Bonus is one of the most important employee benefits in the form of an added remuneration that employees receive in addition to their monthly wages. It is the employer's profit that is shared among the employees as compensation for their services and loyalty to the company.
Bonus is a great way to help businesses meet their objectives and helps enhance the confidence, zeal and effort to work, and morale. It also motivates employees to work effectively, thus helping the business reach new heights.
Raj Singh is a merchant who started his small business in Chandigarh. He was confused about whether he should pay a bonus to his workers out of the profit he earned from his business or not. If he should, then how much.
These questions led him to search and know everything about the Payment of Bonus Act. This stipulated law educates business owners on how they should distribute bonuses among their employees. The Payment of Bonus Act describes the eligibility, calculation of Bonus, and the limit.
This article is specifically targeted to educate small business owners like Mr. Raj Singh about the Payment of Bonus Act.
Table of Contents
- About the Payment of Bonus Act,1965
- Objective and Scope of the Payment of Bonus Act
- Categories of Employees for the Payment of Bonus Act
- Exceptions to the Payment of Bonus Act
- Amendment Details of the Payment of Bonus Act
- Minimum and Maximum Bonus as Specified Under the Payment of Bonus Act
- Calculation of Bonus Payments Under the Payment of Bonus Act
- Calculation of the Bonus
- Disqualification from Paying the Bonus According to The Payment of Bonus Act
- How Bonus Business Days Are Calculated under Section 14 of the Payment of Bonus Act
- How the Bonus Is Settled (Section 17)
- Inspectors According to Section 20 of The Payment of Bonus Act
- Powers of inspectors
- Obligations of The Employers
- Rights of Employers
- Employee Rights
- Violations and Punishments
- Compliances and Conformities that Need to Be Followed Under the Payment of Bonus Act
- Form A – Calculation of Attributable Surplus
- Form B – Attributable Surplus ‘Set-On’ and ‘Set-Off’
- Key Takeaways
About the Payment of Bonus Act,1965
Besides managing payroll, once your business is established, it becomes important to distribute the profits earned as bonus amounts to their employees.
This Act covers specific establishments related to productivity or production or for business profits.
Objective and Scope of the Payment of Bonus Act
The primary purpose of the Payment of Bonus Act is to boost the workers' morale by allowing them to share the wealth of the establishment. This law guarantees their right to be eligible for a surplus from the profits earned by the business and applies to all of India.
The Payment of Bonus Act applies to:
- People who work in specified establishments and employ 20 or more people, based on profit earned in a given financial year
- Any employee with a salary of Rs. 21,000/- p.m. doing any work in any industry for a salary
- The government can apply the Payment of Bonus Act to businesses that employ more than 10 but less than 20 people by issuing a notice in the Official Journal (JO); they also need to send a 2 months notice to the employer along with a notification of the same
- In an establishment with several employees less than 20/10, the Payment of Bonus Act will still apply for the financial year if it was applied since the start of the financial year
Categories of Employees for the Payment of Bonus Act
- A temporary worker for the days worked by him
- A trainee
- A terminated employee who has been rehired and given salary arrears
- A regularly employed part-time cleaning worker
- A proportional bonus for a seasonal factory employee
- A dismissed worker provided he has rendered his services towards the business for the minimum qualifying period
- A pieceworker
Exceptions to the Payment of Bonus Act
The Payment of Bonus Act does not apply in the following cases as specified under Section Article 32:
- LIC Employees
- RBI Employees
- Employees of UTI, IDBI, IFCI, SFC, etc.
- Seafarers, according to the Merchant Shipping Act
- Employees registered under the Dockworkers Act, 1948
- Employees of universities, Indian Red Cross Societies, hospitals, educational institutions, chambers of commerce, and social agencies
- Employees employed by a facility under central government/state government or local government authority
- Employees of Inland Water Transport establishment according to Section 32(iv) of the Act – Case Haryana Housing Authority v. Haryana Housing Board Employees' Union, AIR 1996 SC 434
Amendment Details of the Payment of Bonus Act
According to the Payment of Bonus Act, the stipulated bonus amount is 8.33% - the minimum Bonus payable by each facility under Section 10 of the law. The maximum Bonus cannot exceed 20% of the worker's pay under Section 31A of the law in a given financial year. The Payment of Bonus Act was last amended in 2015 and was notified on 1st January 2016, and came into effect from 1st April 2014. Here are the amendment details:
Amendment Year- Eligibility Limit (INR Per Month)- Calculation Ceiling (INR Per Month)
- 1965-Rs. 1600-Rs.750
- 1985-Rs.2500-Rs. 1600
- 1995-Rs. 3500-Rs. 2500
- 2007-Rs. 10000-Rs. 3500
- 2015-Rs. 21000-Rs. 7000 Or the minimum - the higher of the two.
