The payment of bonus is a vital component of employee welfare and an important instrument for ensuring equitable sharing of profits between employers and employees. Under the Code on Wages, 2019 (“Code”), the provisions relating to payment of bonus have been consolidated, streamlined and modernised with the objective of maintaining continuity with the earlier legal framework while ensuring greater clarity, uniformity and compliance. These provisions seek to balance the interests of labour and industry by prescribing eligibility, computation, disbursement timelines and safeguards, thereby reinforcing the principle that bonus is not a matter of discretion but a statutory right subject to defined conditions.
Who is eligible to receive bonus and what is the minimum bonus payable?
(a)
Every employee who draws wages not exceeding the amount notified by the appropriate Government and who has worked for at least thirty days in an accounting year is entitled to receive an annual minimum bonus from the employer.
(b)
The minimum bonus shall be eight and one-third per cent of the wages earned by the employee or one hundred rupees, whichever is higher, irrespective of whether the employer has any allocable surplus during the previous accounting year.
How is bonus calculated when an employee’s wages exceed the notified wage limit?
Where an employee’s wages exceed the amount per month notified by the appropriate Government, the bonus payable shall be calculated as if the employee’s wages were equal to the notified amount or the minimum wage fixed by the appropriate Government, whichever is higher.
What happens when the allocable surplus exceeds the minimum bonus payable?
If, for any accounting year, the allocable surplus exceeds the amount of minimum bonus payable, the employer shall pay bonus in proportion to the wages earned by the employee during that accounting year, subject to a maximum limit of twenty per cent of such wages.
How is allocable surplus computed for the purpose of bonus?
While computing the allocable surplus, any amount set on or set off shall be taken into account in accordance with the applicable provisions governing set on and set off.
Can employees demand bonus in excess of the minimum bonus based on production or productivity?
Yes. Any demand for bonus exceeding the minimum bonus, whether based on production or productivity for the accounting year, shall be determined by an agreement or settlement between the employer and the employees. However, the total bonus, including the annual minimum bonus, shall not exceed twenty per cent of the wages earned by the employee in that accounting year.
How is bonus payable during the first five accounting years of a new establishment?
In the first five accounting years after the employer begins selling goods produced or manufactured, or rendering services, bonus shall be payable only for those accounting years in which the employer derives profit from the establishment. The bonus shall be calculated in accordance with the applicable provisions, without applying the provisions relating to set on and set off.
How does the bonus calculation work in the sixth and seventh accounting years of a new establishment?
(a)
For the sixth and seventh accounting years, provisions relating to set on and set off shall apply with modifications.
(b)
For the sixth accounting year, set on or set off shall take into account the excess or deficiency of allocable surplus of the fifth and sixth accounting years.
(c)
For the seventh accounting year, set on or set off shall take into account the excess or deficiency of allocable surplus of the fifth, sixth and seventh accounting years, in the manner prescribed.
What rules apply from the eighth accounting year onwards?
From the eighth accounting year onwards, the provisions relating to set on and set off shall apply in the same manner as they apply to any other establishment.
When is an employer deemed to have derived profit for the purpose of bonus?
An employer shall not be deemed to have derived profit unless provision has been made for depreciation for that year and all arrears of depreciation and past losses of previous accounting years have been fully set off against the profits.
Is sale during trial production or prospecting stage considered for bonus eligibility?
No. Sale of goods produced during trial running of a factory or during the prospecting stage of a mine or oilfield shall not be considered. Any dispute regarding such production shall be decided by the appropriate Government after giving the parties a reasonable opportunity to be heard.
What happens if an employee has not worked for all working days in an accounting year?
If an employee has not worked for all working days in an accounting year, the minimum bonus shall be proportionately reduced, provided the minimum bonus is higher than eight and one-third per cent of the wages for the days actually worked.
Which days are treated as days worked for computing working days?
An employee is deemed to have worked on days when:
(a)
the employee was laid off under a lawful agreement or applicable law;
(b)
the employee was on leave with wages;
(c)
the employee was absent due to temporary disablement caused by an employment-related accident; and
(d)
the employee was on maternity leave with wages.
In which cases is an employee disqualified from receiving bonus?
An employee is disqualified from receiving bonus if dismissed for:
(a) fraud;
(b)
riotous or violent behaviour on the premises of the establishment;
(c)
theft, misappropriation or sabotage of the employer’s property; or
(d)
conviction for sexual harassment.
