Avail your bonus now! Find out about the Payment of Bonus Act

The Payment of Bonus Act, enacted in the year 1965 is the principal legislation to ensure the payment of bonuses to the employees as a reward for their loyalty and dedication towards the works of the organization. It is a step forward to share the success of the business reflected by the gains and profits earned by the aggregate efforts of management and employees. The Act imposes a legal obligation upon an employer of every factory and other establishments having 20 or more employees to pay the requisite bonus in accordance with the provisions of the Act. The Act further puts forward the concept of minimum bonus and maximum bonus that the employer must comply with. 

Table of Contents:

1. Applicability of the Act

2. When is an employee eligible for a bonus?

3. Disqualification of an employee from receiving a bonus

4. Payment of Minimum and Maximum Bonus

5. Number of Working Days

6. What includes ‘salary and wage’?

7. Available surplus and allocable surplus

8. What is set on and set off of allocable surplus?

9. Deadline for Payment of Bonus

10. Four Schedules under the Act

11. Rights of Employees

12. Duties of the Employer under the Act

13. How can an employee recover the due bonus?

14. Offenses and Penalties under the Act

Applicability of the Act

The Payment of Bonus Act applies to:

• Every factory or 

• Every other establishment having twenty or more workers employed on any day during the year

Note – Any new branches or departments or undertakings of an existing establishment shall be considered as a part of the similar establishment for computation of bonus under the Act irrespective of its location whether in the same place or not. However, if separate balance-sheets and profit & loss accounts are prepared and maintained for such branches or departments or undertaking in an accounting year, then such branch or department or undertaking shall be treated as a separate establishment for the purpose of computation of bonus under this Act for that accounting year.

Section 32 of the Act states the list of employees to whom this Act is not applicable, they are:

• employees employed by the Indian Red Cross Society or any other institution of a like nature (including its branches)

• employees employed by universities and other educational institutions

• employees employed by non-profit making organizations

• Employees of establishments such as LIC, hospitals which are excluded under section 32

• employees listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948[1] and employed by registered or listed employers

• Employees of establishments exempted by the appropriate government like sick units

• Employees employed by the Reserve Bank of India, etc. as exempted under Section 32 of the Act

Consult: Expert Employment Lawyers in India

When is an employee eligible for a bonus?

Under the Act, the term “employee” means any person (other than an apprentice) employed on a salary or wage not exceeding twenty-one thousand per month in any industry to do any skilled or unskilled, managerial , supervisory,  administrative, manual, technical or clerical work for hire or reward, whether the terms of employment is expressed or implied. So the main features of the act allow, the below-mentioned employees to be eligible for a bonus under the Act:

• An employee whose salary is up to Rs. 21,000 and

• He/she must have worked in the establishment for not less than 30 working days in an accounting year to become eligible for a bonus under the Act

Disqualification of an employee from receiving a bonus

An employee shall be disqualified from receiving the bonus if he has been dismissed from the service on the grounds of:

• Fraud

• Riotous or violent behavior

• Theft, misappropriation or sabotage of any establishment’s property

The employers have the power to deduct the bonus in case of disqualification of the employee

Payment of Minimum and Maximum Bonus

Section 10 of the Act commands the employer to pay a minimum bonus @ 8.33% of the salary/wage or one hundred rupees, whichever is higher, to his employees in every accounting year. The bonus must be paid along with the salary and the same cannot be avoided even in the case of loss or inadequate profit. The employer may choose the higher rate of bonus but the same must not exceed 20% of the salary or wage. In other words, the maximum bonus linked with productivity in any accounting year must not exceed 20% of the salary or wage of an employee.

Several amendments have been made to this Act until now. The latest amendment has been made in the year 2015 and made applicable from 1st day of April 2014. Let’s have a look over a series of amendments to the Payment of Bonus Act, 1965 which changed the eligibility limit as well as ceiling limit for the purpose of calculating the bonus.