Minimum and Maximum Bonus as Specified Under the Payment of Bonus Act
As specified in the Payment of Bonus Act, the employee is paid a minimum bonus of 8.33% of the salary for a fiscal year or Rs 100, the higher of the two. There is a cap of 20% of the salary that the employee can earn as a bonus amount. To make it clearer:
- If the employee is more than or equal to 15 years, then the cap is 8.33% of salary or wage, or Rs.100, the higher of the two
- If the employee is less than 15 years of age, then the cap is 8.33% of salary or wage, or Rs.60, the higher of the two
If the salary exceeds Rs.7,000/- per month, it shall be taken as Rs.7,000/- or minimum wages per month for calculating the Bonus.
Calculation of Bonus Payments Under the Payment of Bonus Act
If an employee's income is less than Rs. 21,000, they qualify for a bonus.
- If the base salary + DA (Dearness Allowance) is less than Rs. 7,000, then the Bonus will be calculated on the actual amount
- If the base salary + DA (Dearness Allowance) exceeds Rs. 7000, the Bonus is calculated at Rs 7000
Calculation of the Bonus
Section 4 and Section 7, together with Annexes 1 and 2, deal with the calculation of gross profit and available surplus, of which 67% in the case of companies and 60% in the other cases would be an attributable surplus. Thus, to calculate the available surplus, the amounts that can be deducted from the gross margin are:
- All direct taxes under Section 7
- The amounts indicated in the table
- The investment or development deduction that the employer is entitled to deduct from his income under the Income Tax Act.
Available Surplus = Gross Profit – (subtract) the following:
- Depreciation is permitted under Section 32 of the Income Tax Act.
- Development Assistance.
Disqualification from Paying the Bonus According to The Payment of Bonus Act
Employers can disqualify employees based on poor conduct, omission, or fraudulent activities. Employers must ensure they follow the protocol before disqualifying an employee from the payment of a bonus. They should follow the right method of an internal investigation, proper documentation, and a confirmation that the employee accepts the poor conduct.
How Bonus Business Days Are Calculated under Section 14 of the Payment of Bonus Act
In the calculation of the number of working days, the following working days are considered working days
- Employees laid off and licensed under the Industrial Disputes Act
- Remuneration for paid holidays
- Maternity leave
- Absent due to temporary inability to work
According to the NEW Institution (Article 16) of the Payment of Bonus Act, for the first 5 years, the Bonus Payout is NOT mandatory for such incorporation, only for the year in which the employer has not made any profit.
How the Bonus Is Settled (Section 17)
If the employer had already paid in the accounting year:
- Bonus Puja
- Provisional Bonus
- Any other bonuses
Then the employer can subtract the Bonus thus paid from the calculated amount and only needs to pay the balance to the employee.
The payment deadline for the Bonus (Section 19) of the Payment of Bonus Act
The employer must make the bonus payment within eight months from the end of the financial year or within one month of the initiation date as per law.
Inspectors According to Section 20 of The Payment of Bonus Act
Article 20 allows the competent government to appoint inspectors for this law after publication in the Official Gazette.
Powers of inspectors
- Mandate an employer to provide information; they can visit any factory at any time.
- They can sort and examine certain production documents and take extracts from the administration
- Inspectors can investigate employers, agents or employees, or any other person in charge of the site.
- Exercise other powers that the Regulations may prescribe.
Obligations of The Employers
Employers need to estimate the annual Bonus payment as required by law. They must maintain the following records according to the Payment of Bonus Act:
- The register must report the calculation of the excess allocation in the relevant form.
- The register must be kept at the time the employee bonus is paid.
- Records must be retained before inspection and such other information retained.
Rights of Employers
- Right to report disputes to the Labor Court or Labor Court.
- The right to deduct bonuses like the paid festival bonus or any kind of monetary damage caused by employee behavior.
