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The Payment of Bonus Act, 1965 provides for the payment of a Statutory Bonus, which is often confused with the Incentive Bonus paid by employers. Unlike incentive bonus, which is an ex gratia payment, Statutory bonus is a compulsory payment by law. Payment of statutory bonus under the Payment of Bonus Act is not a matter of choice of the employer but rather a matter of right of the employee. Here is everything you need to know about Statutory Bonus, Payment of Bonus Act, Eligibility, Calculation and more.
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Payment of Bonus Act
Under the Payment of Bonus Act, 1965, certain categories of employees are entitled to receive a statutory bonus calculated by reference to the employee’s salary and the employer’s profits.
The Act applies in respect of factories and establishments with 20 or more employees (or in some states, factories and establishments with 10 or more employees). Employees with service of at least 30 working days in the relevant accounting year are entitled to a statutory bonus subject to them meeting certain eligibility criteria. Below we have explained everything you need to know about the act:
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Bonus Rules in India
There have been many amendments since the act came into force. The main changes to the Act are: Eligibility for the bonus has been increased to include employees’ income up to Rs. 21,000 per month (from Rs. 10,000 per month before)
Increase of the premium ceiling: previously, for the calculation of the statutory bonus, a salary ceiling of Rs. 3,500 per month was applied (so that the salary of an eligible employee exceeded Rs. 3,500 per month for calculation purposes). This ceiling was increased to Rs. 7,000 per month or the minimum wage for employees under the Minimum Wage Act 1948, whichever is greater.
Applicability of the Act
The provisions under the Payment of Bonus Act, 1965 are applicable to every factory and establishment which has 20 or more employees. Once the establishment begins to fall under the Act it should continue to pay the bonus even if the number of employees falls below 20 subsequently.
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Employee’s Eligibility to Receive Statutory Bonus
Below is the eligibility criteria for getting Statutory Bonus:
- Eligibility for statutory bonus has been broadened to include employees earning up to Rs. 21,000 per month
- Only employees who have worked in an establishment for a period of not less than thirty days in that year shall be eligible to receive bonus
- An employee is deemed to have worked in an establishment in any accounting year also on the days on which he/she has been laid off or on leave (with salary) or he/she has been absent due to temporary disablement caused by accident arising out of and in the course of his employment or availing maternity leave
Deductions from the amount of bonus payable
Employees can be disqualified if they are dismissed on the basis of fraud, misconduct, or any similar situation.
If during an accounting year an employee is found guilty of misconduct which has resulted in a financial loss to the employer then in such case the employer may deduct the amount of loss suffered from the amount of bonus payable to the employee in respect of that accounting year only and balance if any after such deductions shall be remitted to the employee.
Special Provisions pertaining to startups/ new establishments
It is to be noted that Startups and New establishments have been given a respite from payment of bonus for the first five years. In the first five years following the accounting year in which the operations of the new establishment/ startup commence, employers can pay Statutory Bonus only in the years in which the employer derives profits.
Minimum and Maximum Bonus
Minimum Bonus- The Act contemplates that a minimum bonus of 8.33% of the salary or the wage earned by the employee during the accounting year or Rs. 100 whichever is higher should be paid to an employee.
Maximum Bonus- It is important to note that the Act stipulates an upper limit of 20% of the salary or wage earned by the employee during an accounting year for the payment of maximum bonus.
Calculation for Bonus Payable
Calculation of bonus will be as follows:
| BONUS PAYABLE | |
| If Basic Salary + Dearness Allowance of an employee is less than Rs. 21,000 | If Basic Salary + Dearness Allowance of an employee is more than Rs. 21,000 |
| In the above case, Bonus is Payable | In the above case, Bonus is not Payable |
- If Salary is equal to or less than Rs. 7000/- then the bonus is 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 is calculated on Rs. 7,000/- by using the formula: Bonus = 7,000 x 8.33/100
For example, If Z’s Salary is Rs. 5,000/- than bonus payable shall be = 5,000 x 8.33/100 = 416.5 per month (Rs. 4,998 per year)
And, if Y’s Salary is Rs. 12, 000 then bonus payable shall be = 7,000 x 8.33/100 = 583 per month (Rs. 6997per year).