Number of Working Days

Section 14 of the Act provides the procedure to calculate the number of working days of an employee for the purpose of determining the deduction in the bonus amount. An employee shall be considered to have worked in an accounting year on days on which: 

• The employee has been laid off under an agreement or as permitted by standing orders under  the Industrial Employment (Standing Orders) Act, 1946,  the Industrial Disputes Act, 1947 or any other law applicable to the establishment

•  The employee has been on leave with salary

•  The employee has been absent due to temporary disablement caused by accident arising out of and in the course of his work

• The employee has been on maternity leave with salary or wage

What includes ‘salary and wage’?

Section 2(21) of Payment of Bonus Act, 1965 defines the term ‘salary and wages’ as all remuneration in respect of work done (except remuneration in respect of overtime work) capable of being expressed in terms of money, which in the terms of employment were fulfilled either expressly or impliedly, that includes dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living) and food allowance or the value of free food given to employees by the employer in lieu of salary. 

However, it does not include: 

• Any other allowances 

• Any facility or concession supply of food grains or other articles

• Bonus

• Traveling concession 

• Any retrenchment compensation or any gratuity or any ex gratia payment or any other retirement benefits given to employees

• Employer's contribution to PF or other pension funds 

• Commission 

Available surplus and allocable surplus

Section 2(6) defines the available surplus as ‘available surplus computed under Section 5’. Basically. the available surplus in any accounting year is the aggregate of gross profits and amount of tax exemption on account of paid bonus minus certain deductions as per Section 6 of the Act.  

The sums which are deductible from the gross profits are (Section 6):

• Depreciation is allowable as per Section 32 of the Income Tax Act

• All types of direct taxes under section 7

• The investment or development allowance in which the employer is allowed to deduct from his income under the Income Tax Act, 1961

• The sums which are particularised in respect of employer in the third schedule

Note- For the purpose of this Act, the term direct tax means any tax chargeable under-

• The Income-tax Act, 1961

• The Super Profits Tax Act, 1963

• The Companies (Profits) Surtax Act, 1964 

• The agricultural income-tax law; and 

• Any other tax as declared by the Central Government, by notification in the Official Gazette,

The allocable surplus is the proportion of available surplus as 67% in the case of companies and 60% in other cases. If in any accounting year, the allocable surplus exceeds the amount of minimum bonus payable to the employees, then the employer shall pay to every employee as bonus proportionately to the salary or wage earned by the respective employee during that accounting year provided it must not exceed twenty percent of such salary or wage.

What is set on and set off of allocable surplus? 

• If in any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under section 11 i.e. a sum of money is left even after paying the maximum bonus of twenty percent of the total salary or wage of the employees in that accounting year, then the excess amount shall be carried forward or set on for the succeeding accounting year and so on up to and inclusive of the fourth accounting year. That excess amount can only be utilized for the purpose of payment of bonus as in accordance with the fourth schedule

• In any accounting year, if there is no or shortage of allocable surplus to meet the minimum bonus payment requirement under Section 10 of the Act then such minimum amount or the deficiency shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year for future payment in accordance with the Fourth Schedule

• If any amount has been carried forward and set on or set off under this provision then in calculating bonus for the succeeding accounting year, the amount so carried forward shall first be taken into account

Deadline for Payment of Bonus

The bonus must be paid to the employees in cash within eight months from the end of the accounting year. However, if there is a dispute regarding the payment of bonus pending before any authority under section 22 then it must be paid within a month from the date on which the award becomes enforceable or the settlement was made.

