Understanding the Payment of Bonus Act, 1965
The Payment of Bonus Act, 1965, is one of the most misunderstood and frequently violated labour statutes in India. Many employers treat bonus as discretionary or festive goodwill — but in reality, it is a statutory entitlement for eligible employees. The Act mandates that every factory and establishment employing 20 or more persons must pay an annual bonus to employees drawing wages up to ₹21,000 per month, at a minimum rate of 8.33% of their annual wages.
The bonus must be paid within 8 months of the close of the accounting year (typically by 30th November for a March-ending financial year). Any delay attracts interest. Non-payment, underpayment, or misclassification of employees to evade bonus liability can result in prosecution and imprisonment up to 6 months. Use our Bonus Calculator for instant bonus computation.
Bonus Eligibility: Who Qualifies?
- Wage threshold: Employees drawing salary or wages up to ₹21,000 per month are eligible for statutory bonus. The government revises this threshold periodically.
- Minimum 30 working days: The employee must have worked for at least 30 working days in the accounting year. Even employees who resigned mid-year but completed 30 days are eligible.
- Employees above ₹21,000 but below ₹21,000: For calculation purposes (but not eligibility), wages are capped at ₹7,000 per month or the minimum wage, whichever is higher. This means the maximum bonus is computed on ₹7,000/month (₹84,000/year) regardless of actual salary.
Bonus Calculation: Minimum, Maximum, and Available Surplus
Minimum Bonus (8.33%): Every eligible employee must receive a minimum bonus of 8.33% of their annual salary (or ₹100, whichever is higher). For an employee with a capped salary of ₹7,000/month: Minimum bonus = 8.33% × ₹84,000 = ₹7,000 per year.
Maximum Bonus (20%): The maximum statutory bonus is 20% of the employee's annual salary. Any amount above 20% is treated as ex-gratia (not statutory bonus).
Available Surplus Calculation: For employers, the actual bonus payable depends on the "available surplus" — computed as: Gross Profits (as per Schedule I/II of the Act) − Prior Charges (depreciation, development rebate, income tax, dividends, etc.) = Available Surplus. The allocable surplus is 67% of available surplus (for companies) or 60% (for non-corporate entities). If the allocable surplus is insufficient to pay the minimum 8.33% bonus, the employer must still pay the minimum — this is called the set-on/set-off mechanism.
Set-on / Set-off: If allocable surplus exceeds the amount needed for maximum bonus (20%), the excess is "set on" and carried forward for up to 4 years. If allocable surplus is less than required for minimum bonus (8.33%), the shortfall is "set off" against future surpluses. See our Bonus Calculator for demonstration.
Bonus Calculation Examples for Different Scenarios
Understanding bonus calculation through practical examples makes the provisions of the Payment of Bonus Act, 1965 clearer for employers. Here are three common scenarios that Kerala businesses encounter:
Scenario 1 — Minimum Bonus Payable (Loss-Making Company): ABC Traders in Kottayam employs 25 people earning between ₹8,000 and ₹18,000 per month. The company made a net loss in FY 2025-26. Under Section 10 of the Act, even though the allocable surplus is zero, ABC Traders must still pay a minimum bonus of 8.33% of each employee's annual salary. For an employee earning ₹12,000/month (annual salary ₹1,44,000): Minimum bonus = 8.33% × ₹1,44,000 = ₹11,995. However, since the wage cap for bonus calculation is ₹7,000/month (or the minimum wage, whichever is higher), the bonus is computed on ₹7,000 × 12 = ₹84,000. So minimum bonus = 8.33% × ₹84,000 = ₹6,997. Even though the company made a loss, this bonus must be paid. The shortfall is "set off" against future allocable surplus. Use our Bonus Calculator for instant minimum bonus computation.
Scenario 2 — Maximum Bonus in a Profitable Year: XYZ Manufacturing in Kochi employs 100 people. For FY 2025-26, the company's allocable surplus (67% of available surplus) is ₹30,00,000. The total bonus on a minimum 8.33% basis for all employees is ₹2,50,000. Since the allocable surplus (₹30,00,000) far exceeds the amount needed for minimum bonus, the company can pay higher bonus up to the maximum of 20% of each employee's salary. For an employee earning ₹15,000/month (computed on the capped ₹7,000/month): Maximum annual bonus = 20% × ₹84,000 = ₹16,800. The remaining allocable surplus beyond what is paid as bonus is "set on" — carried forward for up to 4 years to cover bonus obligations in future deficit years. This set-on mechanism is a unique feature of the Payment of Bonus Act that smooths out bonus payouts over business cycles.
Scenario 3 — New Establishment Exemption: A new startup in Thiruvananthapuram Technopark commenced operations in June 2024 with 50 employees. Section 16 of the Act exempts new establishments from paying bonus for the first 5 accounting years following the year in which the establishment was set up. However, if the establishment derives profits in any of the first 5 years, the exemption is lost for that year, and bonus becomes payable. Also, even during the exemption period, if the establishment has set-on surplus from previous years, bonus must be paid. Kerala's IT startups often miss this nuance and assume complete exemption for 5 years regardless of profitability.
Bonus payment timeline: Bonus must be paid within 8 months of the close of the accounting year (by 30th November for March-ending FY). Delay beyond 8 months attracts interest at the rate notified by the government. The Register of Bonus (Form C) must be maintained showing employee-wise eligibility, deemed salary, allocable surplus, set-on/set-off, bonus payable, and bonus paid. The annual return (Form D) must be submitted to the Labour Inspector within 30 days of bonus payment.
For employees, bonus is part of total compensation. Read our CTC Structure Guide and TDS on Salary Guide for how bonus interacts with take-home pay and tax. For employers, our Payroll Services include annual bonus computation, allocable surplus calculation, set-on/set-off tracking, register maintenance, and Form D filing — ensuring full compliance with the Payment of Bonus Act without adding to your administrative burden. Contact us for a bonus compliance review.
Exemptions and Special Categories
- New establishments: Exempt from bonus for the first 5 accounting years, unless they derive profit in any of those years.
- Employees of LIC, banks, and public sector undertakings: Covered under separate bonus schemes (not the Payment of Bonus Act).
- Employees in establishments covered under the Act but drawing wages > ₹21,000: Not eligible for statutory bonus (but may receive ex-gratia).
- Apprentices (under the Apprentices Act, 1961): Not eligible.
Penalties for Non-Compliance
- Non-payment of bonus: Imprisonment up to 6 months or fine up to ₹5,000, or both
- Non-maintenance of registers: Fine up to ₹1,000
- Failure to produce records: Fine up to ₹1,000
- Falsification of records: Imprisonment up to 3 months or fine, or both
For comprehensive bonus compliance — from available surplus computation to set-on/set-off tracking and annual returns — read our CTC Structure guide and Payroll Services.
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Calculating bonus correctly — especially the available surplus, set-on/set-off, and allocable surplus — requires accounting expertise and statutory knowledge. GHR Consultancy's Payroll Services include annual bonus computation, register maintenance, and compliance reporting. Contact us for a bonus compliance audit.