Applicability: Which Establishments Must Pay Bonus

The Payment of Bonus Act 1965 applies to every factory and to every other establishment employing 20 or more persons on any day in the accounting year; several states have extended it to establishments with 10 or more. Once the Act applies it continues to apply even if headcount later falls below the threshold. New establishments get a limited exemption in their early years until they make profits, subject to the Act's conditions, but must still pay minimum bonus from the sixth accounting year.

The Act covers employees on salary or wages up to ₹21,000 per month (basic + DA), whether they are permanent, contract, casual or piece-rated, and whether they are skilled or unskilled. Apprentices under the Apprentices Act are excluded. Employees who have worked at least 30 working days in the accounting year are eligible for that year. Days of paid leave, lay-off, maternity leave and absence due to a work accident count as working days for this test.

The bonus provisions of the Code on Wages 2019 replace the 1965 Act as the Code's rules are notified, but the structure is the same: an eligibility wage limit fixed by the appropriate government, minimum 8.33%, maximum 20%, and a calculation ceiling. Until state rules fix new figures, payroll teams continue with the 1965 Act numbers described here. The statutory bonus glossary entry tracks changes as they are notified.

• 20+ employees in the accounting year (10+ in some states); continues to apply once triggered
• Employees with basic + DA up to ₹21,000 are eligible; apprentices excluded
• Minimum 30 working days in the year, counting paid leave and maternity leave
• Code on Wages keeps the same structure; use 1965 Act figures until rules change them

The Two Ceilings: ₹21,000 for Eligibility and ₹7,000 or Minimum Wage for Calculation

There are two different wage limits and they are constantly confused. The eligibility ceiling is ₹21,000: an employee whose basic + DA exceeds it in the month is not entitled to statutory bonus. The calculation ceiling is ₹7,000 per month or the minimum wage for the scheduled employment fixed by the appropriate government, whichever is higher: where an eligible employee's wage exceeds this figure, bonus is computed as if the wage were that figure.

So an employee on ₹18,000 basic + DA is eligible (under ₹21,000), but bonus is not 8.33% of ₹18,000. It is 8.33% of ₹7,000, or of the applicable minimum wage if that is higher. Since most state minimum wages for even unskilled work are now above ₹7,000 a month, the minimum wage has become the effective calculation ceiling in practice, and the figure differs by state, skill category and zone. Pull the current minimum wage for the employee's category from the state notification each year and store it in the wage master.

Where the employee's actual wage is below the calculation ceiling, bonus is computed on the actual wage. Note that if an employee earns less than the applicable minimum wage, the bigger problem is the minimum-wage breach itself; arrears of wages will be due, and bonus is then recomputed on the corrected wage. The minimum wages compliance guide covers how to keep the wage master current.

• Eligibility ceiling ₹21,000 basic + DA: above it, no statutory bonus
• Calculation ceiling: ₹7,000 or the scheduled minimum wage, whichever is higher
• Wage above the calculation ceiling: bonus on the ceiling; below it: bonus on actual wage
• Store the current state minimum wage per category in the payroll master

Rates: 8.33% Minimum, 20% Maximum and the Allocable Surplus

Every covered employer must pay a minimum bonus of 8.33% of the wages earned in the accounting year (or ₹100, whichever is higher; ₹60 for employees under 15), whether or not the establishment made a profit. 8.33% is one twelfth, so the minimum bonus is roughly one month's wage on the calculation base. The maximum is 20% of annual wages.

Between those bounds the rate is decided by the allocable surplus: a share of the gross profit for the year after deducting depreciation, development rebate, direct taxes and certain other sums under the Act's schedules. If the allocable surplus exceeds the minimum bonus, the employer must pay a higher percentage up to 20%. Excess allocable surplus above 20% is carried forward (set on) for up to four years, and shortfalls are set off against future surplus. Form A and Form B record these computations.

Most small establishments pay 8.33% and treat the allocable surplus computation as an accountant's task; larger companies and unionised plants negotiate rates between 8.33% and 20%. Either way the computation should be documented, because the Act gives inspectors power to examine the accounts, and bonus paid under a settlement is still bonus under the Act.

• Minimum 8.33% of annual wages on the calculation base, payable even in a loss year
• Maximum 20%; the actual rate depends on allocable surplus
• Set-on and set-off carry excess or shortfall across up to four years
• Form A (computation of allocable surplus) and Form B (set-on/set-off) record the working

Worked Examples

Example 1. A helper's basic + DA is ₹9,000, and suppose the state minimum wage for that scheduled employment and category is ₹8,400 per month (a hypothetical figure; use the current notification). The calculation ceiling is the higher of ₹7,000 and ₹8,400, so ₹8,400. Because ₹9,000 exceeds the ceiling, bonus is computed on ₹8,400. Annual wages for bonus = ₹8,400 × 12 = ₹1,00,800. Minimum bonus = 8.33% × ₹1,00,800 = ₹8,397. At 20% it would be ₹20,160.

Example 2. A part-time cleaner's basic + DA is ₹6,500, below the ₹7,000 ceiling. Bonus is on the actual wage: ₹6,500 × 12 = ₹78,000; 8.33% = ₹6,497, effectively one month's wage. If she worked only 8 months in the year, wages earned are ₹52,000 and the minimum bonus is ₹4,332.

