Every year before Diwali, the same question surfaces in payroll departments across India - how much statutory bonus do we owe, and have we calculated it correctly? The answer is often more complicated than expected, because the Payment of Bonus Act uses a calculation wage that is different from the employee's actual salary.
An employee earning Rs 18,000 per month does not receive bonus on Rs 18,000. The Act caps the calculation at Rs 7,000 or the applicable minimum wage - whichever is higher. Getting this distinction wrong is the single most common bonus compliance error in India.
This guide explains the Payment of Bonus Act 1965, who must pay bonus, who is eligible to receive it, the step-by-step calculation method, the set-on and set-off mechanism, filing requirements under Forms A through D, and the penalties for non-compliance.
What Is the Payment of Bonus Act and Why Does It Matter?
The Payment of Bonus Act, 1965 is a Central legislation that mandates certain employers to share a portion of their profits with eligible employees as an annual bonus. The Act ensures that workers receive a minimum bonus of 8.33% of their annual wages even if the employer has no allocable surplus.
Under Section 10, the minimum bonus is 8.33% of annual wages (or Rs 100, whichever is higher). Under Section 11, the maximum bonus is 20% of annual wages - payable when the allocable surplus permits. The Act was significantly amended in 2015 to raise the eligibility ceiling from Rs 10,000 to Rs 21,000 per month and the calculation ceiling from Rs 3,500 to Rs 7,000 per month.
Employers using payroll processing and management services can automate bonus calculation with the correct wage ceiling, ensure timely payment within the 8-month window, and file the annual return in Form D - avoiding penalties and inspection triggers.
Key Terms You Should Know
- Eligibility Ceiling (Rs 21,000/month): Under Section 2(13) read with Section 8, employees drawing salary or wages up to Rs 21,000 per month (basic + DA) are eligible for statutory bonus. Employees earning above this limit are excluded from the Act.
- Calculation Ceiling (Rs 7,000/month): Under Section 12, bonus is calculated on Rs 7,000 per month or the minimum wage fixed by the State Government - whichever is higher. Even if an employee earns Rs 20,000/month, the bonus is calculated on the lower ceiling.
- Allocable Surplus: The portion of the employer's gross profit (after statutory deductions) that is available for bonus distribution - 60% of available surplus for companies and 67% for non-companies, as per Sections 2(4) and 3.
- Set-On (Section 15): When the allocable surplus in a year exceeds the amount of maximum bonus payable, the excess can be carried forward (set-on) for up to 4 years to cover future shortfalls.
- Set-Off (Section 16): When the allocable surplus is less than the minimum bonus payable, the deficit is carried forward (set-off) and adjusted against future surpluses for up to 4 years.
- Form D (Annual Return): The prescribed annual return that every covered employer must file with the Labour Inspector within 30 days of the bonus payment deadline, reporting bonus amounts paid to each employee.
Who Must Pay Bonus Under the Payment of Bonus Act?
The Payment of Bonus Act applies to specific categories of employers based on the size and type of their establishment.
- Every factory as defined under the Factories Act 1948 - employing 10 or more workers on any day during the accounting year
- Every other establishment employing 20 or more persons on any day during the accounting year
- Once the Act becomes applicable to an establishment, it continues to apply even if the employee count subsequently falls below the threshold
- The Act covers both the Central Government and State Government establishments where notified
- New establishments are exempt from paying bonus for the first 5 years from the date of establishment (for first 6 accounting years if profit is not earned in any of the first 5 years) - but minimum bonus (8.33%) is still payable
- Public sector undertakings selling goods produced by them are covered; departments selling goods not produced by them are generally excluded
Organisations providing payroll compliance services must verify bonus applicability for each establishment separately - a company with a factory (10+ threshold) and a corporate office (20+ threshold) has different applicability triggers for each.
