Boosting Employee Morale: A Guide to the Payment of Bonus Act, 1965

Every year, as Diwali approaches, millions of Indian workers look forward to one thing beyond the festivities – their bonus. But this isn’t just a goodwill gesture from employers. For a large section of India’s workforce, it is a statutory right backed by law. The Payment of Bonus Act, 1965 mandates that eligible employees in qualifying establishments receive a share of their employer’s profits as a bonus each year. Enacted on September 25, 1965, this law was the result of years of industrial disputes and the recommendations of a government-appointed Tripartite Commission that examined how workers could equitably share in business prosperity.

Background and objective of the Act 🔗

The tradition of paying bonuses in India can be traced back to World War I, when some textile mills voluntarily offered wage increases as a “war bonus.” Over the following decades, bonus demands became a recurring theme in labour disputes, and courts began developing calculation formulas. By 1960, the Standing Labour Committee recommended appointing a formal commission. The resulting legislation – the Payment of Bonus Act, 1965 – imposed a legal obligation on employers to pay bonuses based on profits or productivity, bringing uniformity to an otherwise inconsistent practice.

The core objective is straightforward: to allow workers to share in an establishment’s financial success, earning slightly more than the minimum wage during profitable years. It promotes industrial peace, reduces wage-related disputes, and builds a motivated workforce – all while setting clear, enforceable rules for both employers and employees.

Applicability: which establishments does the Act cover? 🔗

Under Sections 1 and 3 of the Act, the law applies to:

• Every factory (as defined under the Factories Act, 1948) employing 10 or more persons.
• Every other establishment employing 20 or more employees on any day during the accounting year.

Importantly, once an establishment crosses the threshold of 20 employees, it remains covered even if the headcount later falls below that number. Every department and branch of an establishment – whether in the same location or elsewhere – is also covered under the Act.

Establishments exempt under Section 32 🔗

Certain establishments are excluded from the Act’s coverage. These include the Life Insurance Corporation (LIC), the Reserve Bank of India (RBI), the Unit Trust of India (UTI), NABARD, IDBI, inland water transport establishments, universities, non-profit organizations, and seamen as defined under the Merchant Shipping Act, 1958. Public sector enterprises and government-run industries also generally fall outside the Act’s scope.

Who is eligible to receive a bonus? 🔗

Under Section 8 of the Act, an employee is entitled to a bonus if they have worked for at least 30 working days in the accounting year. The monthly salary or wage must not exceed ₹21,000 (basic pay plus dearness allowance). This ceiling was revised from ₹10,000 to ₹21,000 by the Payment of Bonus (Amendment) Act, 2015, which came into effect from April 1, 2014.

The Act covers all types of workers – skilled, unskilled, supervisory, managerial, administrative, technical, and clerical – as long as they are employed under an express or implied contract and are not apprentices. Even seasonal and contract workers can be eligible, provided they meet the 30-day requirement, as affirmed by the Bombay High Court in J.K. Ginning & Pressing Factory v. Second Labour Court, Akola.

Disqualification under Section 9 🔗

An employee loses their entitlement to a bonus in an accounting year if they are dismissed for fraud, theft, misappropriation, sabotage of property, or violent and riotous behaviour on the premises of the establishment. Employees earning more than ₹21,000 per month, apprentices, and those employed by exempt institutions are also not covered.

Calculating the bonus: minimum, maximum, and the salary cap 🔗

The Act prescribes a minimum bonus of 8.33% of an employee’s annual basic salary and dearness allowance – effectively equivalent to one month’s salary. This must be paid regardless of whether the employer makes a profit, subject to the provisions for newly set-up establishments. The maximum bonus is capped at 20% of the annual salary, payable only when the allocable surplus is sufficient.

There is also a calculation ceiling. Where an employee’s salary exceeds ₹7,000 per month (or the applicable minimum wage for that employment, whichever is higher), the bonus is calculated as if the salary is ₹7,000 per month. This cap on the calculation base ensures that the bonus formula remains tied to wage equity rather than reflecting upper-end salaries.

How gross profit, available surplus, and allocable surplus connect 🔗

The actual bonus percentage an establishment pays depends on a step-by-step profit computation laid down in the Act. First, the employer calculates gross profits as per the schedules in the Act (Schedule I for banking companies, Schedule II for others). From this, certain prior charges are deducted – including depreciation, development allowance, and direct taxes – to arrive at the available surplus. A specified percentage of the available surplus is then designated as the allocable surplus – this is the pool from which bonus payments are made.

As explained by ComplianceBook, the allocable surplus is 60% of the available surplus for most establishments, and 67% for banking companies. If this allocable surplus exceeds the minimum bonus payable, the employer pays a higher bonus – up to the 20% ceiling. If it falls short of even the minimum, the minimum must still be paid (with the shortfall carried forward as a “set off”).

The principle of set on and set off 🔗

One of the most technically distinctive features of the Act is the mechanism of set on and set off under Section 15.

