What is the Payment of Bonus Act? Rules and Computation

Bonuses are more than just financial perks; they are expressions of appreciation, motivation boosters, and key drivers of employee engagement. In India, these monetary rewards are not merely optional; they are governed by specific legislation that mandates fair distribution of profits to employees. This is where the Payment of Bonus Act comes into play.

This guide provides a comprehensive overview of the Bonus Act, including its purpose, eligibility criteria, statutory limits, and calculation methods. Whether you’re handling HR operations in a growing company or managing large-scale payroll for multiple locations, this blog will help you navigate the complexities of bonus disbursements under Indian law.

What is the Bonus Act?

The Payment of Bonus Act, 1965 was introduced to ensure that employees receive a fair share of the company’s profits. It applies to every establishment that has employed 20 or more persons on any day during the accounting year. Even if the company does not make a profit in a given year, eligible employees are still entitled to receive a minimum bonus.

Objective of the Bonus Act

The primary objective of the Act is two-fold:

• To ensure that employees share in the prosperity of the business they contribute to.
• To provide financial security and reward performance, thereby improving overall employee retention and satisfaction.

The Act emerged from recommendations made by the Tripartite Bonus Commission, which recognised the need to formalise profit-sharing between employers and employees.

Applicability in Detail

• All factories and establishments with 20 or more workers are affected.
• Eligible employees are those who have worked for at least 30 days during the accounting year and make ₹21,000 or less per month.
• Non-applicable organisations: Government organisations, universities, and public sector institutions may be exempt unless otherwise notified.

Bonus Act and Modern HR Practices

With businesses becoming more employee-centric and focused on holistic compensation strategies, statutory bonuses are now integrated with other reward mechanisms like performance incentives, recognition programs, and ESOPs. However, statutory bonuses under the Bonus Act remain mandatory and must be distinctly calculated and disbursed.For streamlined compliance, organisations are increasingly adopting HR software for compliance management that handles all payroll rules including bonus payments without manual errors.

Minimum and Maximum Bonus as Per Bonus Act

Understanding the statutory limits around bonuses is critical to ensure that your organisation remains compliant while managing employee expectations effectively.

Minimum Bonus as per Bonus Act

The minimum bonus provision ensures that employees receive a basic financial reward regardless of the employer’s profitability.

Key Highlights:

• Every eligible employee must receive a minimum bonus of 8.33% of their salary or ₹100, whichever is higher.
• This minimum is applicable even if the company makes a loss during the accounting year.
• The logic behind this is to safeguard employees’ interests and promote their continued commitment to the organisation.

For example: If an employee’s base pay, which is capped at ₹7,000 for computation, is ₹7,000 and they have worked for the entire year:

Minimum bonus = 8.33% of ₹7,000 × 12 = ₹7,000 approx.

This amount must be paid regardless of the company’s profit situation, unless the organisation qualifies for a legitimate exemption.

Maximum Bonus as per Bonus Act

Employers can reward employees with a bonus of up to 20% of annual wages, provided there is sufficient allocable surplus.

• Maximum bonus = 20% of ₹7,000 × 12 = ₹16,800 per annum
• This ceiling ensures consistency and avoids excessive payouts that could destabilise company finances.

Employers may voluntarily choose to pay higher bonuses, but anything above 20% will not be considered part of statutory bonus under the Act.

Bonus Calculation Wage Ceiling

The bonus amount is calculated based on:

• ₹7,000 per month, or
• Minimum wage for the scheduled employment under the Minimum Wages Act (whichever is higher)

Even if an employee earns ₹18,000 or ₹20,000 per month, the calculation will still be based on ₹7,000 or the applicable minimum wage. The purpose of this pay cap is to give all qualified workers an even playing field.