- The right to reject an employee's Bonus for poor behavior, fraud, etc.
- Employees have the following rights:
- Right to claim any bonuses due
- Refund any unpaid bonus within a year of its expiry.
- Right to submit any dispute to the Labor Court.
- Employees who are not eligible for the Payment of Bonus Act cannot raise a bonus dispute under the Employment Disputes Act. They can only ask for clarifications on their site accounts.
Violations and Punishments
- In case of violation of the Payment of Bonus Act or regulation, the penalty is imprisonment for 6 months or can be fined Rs.1000 or both.
- In case of non-compliance with the indications or the demands made, the penalty is imprisonment for 6 months or can be fined Rs. 1000 or both.
- In the case of crimes committed by companies, enterprises, legal persons, or associations of natural persons, the director, the shareholder, or an administrator or manager in charge of carrying out their business must be found guilty of this crime unless the interested party proves that he conducted due diligence and the crime was committed without his knowledge.
Compliances and Conformities that Need to Be Followed Under the Payment of Bonus Act
Form A – Calculation of Attributable Surplus
The employer must keep a register indicating the calculation of the surplus to be distributed by paragraph 4 of Section 2 in the specified format.
The allowable surplus is:
- in respect of an employer which is not a banking corporation that has failed to make such arrangements as are required by the Income Tax Act for the declaration and payment in India of dividends payable out of its profits under the provisions of Section 194 of the law, 67% surplus available in an accounting year
- in all other cases, 60% of the available surplus
The available surplus relating to a financial year is the gross profit for that financial year after deducting the amounts deductible by Section 6.
Form B – Attributable Surplus ‘Set-On’ and ‘Set-Off’
The employer must keep a register showing the ‘Set-On’ and ‘Set-Off’ of the allowable surplus by Section 15 of the Act in the prescribed format.
If the attributable surplus for a financial year is more than the maximum bonus to be paid to employees of the establishment under Section 11, the surplus amounts to a maximum of 20% of the total wages or salaries of employees during this financial year are carried over to the next financial year, etc. up to and including the fourth financial year to be used for the payment of the bonus.
For an accounting year, if there is no existing surplus or if the surplus to be allocated for this year is less than the amount of the minimum bonus to be paid to employees of the company according to Section 10 of the Payment of Bonus Act, and there is not a sufficient amount deferred by paragraph (1) and credited, which could be used for payment of the minimum bonus; such shortfall shall be carried forward for set-off during the following financial year, etc., up to and including the fourth financial year.
Form C – Payment of Bonus Statement
- The employer must keep a record detailing the amount of bonus due to each employee, the declaration made under Articles 17 and 18 of the Payment of Bonus Act, and the amount paid in the specified format
- If an employer has paid any bonus to an employee, he can deduct the amount of the bonus thus paid and should pay only the balance
Form D – a Record of The Amount of Bonus Return (per Financial Year) Paid to Employees
Each employer must send a statement in the specified format to the inspector within 30 days of the expiration of the period specified in Article 19 of the Payment of Bonus Act, which he receives.
The employer pays the bonus amount in cash within eight months from the end of the financial year.
The Payment of Bonus Act specifies the bonus amount established to reward employees for their loyalty, dedication, and hard work for the company. It is a step forward in sharing the profits earned with the employees and a way to thank the employees for their contributions towards earning the profits – through their management and labor.
- The Payment of Bonus Act governs matters regarding the payment of bonus amounts to workers in specified establishments; it is applicable in the whole country and was enforced on 25 September 1965
- The purpose of the Payment of Bonus Act is to monitor whether the employer is paying the bonus in case of profit according to the law or not; the employer needs to follow the bonus calculation formula
- The Payment of Bonus Act applies to companies, businesses, establishments, and factories with 20 or more employees during a financial year
- Any employee with a payout up to Rs. 21,000 is eligible to claim the bonus
- As per the 2015 amendment, a maximum amount of Rs. 7000 will be considered as salary or wages for bonus calculation; the percentage for calculating the least bonus is 8.33%, and 20% for the highest
- The Payment of Bonus Act is the main employee bonus payment law that is established to reward employees and is all about sharing profits earned with the employees; this is a way to thank the employees for their contributions towards the prosperity of the company, which eventually enhances their morale to work