Payment of Bonus Act explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The Payment of Bonus Act 1965 makes it mandatory for covered employers to pay annual bonus to eligible employees. It also prescribes the minimum and maximum bonus rates and the formula for calculating allocable surplus.
Applicability
- Every factory (Schedule I of Factories Act) and every other establishment where 20 or more persons are employed on any day
- Once applicable, continues even if employee count drops below 20
- Applies to employees drawing wages/salary up to Rs.21,000 per month (effective from 2016)
Calculation Salary Cap
Bonus is computed on a notional salary cap:
- If actual salary ≤ Rs.7,000/month (or minimum wage): Bonus on actual salary
- If actual salary > Rs.7,000/month (but ≤ Rs.21,000): Bonus computed on Rs.7,000 OR applicable minimum wage (whichever is higher)
- If actual salary > Rs.21,000: Not entitled to bonus under the Act (but company can pay ex-gratia)
Allocable Surplus
Bonus is funded from the "allocable surplus" of the employer:
- Available surplus = Net profits per Act + depreciation added back + development rebate + investment allowance (as computed under Sections 4-5 of the Act)
- Allocable surplus = 67% of available surplus (non-banking companies) / 60% (banking companies)
Bonus Rates
| Scenario | Bonus Rate |
|---|---|
| Minimum bonus (loss year or surplus insufficient) | 8.33% of annual salary (min Rs.100) |
| Maximum bonus | 20% of annual salary |
| New establishment (first 5 years) | No bonus in loss years; minimum bonus if profit; no set-on/set-off |
Set-On and Set-Off (Section 15)
Set-On
If the allocable surplus in any year exceeds the maximum bonus payable (20% of total wages), the excess is "set on" for future years (carried forward for up to 4 accounting years) to supplement future bonus payments during lean years.
Set-Off
If allocable surplus is insufficient to pay minimum bonus (8.33%), the minimum is still paid, and the deficit is "set off" — carried forward as a charge against the employer's future allocable surplus for up to 4 years.
Eligibility for Bonus
- Must have worked for 30 working days in the accounting year
- Proportionate bonus if worked more than 30 days but less than full year
- Not eligible: employees who have been dismissed for fraud, violence, riotous behavior, sabotage, or are engaged on casual basis
Payment Timeline
- Within 8 months from close of accounting year
- E.g., for FY April-March: by 30 November
- If dispute exists: amount payable deposited with labour authorities before due date
Non-Compliance Penalties
- Section 28: Failure to comply — imprisonment up to 6 months + fine Rs.1,000
- Officers of the company (directors, managers) can be personally prosecuted
Need Expert Help?
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Get Free ConsultationKey Facts About Payment of Bonus Act
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
Who is covered under the Payment of Bonus Act?
Employees drawing wages up to Rs.21,000 per month in factories and establishments with 20 or more employees. Excludes government servants, LIC employees, university/hospital staff, and seamen.
What is the minimum and maximum bonus?
Minimum bonus: 8.33% of annual salary (or Rs.100, whichever is higher). Maximum bonus: 20% of annual salary. The actual bonus depends on allocable surplus — but minimum is guaranteed even in loss years.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Payment of Bonus Act: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.
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Why This Matters
Staying compliant with Indian regulations protects your business from penalties, interest and unnecessary legal trouble. It is always wise to maintain proper records and documentation so that any future scrutiny can be handled smoothly. Rules and thresholds in labour are revised periodically, so it helps to review your obligations at the start of each financial year. Professional guidance from a qualified CA, CS or advocate ensures that filings are accurate and submitted well before the due date.