Please note that Salary here means: Basic Salary + Dearness Allowance
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Payment method and time limit for the payment of bonus
All amounts payable to the employee as bonus under the provisions of the Act should be paid in cash. Which means that the employer cannot guise bonus as perquisites or allowances.
A statutory Bonus should be paid within 8 months of closing the book of accounts. For instance, for the accounting year ending 31st March 2021, a bonus shall be paid before 30th November 2021.
Ways in which Statutory Bonus can be paid
There are four ways in which Statutory Bonus can be paid to employees:
| Advance payment through salary | Advance payment as an adhoc head | Advance payment in bulk | Arrear payment in bulk |
| To pay advance Statutory Bonus through salary the employer will have to include this as head in the salary structure. Once it is included in the salary structure it gets paid automatically through payroll | If the employer has not added a Statutory Bonus to an employee’s salary structure, they can still make the payment through the Adhoc payment process | If the employer wishes to pay the employee in advance during the year but also based on a percentage of wages then the employer can use this option, i.e. advance payment in bulk | While the employer can pay advance Statutory Bonus any number of times and with varying percentages, the arrear payment can be done only once for an employee and only after his March payroll for the year has been confirmed |
To whom The Payment of Bonus Act does not apply?
The Payment of Bonus Act does not apply to the following sections of employees:
- The employees of Life Insurance company
- Seamen defined under clause 42 of the merchant shipping act 1958
- Employees who registered or listed under the dock workers Act 1948 and employed by the registered or listed employers
- The employees of any industry controlled by the Central or State Government
- Employees from Indian red cross society or education institutions, institutions not for profit.
- Employees employed by the contractor on building operations
- Reserve Bank Of India(RBI) employees
- Employees of any financial corporation under Section 3 or Section 3a of the State Financial Corporation Act (SFC) 1951
- Employees of IFCI, Deposit Insurance Corporation, Agriculture Refinance Corporation
- Any financial institution is an establishment in the public sector which the Central Government notifies
- The employees of Inland Water Transport Establishment
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Difference Between Bonus & Statutory Bonus
| Bonus | Statutory Bonus |
| Bonus is a generic name to denote a bonus linked to performance or productivity as an incentive or any customary bonus given on festivals | When the bonus is specifically called Statutory Bonus, it indicates the bonus paid under the Payment of Bonus Act, 1965 |
Frequently Asked Questions (FAQs)
Who is eligible for statutory bonus?
All employees earning up to the wage threshold (increased to Rs. 21,000 by the Amendments), and who have worked in the establishment for not less than 30 working days in the year are eligible to receive this statutory bonus.
What is statutory bonus in CTC?
Statutory Bonus in India is paid as per Payment of Bonus act (1965). The bonus rate is between 8.33% and 20% based on the ‘available surplus’ as mentioned in the act. Bonus is essentially deferred earnings, and some companies choose to pay it out in advance.
What disqualifies you to receive a bonus?
Employees can be disqualified from bonus payments if they are dismissed on the basis of fraud, misconduct, or even absenteeism.
What is advance statutory bonus in salary?
Advance statutory bonus is a type of bonus paid to the employee in advance. The statutory bonus is paid according to the 1965 Act of Payment of bonus. The statutory bonus is paid at a minimum rate of 8.33% on salary to a maximum of 20%.
What is the time limit for payment of bonus?
Time limit for payment of bonus: It is mentioned in the Act that all amounts payable to an employee by the way of bonus are to be paid in cash. It is also mentioned that within 8 months from the close of the accounting year the bonus should be paid to the employees.