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Bonus is the compensation given to the employee in addition to the amount of pay specified as the base salary. A bonus is financial compensation that is above and beyond the normal salary of the employee. Bonuses may be awarded to both entry-level employees and to senior-level executives. Bonuses may be given as incentives to prospective employees and can also be distributed to the company’s shareholders. Here we have given details about bonus pay, how does it work, payment of bonus act 1965, its calculation and types.
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What is Bonus Pay?
Bonus Pay is an additional pay given to an employee on top of his or her regular earnings. It is used by many organizations as recognition or regard to employees or a team that has achieved significant goals. Bonus Pay is also offered to improve employee morale, motivation, and productivity. Your basic salary and bonus opportunities together make up your annual income. That is why you need to understand how they relate to one another.
How does Bonus Pay work?
Bonuses come in various forms but, in general, they are performance-based, meaning a company distributes them on the basis of how an employee or group of employees contributes to a team or company goals. A lot of bonuses are discretionary, meaning rather than the bonus tied to a specific quota, your level, or your performance, your manager simply gets to decide who is and isn’t worthy of getting one, as well as the bonus amount. Non-discretionary bonuses are generally specified in the employee offer letter or a contract.
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About Payment of Bonus Act, 1965
In India, there is a principle law relating to the procedure of payment of bonus to the employees and that law is named as Payment of Bonus Act, 1965.
The Payment of Bonus Act applies to every factory and establishment employing not less than 20 persons on any day during the accounting period. All the organizations covered under the act shall continue to pay bonus even if the number of employees fall below 20 subsequently. Here is what you need to know about the act:
Details of Payment of Bonus Act, 1965 |
|
| Objective | To reward the employee of the organization by sharing the profits earned and is linked to productivity |
| Applicable To | Any establishment with 20 or more employees |
| Eligibility | Employees getting Rs. 21,000 per month or less (basis + DA, excluding other allowances) and have completed 30 working days in that financial year |
| Components of Bonus | Salary / Wages only include basic and DA for bonus payment and the rest of allowances (eg, HRA, overtime, etc.) are excluded |
| Min / Max and time limits on bonus payments | Should be paid at the minimum rate of 8.33% and maximum rate of 20%. It needs to be paid within 8 months from the close of the accounting year |
| Disqualification of bonus | Employees can be disqualified if they are dismissed on the basis of fraud, misconduct, or any similar situation |
Calculation for Bonus Payable
As per the amendment on the Payment of Bonus Bill passed in 2015, if the gross earning of the employee is below Rs. 21,000, employers are liable to pay bonuses. The bonus will be calculated as follows:
- If salary is equal to or less than Rs. 7,000, then the bonus will be calculated on the actual amount by using the formula: Bonus= Salary x 8.33 / 100
- If salary is more than Rs. 7,000, then the bonus will be calculated on Rs. 7,000 by using the formula: Bonus= 7,000 x 8.33 /100
Note: Salary means: Basic Salary + Dearness Allowance
Examples:
1. If A’s Salary (Basic + DA) is Rs. 6,000, then bonus payable will be: 6,000 x 8.33 / 100= Rs. 500 per month (Rs. 6,000 per year)
2. If B’s Salary (Basic + DA) is Rs. 7,500, then bonus payable will be: 7,000 x 8.33 / 100= Rs. 583 per month (Rs. 6,996 per year)
Types of Bonus Payments
Some bonuses are distributed quarterly, others yearly. Some are a one-time thing, others are recurring. It all depends on what role you are in, what level you are at, what you contribute, what your leadership is like, and what kind of company you work for (among many other factors). Some of the common types of bonuses are given below-
| Annual Bonus | Spot Bonus |
| It is usually based on overall company performance. So you may get a large or small bonus depending on how successful your organization was that year as well as how big a part of that success you are. This can also be considered as ‘profit sharing’. | A spot bonus is for people who go above and beyond their normal duty and is usually tied to a task that was outside the scope of your role. It’s generally a one-time thing, if not an occasional occurrence depending on budget, priorities, and work efficiency. |
| Signing Bonus | Retention Bonus |
| It is a one-time bonus provided when you sign on to a new role. Companies usually offer signing bonuses when an employee is moving to a new city for a job and the company wants to cover some of the cost. It is also a way for employers to make up for salary demands they can’t meet. | A retention bonus is somewhat similar to a signing bonus and is given for retaining valuable employees. It’s generally given during an acquisition, merger or to make someone stick around for an extra period of time if they were looking to leave. |
| Referral Bonus | Holiday Bonus |
| A referral bonus is given to current employees on referring great candidates for jobs at their company. It’s generally given when the candidate is hired and has stayed on for several months (usually 3-6 months). | A holiday bonus is another way to recognize employees for their hard work and to give them an extra boost during an especially expensive time of the year. It’s often but not always a set percentage of your annual salary (say anywhere from 5% to 10%). |
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Frequently Asked Questions (FAQs)
What component of wages are used to calculate Bonus?
Only the basic salary and DA components are applicable for the bonus payment.
How is the bonus calculated?
With a min rate of 8.33% and max rate of 20%, when wages or salary exceeds Rs. 7,000 or the minimum wages fixed by the government, the bonus will be payable on Rs. 7,000 or the minimum wages as fixed by govt., whichever is higher.
How bonuses are settled if an employee exits the organization before the completion of the financial year?
Bonus needs to be paid as part of the settlement to the employee on a pro-rata basis, when he or she exits before the completion of the financial year.
How much are bonuses usually?
A company sets aside a predetermined amount; a typical bonus percentage would be 2.5 and 7.5 percent of payroll but sometimes as high as 15 percent, as a bonus on top of base salary.
Are bonuses part of the salary?
Bonuses are usually calculated as a percentage of your Base Salary. This means that having a higher base salary will also improve your bonuses in most companies.
What is a stock bonus in salary?
A stock bonus plan allows employees to share in a company’s success. With this type of plan, a company contributes stocks to an account held on behalf of its employees in an effort to help them accumulate assets for retirement.
How are bonuses taxed vs salary?
While bonuses are subject to income taxes, they don’t simply get added to your income and taxed at your top marginal tax rate. Instead, your bonus counts as supplemental income and is subject to federal withholding at a 22% flat rate.