Set on applies when the allocable surplus in a given year exceeds the maximum bonus (20%) payable to employees. The excess amount – subject to a ceiling of 20% of total wages – is carried forward to the next accounting year to be used for bonus payments in leaner years.

Set off is the reverse. When the allocable surplus is insufficient to cover even the minimum bonus, the shortfall is carried forward as a liability to be set off against future surpluses. This carry-forward can extend for up to four successive accounting years. When calculating bonus for any year, set on or set off amounts from the earliest accounting year are taken into account first. This mechanism ensures that bonus obligations are met consistently, regardless of year-to-year profit fluctuations.

Newly established businesses: a limited exemption 🔗

Under Section 16, a newly set-up establishment is not required to pay a bonus for the first five accounting years unless it earns a profit. If profits are earned in any year within that five-year window, the employer must pay the bonus for that specific profitable year. From the sixth year onward, bonus payment is mandatory irrespective of profit or loss, and the calculation follows the set on and set off principles from the fifth and sixth years’ surpluses.

When must the bonus be paid? 🔗

Under Section 19 of the Act, bonuses must be paid within eight months from the close of the accounting year. For most establishments, this means payment by November 30 (for a financial year ending March 31). The government can extend this period, but the total extension cannot exceed two years. Where a bonus dispute is pending before any authority, the amount must be paid within one month from the date the award or settlement becomes enforceable.

Employees who leave an establishment mid-year are entitled to a pro-rata bonus based on the days worked, as long as they have completed the minimum 30-day threshold. The only exception is employees dismissed for proven misconduct such as fraud or theft.

Compliance requirements for employers 🔗

The Act lays down clear compliance obligations for employers, which include maintaining three key registers:

• Form A – Register showing the computation of the allocable surplus.
• Form B – Register showing set on and set off of the allocable surplus across years.
• Form C – Register detailing the bonus due to each employee, deductions made, and amounts actually paid.

In addition, employers must file an annual return in Form D on the Ministry of Labour and Employment portal by February 1 each year. These registers are subject to inspection by labour authorities and must be maintained accurately.

Deductions permissible under the Act 🔗

Employers are permitted to make deductions from the bonus payable in two specific situations. First, if the employer has already paid a customary bonus (such as a Puja bonus) during the year, that amount can be deducted from the statutory bonus payable. Second, if an employee is found guilty of misconduct that caused a financial loss to the establishment, the amount of that loss can be deducted from the bonus due for that year, with any remaining balance paid out.

Penalties for non-compliance 🔗

The Act does not leave enforcement to goodwill. Under its penal provisions, an employer who contravenes the Act or fails to comply with its requirements can face imprisonment of up to six months, a fine of up to ₹1,000, or both. Employees who are denied their rightful bonus can raise a dispute before the appropriate labour authority or labour court.

The Act in the context of the Code on Wages, 2019 🔗

It is worth noting that the Code on Wages, 2019 – one of India’s four consolidated labour codes – is set to subsume the Payment of Bonus Act, 1965, along with three other wage-related legislations. However, until the Code on Wages is formally operationalized across states, the Payment of Bonus Act continues to remain in force and governs bonus payments across India. Students and practitioners of labour law need to be familiar with both frameworks.

Why this Act matters beyond the numbers 🔗

The Payment of Bonus Act is not merely a financial regulation. It reflects a broader philosophy: that the people who contribute to building an enterprise deserve to share in its success. By setting a floor (8.33%) and a ceiling (20%), the Act balances employer profitability with worker welfare. The set on and set off mechanism acknowledges business cycles, ensuring that bonus commitments are honoured even when profits dip. For employees – particularly in the lower and middle-income brackets – the annual bonus can represent a significant supplementary income, one that the law guarantees regardless of whether it is written into their employment contract.

Landmark cases like East Asiatic Co. Ltd. v. Industrial Tribunal and Jalan Trading Co. v. Mill Mazdoor Sabha have further shaped the interpretation of the Act, reinforcing employee rights and clarifying the scope of employer obligations under Indian labour law.

What do you think? Given that the Payment of Bonus Act links employee earnings to an employer’s profits, does this create a sufficient incentive for transparency in how establishments report their financials? And with the Code on Wages, 2019 on the horizon, do you think consolidating bonus law into a broader wage code will strengthen or dilute worker protections under the current framework?

References

1. https://labour.gov.in/sites/default/files/the_payment_of_bonus_act_1965_0.pdf
2. https://www.indiacode.nic.in/handle/123456789/1548?view_type=brow
3. https://factohr.com/bonus-act-1965/
4. https://compliancebook.in/available-surplus-and-allocable-surplus/
5. https://www.zoho.com/in/payroll/academy/payroll-laws/central/payment-of-bonus-act.html
6. https://www.legalserviceindia.com/legal/article-5890-payment-of-bonus-act-1965.html