Practical Example

Let’s say the applicable minimum wage is ₹9,000/month. Then:

• Bonus calculation will be done on ₹9,000 (not ₹7,000)
• If the bonus percentage declared is 10%, the annual bonus = ₹9,000 × 10% × 12 = ₹10,800

This ensures fairness for employees in regions with higher living costs and minimum wage standards.

A cloud-based HRMS, which automatically adjusts minimum pay levels and bonus caps based on state-specific requirements, is important for effectively managing such regional disparities.

How to Compute Bonuses Under the Payment of Bonus Act?

Calculating bonuses accurately is vital for payroll teams and HR departments. A wrong calculation could lead to penalties, employee dissatisfaction, or legal disputes.

Here’s a detailed breakdown of how to compute bonuses under the Act:

1. Determine Eligibility

• Salary ≤ ₹21,000/month
• Minimum 30 working days in the accounting year

2. Identify Wage Ceiling

• Use ₹7,000 or state-specific minimum wage (whichever is higher) for bonus computation.

3. Understand Allocable Surplus

Allocable surplus is the amount available for distribution as bonus. It is derived after accounting for depreciation, taxes, and development rebates.

Formula: Allocable Surplus = Gross Profit – (Depreciation + Direct Taxes + Prior Bonus Set-Off)

In case of insufficient surplus, organisations may still need to pay the minimum bonus, unless exempted by the government.

4. Apply Bonus Percentage

The employer decides the bonus percentage, which must be:

• Minimum: 8.33%
• Maximum: 20%

Multiply this percentage with the annual wage (as per wage ceiling) and months worked.

5. Use Set-On and Set-Off Provisions

The Act allows for:

• Set-On: If allocable surplus exceeds the bonus payable, the excess can be carried forward for up to 4 years.
• Set-Off: If surplus is inadequate in a given year, the deficit can be carried forward and adjusted against future surpluses.

These provisions help organisations smoothen the bonus payments over time and avoid year-on-year fluctuations.

6. Timely Payment and Record Keeping

The employer must:

• Pay the bonus within 8 months from the end of the financial year
• Maintain statutory registers (Form A, B, C) for inspection

By using automated employee management systems, companies can track eligibility, generate bonus sheets, and store compliance records effortlessly.

Common Challenges and Practical Tips

1. Managing Bonus Across Multi-State Operations

Different states have different minimum wages. Always refer to the state-specific wage rates while applying the ceiling.

2. Handling New Joinees and Exits

If an employee has joined or exited mid-year, calculate bonus proportionately for the months they worked.

3. Aligning with Appraisals and Performance-Based Incentives

Statutory bonuses are separate from performance bonuses or variable pay plans. Maintain clear communication with employees to avoid confusion.

4. Communicating with Employees

Use payslips, portals, and bonus letters to inform employees about their statutory bonus breakdown. This builds transparency and avoids disputes.

Why the Bonus Act Still Matters in 2025

Despite evolving compensation structures and high-performance cultures, the Bonus Act remains a cornerstone of equitable compensation in India. It is especially relevant for:

• Manufacturing units
• Start-ups employing blue-collar staff
• Retail chains
• Warehouse and logistics businesses
• Labour-intensive sectors

Businesses that abide by the Act not only stay out of trouble with the law but also promote a culture of justice and trust.

Modern HR teams often integrate bonus policies with performance appraisal systems to create a cohesive and rewarding employee experience.

Conclusion

The Payment of Bonus Act offers a structured framework for employee compensation, ensuring that business profitability is shared fairly among the workforce. Understanding the minimum and maximum bonus as per Bonus Act, knowing how to compute bonuses, and ensuring timely and accurate payments is crucial for maintaining goodwill and avoiding penalties.

As your organisation grows, compliance becomes more complex but it doesn’t have to be a burden. With tools like Qandle’s Payroll and Compliance Solutions, you can ensure legal accuracy, save time, and focus on strategic HR functions.Ready to automate your bonus computation and stay compliant effortlessly? Explore Qandle’s comprehensive Payroll and Compliance Solutions today.