gujarat and Punjab&Haryana have stayed the retrospective operation of the amendment w.e.f the year 2014.
Coming to Ganeshprabhu's query, since the employee concerned had worked for 9 months and 8 days in the Accounting year before his resignation, the bonus payable to him has to be calculated as the declared percentage of his total earnings in the year and no question of rounding of the service rendered by him.
Finally, the query of Vinitha is a bit confusing to me. My presumption, therefore, is that she is talking about the cases of Full&Final settlement. If my presumption is correct, the employer can not adopt different rates of bonus for serving employees and past employees because bonus relates to the period of service already rendered only.
From India, Salem
As per the Payment of Bonus (Amendment) Act,2015 which takes retrospective effect from 01-04-2014 the following are the position as of now:
Section 2(13): The salary limit for the definition of the term "employee" stands revised from the existing Rs.10,000-00 to that of Rs.21000-00.
Section 12: Calculation of bonus with respect to certain employees- the existing notional limit of the salary of those employees falling within the maximum salary mentioned in section 2(13) has been revised from Rs.3500-00 p.m to Rs.7000-00 p.m or the minimum wages for the scheduled employment as fixed by the appropriate Government, whichever is higher.
To the query of Pranay, as far as I know that so far the High Courts of Kerala,Karnataka,Allahabad,Gujarat and Punjab&Haryana have stayed the retrospective operation of the amendment w.e.f the year 2014.
Coming to Ganeshprabhu's query, since the employee concerned had worked for 9 months and 8 days in the Accounting year before his resignation, the bonus payable to him has to be calculated as the declared percentage of his total earnings in the year and no question of rounding of the service rendered by him.
Finally, the query of Vinitha is a bit confusing to me. My presumption, therefore, is that she is talking about the cases of Full&Final settlement. If my presumption is correct, the employer can not adopt different rates of bonus for serving employees and past employees because bonus relates to the period of service already rendered only.
From India, Salem
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