Overview of the Payment of Bonus Act, 1965
The Payment of Bonus Act, 1965 is one of India's key labour welfare legislations. It mandates the payment of bonus to employees in certain establishments based on the profits earned or on the basis of productivity. The Act establishes a statutory right for eligible employees to receive a share of the profits generated by the establishment they work for.
The Act applies to every factory and to every other establishment employing 20 or more persons on any day during an accounting year. Once an establishment is covered, it continues to be governed by the Act even if the employee count falls below 20 subsequently. The central purpose of the law is to bridge the gap between labour and capital and to ensure workers benefit from the prosperity of the business they help build.
Significant amendments in 2015 raised the eligibility ceiling from ₹10,000 to ₹21,000 per month and the calculation ceiling from ₹3,500 to ₹7,000 (or the minimum wage, whichever is higher). This brought a much larger section of the Indian workforce within the ambit of bonus eligibility.
Applicability & Eligibility
Establishment Coverage
- • Every factory (under Factories Act)
- • Every establishment with 20+ employees on any day in the accounting year
- • Once covered, always covered—even if headcount drops
- • Government can extend to establishments with <20 employees
Employee Eligibility
- • Salary/wage up to ₹21,000 per month
- • Must have worked at least 30 days in the accounting year
- • Includes all employees (permanent, temporary, contract)
- • Excludes: Apprentices under the Apprentices Act
Exemptions: Government establishments, social welfare institutions, universities, hospitals (not run for profit), employees of LIC, IFCI, ICICI, RBI, UTI, and newly set-up establishments (first 5 years, with conditions).
Bonus Calculation
The bonus payable is determined through a multi-step statutory formula that takes into account the establishment's profits, available surplus, and set-on/set-off from prior years.
| Parameter | Value |
|---|---|
| Minimum Bonus | 8.33% of salary or ₹100, whichever is higher |
| Maximum Bonus | 20% of salary |
| Calculation Ceiling | ₹7,000/month or minimum wage—whichever is higher |
| Eligibility Ceiling | ₹21,000/month (Basic + DA) |
| Allocable Surplus (Company) | 60% of available surplus |
| Allocable Surplus (Others) | 67% of available surplus |
Worked Example
Employee monthly salary: ₹18,000 (Basic ₹12,000 + DA ₹6,000)
- • Salary exceeds ₹7,000 → bonus calculated on ₹7,000/month
- • Annual bonus-eligible salary = ₹7,000 × 12 = ₹84,000
- • Minimum bonus: ₹84,000 × 8.33% = ₹6,997
- • Maximum bonus: ₹84,000 × 20% = ₹16,800
- • Actual bonus depends on allocable surplus after set-on/set-off
Set-on and Set-off Mechanism
The set-on/set-off mechanism smooths bonus payments across years of fluctuating profits. In profitable years, excess allocable surplus (beyond maximum bonus payable) is “set on” (carried forward). In deficit years, the shortfall is “set off” against future surpluses. This carry-forward is limited to four accounting years.
Set-on (Profit Year)
When allocable surplus exceeds the maximum bonus payable, the excess is carried forward for up to 4 years to cover future deficits.
Set-off (Deficit Year)
When allocable surplus is less than minimum bonus payable, the deficit is set off against future surpluses for up to 4 years.
Payment Timeline & Penalties
Payment Deadline
Bonus must be paid within 8 months from the close of the accounting year. For a March year-end, bonus must be disbursed by November 30.
Penalty for Default
Imprisonment up to 6 months, or fine up to ₹1,000, or both. Interest payable on delayed bonus. Employer can apply to the government for a time extension (up to 2 years).
Records to Maintain
Form A (Allocable Surplus), Form B (Set-on/Set-off), Form C (Bonus Paid), Bonus Register, Annual Return—all preserved for 5 years.
Key Takeaways for Employers
- ✓ Minimum 8.33% bonus is mandatory even if the company incurs losses
- ✓ Maintain set-on/set-off register (Form B) to track surplus carry-forwards
- ✓ File annual return within 30 days of bonus payment
- ✓ Display bonus-entitlement notice at the workplace
- ✓ New establishments are exempt for the first 5 years (pay only in profit years), but must pay 8.33% thereafter