Legal Framework: Payment of Bonus Act 1965 and 2015 Amendment
| Aspect | Pre-2015 Amendment | Post-2015 Amendment (Current) |
|---|---|---|
| Eligibility ceiling | Rs 10,000/month | Rs 21,000/month (basic + DA) |
| Calculation ceiling | Rs 3,500/month | Rs 7,000/month or minimum wage (whichever higher) |
| Minimum bonus | 8.33% of annual wages | 8.33% of annual wages (or Rs 100, whichever higher) |
| Maximum bonus | 20% of annual wages | 20% of annual wages |
| Time limit for payment | 8 months from close of accounting year | 8 months from close of accounting year |
| Eligibility requirement | 30 working days in the accounting year | 30 working days in the accounting year |
| Disqualification grounds | Fraud, violent conduct, theft/sabotage | Same - fraud, riotous/violent behaviour, theft/sabotage (Section 9) |
The 2015 Amendment (effective 01 April 2014, retrospectively) significantly expanded coverage by raising the eligibility ceiling to Rs 21,000. Under the Code on Wages 2019 (commenced November 2025), the definition of "wages" has been restructured - basic pay must be at least 50% of CTC. This may affect the bonus calculation base for employees whose salary structure is revised under the new wage code.
How to Calculate Statutory Bonus: Step-by-Step Process
1. Verify employee eligibility. Check that the employee draws salary/wages up to Rs 21,000/month (basic + DA only - exclude HRA, overtime, and other allowances) and has worked at least 30 days in the accounting year. Employees dismissed for fraud, violent conduct, or theft are disqualified under Section 9.
2. Determine the calculation wage. If the employee's actual monthly salary is Rs 7,000 or less, use the actual salary. If it exceeds Rs 7,000, use Rs 7,000 or the applicable state minimum wage - whichever is higher. For example, if the state minimum wage is Rs 9,000, use Rs 9,000 as the calculation base.
3. Calculate annual wage. Annual calculation wage = Monthly calculation wage × 12. For an employee with a Rs 7,000 cap: Rs 7,000 × 12 = Rs 84,000. For an employee with a Rs 9,000 minimum wage cap: Rs 9,000 × 12 = Rs 1,08,000.
4. Compute allocable surplus. Calculate gross profit as per Sections 4 and 5 of the Act (First Schedule for companies, Second Schedule for others). Deduct employer's direct taxes, depreciation, and development rebate. The allocable surplus is 60% of available surplus for companies (67% for non-companies).
5. Determine bonus percentage. If allocable surplus >= minimum bonus for all employees: distribute surplus as bonus percentage between 8.33% and 20%. If allocable surplus < minimum bonus: pay minimum 8.33% regardless - the deficit is carried forward as set-off. If surplus > maximum bonus: excess is carried forward as set-on (up to 4 years).
6. Calculate individual bonus. Individual bonus = Annual calculation wage × Bonus percentage. Minimum: Rs 84,000 × 8.33% = Rs 6,997 (or Rs 100, whichever higher). Maximum: Rs 84,000 × 20% = Rs 16,800. For employees who worked less than full year: prorate based on working days ÷ total working days.
7. Pay bonus within the time limit. Bonus must be paid within 8 months from the close of the accounting year. For an April-March accounting year, the deadline is 30 November. Most employers pay bonus before Diwali. File Form D with the Labour Inspector within 30 days of the payment deadline.
Registers and Returns Required Under the Payment of Bonus Act
- Form A - Register showing computation of allocable surplus (Section 12)
- Form B - Register showing set-on and set-off of allocable surplus (Sections 15, 16)
- Form C - Register showing details of bonus due to each employee, deductions, and amount actually disbursed
- Form D - Annual return to be filed with the Inspector within 30 days of the bonus payment deadline
- Salary/wage register showing basic pay + DA for each employee for each month of the accounting year
- Attendance register to verify the 30-day minimum working days requirement for eligibility
- Profit & Loss Account and Balance Sheet (audited) for computing gross profit under the First/Second Schedule
- Records of any disqualification events - fraud, misconduct, theft (Section 9)
- Acknowledgement receipt of Form D filing with the Labour Inspector
Bonus Rates: Minimum, Maximum, and Calculation Ceilings 2026
The following table summarises the key numerical parameters for bonus calculation under the Payment of Bonus Act as applicable for FY 2025-26 and FY 2026-27.