Example 3. A supervisor's basic + DA is ₹18,000, and the applicable minimum wage for a skilled worker in that state is, say, ₹12,000 (again hypothetical). Eligible, since ₹18,000 is under ₹21,000. Calculation base is ₹12,000. Annual bonus at 8.33% = ₹11,995; at 20% = ₹28,800. Example 4. An accountant on ₹22,000 basic + DA is above the eligibility ceiling and gets no statutory bonus, although the company may pay an ex-gratia amount by contract.

• ₹9,000 wage, ₹8,400 min wage: bonus on ₹8,400; 8.33% = ₹8,397 per year
• ₹6,500 wage: bonus on actual; 8.33% = ₹6,497 for a full year, ₹4,332 for 8 months
• ₹18,000 wage, ₹12,000 min wage: bonus on ₹12,000; ₹11,995 minimum, ₹28,800 maximum
• ₹22,000 wage: not eligible for statutory bonus

Pro-Rata for Partial Years, LOP and Timing of Payment

Bonus is a percentage of wages actually earned in the accounting year, so pro-rating is automatic. An employee who joins on 1 October has six months of wages in a March year-end and receives 8.33% of those six months. An employee with 40 days of loss of pay in the year has correspondingly lower annual wages and a lower bonus. You do not pro-rate separately by days and then again by wages; use the wages actually paid on the calculation base.

Where the wage is above the calculation ceiling, pro-rate the ceiling in the same way: if the month had 2 LOP days out of 26, the bonus wage for that month is the ceiling × 24 ÷ 26. An employee who leaves mid-year is entitled to bonus for the period worked, payable with the final settlement or at the normal bonus time if the Act permits; most employers pay it with the full and final settlement to close the file.

Bonus must be paid within eight months of the close of the accounting year; for a March year-end that means by 30 November, and many employers pay before Diwali for that reason. A longer period, up to two years, can be permitted by the appropriate government on application. Payment must be in cash or bank transfer, not in kind, and it must be recorded employee-wise in the Form C register with an annual return in Form D.

• Bonus is on wages actually earned, so joining date and LOP pro-rate it automatically
• Pro-rate the calculation ceiling by paid days when the wage exceeds it
• Leavers get bonus for the period worked, usually with the final settlement
• Pay within eight months of year-end; Form C register and Form D return

Monthly Bonus in CTC Versus Annual Payment

Many employers, particularly security agencies, facility-management companies and staffing firms, pay statutory bonus monthly as a payslip component (for example ₹583 per month, being 8.33% of ₹7,000, or 8.33% of the applicable minimum wage). This is common practice and it aligns with client billing, which is monthly. It is defensible if the component is clearly labelled as statutory bonus under the Act, is computed on the correct base, is not below the annual minimum when totalled, and is entered in the Form C register.

The risks are two. First, if the allocable surplus later requires a rate above 8.33%, the difference is still due at year-end; paying monthly does not cap the liability. Second, a monthly bonus line must not be counted as wages for computing the bonus itself or for PF, and it should be excluded from ESI wages as an annual bonus only if it is genuinely the statutory bonus; if the ESIC treats a fixed monthly payment as wages, contributions will be demanded on it. Take a written position and be consistent.

For salaried staff above ₹21,000, an annual performance bonus is a contractual matter, fully taxable, and outside the Act. Do not label it statutory bonus on the payslip. The salary structure guide explains where bonus sits among the components.

• Monthly statutory bonus is common in security and staffing; label and register it correctly
• Paying monthly does not cap the year-end liability if the surplus requires more than 8.33%
• Exclude statutory bonus from the bonus base and from PF wages; take a stance on ESI treatment
• Performance bonus above ₹21,000 is contractual, not statutory

Bonus in Security and Contract-Labour Billing

For a security agency or manpower contractor, statutory bonus is a cost the client must fund. A guard on the state minimum wage generates 8.33% of that wage as annual bonus, which most agencies bill monthly as a line item alongside PF (13% employer cost), ESI (3.25%) and, increasingly, gratuity provision (4.81%). Clients who insist on an all-inclusive rate that does not cover bonus are asking the agency to breach the Act, and the principal employer shares the exposure under the Contract Labour Act when the contractor defaults.

Build the bonus line from the same wage master used for payroll, so that the billed bonus and the paid bonus reconcile at year-end. Keep the Form C register per deployment site if clients audit it, and be ready to show payment proof. The security guard salary calculation guide shows a full cost build-up, and the payroll compliance checklist puts bonus in the annual calendar.

Attend Mitra's payroll module lets you configure statutory bonus as a monthly component computed on the wage master and derived from attendance-linked paid days, and exports salary registers and site-wise man-hour reports that agencies use for client billing. Form A to D preparation and any return filing remain with your accountant.

• Bill bonus as a monthly line item computed on the minimum wage base
• Reconcile billed bonus with paid bonus and the Form C register annually
• Principal employers carry exposure if the contractor does not pay
• Use one wage master for payroll and billing so the figures match