How are departments, undertakings and branches treated for bonus computation?
All departments, undertakings and branches of an establishment, whether located at the same place or different places, are treated as part of the same establishment for bonus computation. However, if separate balance sheets and profit and loss accounts are maintained for any department, undertaking or branch for a particular accounting year, it shall be treated as a separate establishment for that year, unless it was previously treated as part of the main establishment.
From what source is bonus paid?
Bonus shall be paid out of the allocable surplus, which shall be sixty per cent of the available surplus in the case of banking companies and sixty-seven per cent in the case of other establishments.
Can audited accounts be questioned while determining bonus?
Audited accounts of companies shall not normally be questioned.
What happens if there is a dispute regarding the quantum of bonus?
In case of a dispute regarding the quantum of bonus, the competent authority may require the employer to produce the balance sheet. However, information contained in the balance sheet shall not be disclosed without the employer’s consent.
How are gross profits computed?
Gross profits shall be computed in the manner prescribed by the Central Government, whether the establishment is a banking company or any other establishment.
How is available surplus calculated?
The available surplus for an accounting year is the gross profits after deducting prescribed prior charges. For accounting years after commencement of the Code, available surplus also includes the difference between the direct tax calculated on gross profits of the previous year and the direct tax calculated after deducting the bonus payable for that year.
What deductions are made from gross profits?
The following are deducted as prior charges:
(a) admissible depreciation;
(b)
direct taxes payable for the accounting year; and
(c)
any other prescribed sums.
How is direct tax payable by the employer calculated?
Direct tax is calculated at applicable rates, excluding past losses, carried-forward depreciation, export rebates, and most tax rebates or reliefs except those specifically permitted. Special rules apply to charitable institutions, individuals, Hindu Undivided Families, and employers earning export income.
What is meant by set on and set off of allocable surplus?
(a)
If allocable surplus exceeds the maximum bonus payable, the excess is carried forward as “set on” for up to four succeeding accounting years.
(b)
If allocable surplus is insufficient to pay minimum bonus, the deficiency is carried forward as “set off” for up to four succeeding accounting years.
(c)
The earliest carried forward amount is adjusted first.
Can customary or interim bonus be adjusted against statutory bonus?
Yes. Any customary bonus or advance payment of bonus made during the accounting year may be deducted from the bonus payable, and the employee is entitled only to the balance.
Can deductions be made from bonus for misconduct?
Yes. If an employee is found guilty of misconduct causing financial loss to the employer, the employer may deduct the amount of loss from the bonus payable for that accounting year.
What is the time limit for payment of bonus?
(a)
Bonus must be credited to the employee’s bank account within eight months from the close of the accounting year. The period may be extended by the appropriate Government, but not beyond two years in total.
(b)
Where a dispute is pending, bonus must be paid within one month from the date the award becomes enforceable or the settlement comes into operation. In disputes regarding higher rates, the minimum bonus must still be paid within eight months.
When do the above provisions apply to public sector establishments?
If a public sector establishment competes with a private sector establishment and earns at least twenty per cent of its gross income from such sale or services, the bonus provisions apply to it as they apply to private establishments. Otherwise, they do not apply.
To which employees do the above provisions not apply?
The above provisions do not apply to employees of specified institutions and establishments such as life insurance corporations, seamen, dock workers under regulated schemes, government departments, educational and charitable institutions not run for profit, the central banking authority, specified public sector financial institutions, inland water transport establishments operating through other countries, and other establishments exempted by notification.
What is the minimum employment threshold for application of the provisions?
Subject to exclusions, the above provisions apply to establishments in which twenty or more persons are employed or were employed on any day during an accounting year.
Therefore, the framework governing payment of bonus under the Code reflects a carefully structured approach aimed at protecting employees’ entitlements while accommodating the financial realities of establishments. By laying down clear rules on eligibility, calculation, set on and set off, adjustments and timely payment, the Code promotes transparency and predictability in bonus administration. Overall, the bonus regime under the Code strengthens industrial harmony by ensuring fair distribution of surplus, encouraging productivity and fostering a sense of shared growth between employers and employees.
Muneeb Rashid Malik is an Advocate. He tweets @muneebmalikrash.