| Parameter | Amount / Rate | Reference |
|---|---|---|
| Eligibility ceiling | Rs 21,000/month (basic + DA) | Section 2(13) + 2015 Amendment |
| Calculation ceiling | Rs 7,000/month OR minimum wage (whichever higher) | Section 12 |
| Minimum bonus | 8.33% of annual wages (or Rs 100, whichever higher) | Section 10 |
| Maximum bonus | 20% of annual wages | Section 11 |
| Minimum annual bonus (Rs 7,000 base) | Rs 6,997 (8.33% × Rs 84,000) | Calculated |
| Maximum annual bonus (Rs 7,000 base) | Rs 16,800 (20% × Rs 84,000) | Calculated |
| Time limit for payment | 8 months from close of accounting year | Section 19 |
| Minimum working days for eligibility | 30 days in the accounting year | Section 8 |
| Set-on/set-off carry forward limit | 4 accounting years | Sections 15, 16 |
| Allocable surplus - companies | 60% of available surplus | Section 2(4) |
| Allocable surplus - non-companies | 67% of available surplus | Section 3 |
Note: If the applicable state minimum wage exceeds Rs 7,000/month, the bonus calculation base increases to the minimum wage. For example, if the Maharashtra minimum wage for semi-skilled workers is Rs 9,000/month, the minimum annual bonus = 8.33% × (Rs 9,000 × 12) = Rs 8,997. Employers must always check the applicable state minimum wage before finalising bonus calculations.
Common Mistakes to Avoid in Bonus Calculation and Payment
Mistake 1: Calculating bonus on the employee's actual salary instead of the capped wage. The most common error. An employee earning Rs 18,000/month does not receive bonus on Rs 18,000. The Act caps the calculation at Rs 7,000 or the minimum wage. Using the actual salary results in over-payment (which cannot be recovered) or creates audit discrepancies.
Mistake 2: Confusing the Rs 21,000 eligibility ceiling with the Rs 7,000 calculation ceiling. Rs 21,000 determines who is eligible for bonus. Rs 7,000 (or minimum wage) determines how much bonus is calculated. An employee earning Rs 15,000/month is eligible (under Rs 21,000) but bonus is calculated on Rs 7,000 or minimum wage. Many payroll systems get this wrong.
Mistake 3: Not paying minimum 8.33% bonus in a loss-making year. Even if the company has zero profits, the minimum bonus of 8.33% is mandatory. The deficit is carried forward as set-off under Section 16 and adjusted against future surpluses. "We did not make profits" is not a valid reason for non-payment. Employers should ensure their ESIC registration and bonus compliance are both tracked through integrated payroll systems to avoid such gaps.
Mistake 4: Missing the 8-month payment deadline. For an April-March accounting year, bonus must be paid by 30 November. Missing this deadline triggers Section 28 penalties - imprisonment up to 6 months and/or fine. It also generates automatic inspection notices from the Labour Department in most states.
Mistake 5: Not filing Form D annual return with the Labour Inspector. The annual return in Form D must be filed within 30 days of the bonus payment deadline. This is a separate compliance obligation from the payment itself. Many employers pay bonus correctly but forget to file the return - creating a compliance gap that surfaces during inspections.
Penalties for Non-Compliance with the Payment of Bonus Act
The Payment of Bonus Act treats non-payment and non-compliance as criminal offences, with penalties designed to deter employers from withholding statutory bonus.
Under Section 28 of the Payment of Bonus Act 1965, any employer who contravenes the Act or rules is punishable with imprisonment for a term which may extend to 6 months, or with fine which may extend to Rs 1,000, or with both.