Four Schedules under the Act

• The First Schedule of the Act explains the procedure to calculate the gross profit in case of banking companies (Section 4 (a) of the Act)

• The Second Schedule of the Act explains the procedure to calculate the gross profit in any other case (Section 4 (b) of the Act)

• The Third Schedule of the Act enumerates the sum which is deductible from gross profits (as per Section 6 of the Act)

• The Third Schedule of the Act enumerates the procedure for set on and set off read with Section 15 and 16 of the Act 

Rights of Employees

The employees enjoy the following rights:

• Right to receive a minimum bonus

• Right to recover bonus due under the Act 

• Right to notice any dispute to the Labour Court or Industrial Tribunal

• Right to seek clarification or detailed information regarding the amount of bonus or accounts of the establishment

Further Read: Send Legal Notice for Non-Payment of Salary

Duties of the Employer under the Act

The employers are required to:

• To calculate and pay the annual bonus to employees as required under the Act

• To maintain the register[2] having a detailed record of salaries, allocating surplus, amount of bonus, etc. as follow-

1. Computation of allocable surplus to be maintained in Form A

2. Set-on and set-off of the allocable surplus to be maintained in Form B

3. Details regarding the amount of bonus due, deductions and actual bonus amount disbursed are maintained in Form C

4. Annual returns filed in Form D 

• To assist and cooperate with the Inspector.

The Parliament has been empowered to modify the amount of minimum bonus and the same cannot be questionable. It is the obligation of the employer to minimum bonus (subject to the grant of exemption under Section 36 of the Act) and the same cannot be avoided on the ground that there was loss in the concerned accounting year or there is no allocable surplus. 

The Government may, by notification in the official gazette appoint inspectors to ensure the purpose of this Act. Such inspectors shall be deemed as a public servant:

• To demand for production of relevant documents and records

• To verify furnished information (given by employer)

• To inspect the establishment as and when required etc. (as may be prescribed);

How can an employee recover the due bonus?

Section 21 of the Act provides for the recovery of bonuses due to an employer. It says if any amount of the bonus is due to an employee from his employer under a settlement or an award or agreement, the employee himself or any other person authorised by him, or in the case of death of the employee, his assignee or legal heirs may, make an application to the appropriate Government or such authority appointed by the appropriate Government. If the authority is satisfied that any bonus money is so due, a certificate shall be issued for that amount to the collector who shall proceed to recover the same in the manner as arrears of land revenue. The application under this provision must be submitted within one year from the date on which the money became due to the employee. However, the submission may be made after one the deadline if the applicant is having sufficient or reasonable ground.

Reference of disputes-

According to Section 22 of the Act if any dispute arises between an employer and his employees with regard to the bonus payable under this Act or with respect to any provisions of this Act to an establishment in public sector, then such dispute shall be deemed to be an industries dispute within the purview of the Industrial Disputes Act, 1947 or of any corresponding law relating to investigation and settlement of industrial disputes. 

Offenses and Penalties under the Act

In case of violation of: 

• any provision under the Act or rules made thereunder, or

• any direction is given under this Act

then person so liable may be punished with imprisonment which may extend to six months or fine up to Rs.1000 or both. In the case of offenses by companies or any association of persons, the punishment shall be given to such a person who at the time of the offence was responsible for the conduct of its business. However, such a person may be exempted if he proves that the crime was committed out of his knowledge or that he exercised all due diligence to prevent the happening of that offense.

No court is allowed to take cognizance of any offense punishable under this Act unless complaint made by or under the authority of the

• Appropriate Government or 

• Officer of that Central Government not below the rank of a Regional Labour Commissioner specially authorised in this behalf by that Government

• Officer of that State Government not below the rank of a Labour Commissioner specially authorised in this behalf by that Government

Only a presidency magistrate or a magistrate of the first class or any superior court is allowed to try any offense punishable under this Act. Furthermore, the Act bars suit or prosecution or other legal proceedings against the Government or any officer of the Government if they have done anything in good faith or in pursuance of this Act or any rules of it.

External Links:

[1] Dock Workers (Regulation of Employment) Act: An Act to provide safety, health, and welfare of dockworkers

[2] Maintenance of Registers: Form A for Computation of the Allocable surplus, Form B for Set-on and Set-off of the allocable surplus, Form C for Bonus paid to employees for respective accounting year and Form D for Annual Return.

Written by: Sourav