For continuing offences, an additional fine of Rs 100 per day is imposed for every day the contravention continues after the first conviction. This means non-payment of bonus becomes progressively more expensive with each passing day beyond the deadline.
Under Section 19, if the employer fails to pay bonus within 8 months from the close of the accounting year, interest is payable on the delayed amount. Labour courts have routinely upheld employee claims for bonus with interest in delayed payment cases.
Additionally, non-filing of Form D annual return is a separate offence under the Payment of Bonus Rules 1975. Labour inspectors actively flag establishments that have not submitted Form D - triggering inspections and potential prosecution.
How the Bonus Act Connects with Other Provisions
The Payment of Bonus Act operates alongside PF registration and income tax return filing within the broader payroll compliance framework. Bonus paid to employees is treated as salary income under the Income Tax Act and is subject to TDS at the employee's applicable slab rate.
For employers, bonus paid is an allowable deduction under Section 36(1)(ii) of the Income Tax Act - but only if the bonus is paid before the due date for filing the income tax return. Under Section 43B, if bonus remains unpaid by the return filing date, it is disallowed as a deduction and added back to taxable income.
The Code on Wages 2019 (commenced November 2025) restructures the definition of "wages" requiring basic pay to be at least 50% of CTC. This change may increase the minimum wage floor that determines the bonus calculation base. Employers who have restructured salaries under the new code should recalculate their bonus liability on the revised wage base.
Statutory Bonus vs Performance Bonus vs Ex-Gratia: Key Differences
| Feature | Statutory Bonus (Bonus Act) | Performance Bonus | Ex-Gratia |
|---|---|---|---|
| Legal mandate | Mandatory under the Act | Discretionary - no legal mandate | Discretionary - goodwill payment |
| Calculation basis | Rs 7,000/month or minimum wage | Company policy - usually % of CTC | Fixed amount decided by employer |
| Minimum / Maximum | 8.33% min / 20% max | No limit - as per company policy | No limit |
| Eligibility | Rs 21,000/month + 30 working days | As per company policy | As per employer discretion |
| Payment deadline | Within 8 months of year-end | As per company policy | No deadline |
| Tax treatment | Taxable as salary income | Taxable as salary income | Taxable as salary income |
| Form filing | Form D mandatory | No statutory form | No statutory form |
Key Takeaways
The Payment of Bonus Act 1965 mandates statutory bonus for every factory with 10+ workers and every establishment with 20+ employees, with employees earning up to Rs 21,000/month (basic + DA) eligible after working at least 30 days in the accounting year.
Bonus is calculated on Rs 7,000/month or the applicable state minimum wage (whichever is higher) - not the employee's actual salary. Minimum bonus is 8.33% and maximum is 20% of this capped annual wage.
Even in loss-making years, the employer must pay the minimum 8.33% bonus - the deficit is carried forward as set-off under Section 16 and adjusted against future allocable surpluses for up to 4 years.
Bonus must be paid within 8 months from the close of the accounting year (typically by 30 November for April-March year). Form D annual return must be filed with the Labour Inspector within 30 days of the payment deadline.
Non-compliance under Section 28 carries imprisonment up to 6 months and/or fine up to Rs 1,000, with Rs 100/day for continuing offences - and non-payment triggers automatic inspection notices in most states.
Need Help with Bonus Calculation and Compliance?
Calculating statutory bonus correctly - with the right wage ceiling, the right percentage based on allocable surplus, set-on/set-off adjustments, and timely Form D filing - requires coordination between the payroll team, the finance team (for profit computation), and the compliance team (for inspector filing).
Explore our payroll processing and management services for end-to-end bonus compliance - from eligibility assessment and wage ceiling configuration to surplus calculation, bonus disbursement, TDS deduction, and Form D filing with the Labour Inspector.
For queries, reach out at +91 945 945 6700 or WhatsApp us directly.
