Chapter IV · Code on Wages

Payment of Bonus

This chapter sets out who gets a statutory bonus, how much, and how it is worked out from the employer's profits. It guarantees a minimum bonus of 8.33% of wages (or ₹100, if higher) whether or not there is any allocable surplus, with relief for new establishments in their early years, caps bonus at 20% of wages, and sets an eight-month deadline for paying it into the employee's bank account. It covers establishments with 20 or more people and employees earning within the wage ceiling the government notifies.

16 sections ~15 min read Official text, PDF pp. 12–17

HR managersPayroll teamsFactory and business ownersFinance and accounts heads

Key points

1Every employee within the notified wage ceiling who has worked at least 30 days in the accounting year gets a minimum bonus of 8.33% of wages or ₹100, whichever is higher, whether or not there is any allocable surplus. The exception is a new establishment, which in its first five accounting years pays only for years in which it makes a profit. §26
2When the allocable surplus is more than the minimum bonus, the employer must pay a higher bonus, in proportion to each employee's wages, up to 20% of wages. Any extra bonus for production or productivity agreed with workers must keep the total within that same 20%. §26 §31
3For employees earning above the notified calculation ceiling, bonus is worked out as if they earned that ceiling or the minimum wage, whichever is higher. §26
4Bonus must be credited to the employee's bank account within eight months of the close of the accounting year. On the employer's application, the government or an authority it names can extend this for sufficient reasons, but the extensions cannot add up to more than two years. §39
5Puja or other customary bonus, and any bonus paid in advance, can be deducted from the bonus due; so can a financial loss caused by the employee's proven misconduct, but only from that year's bonus. §37 §38
6The chapter applies where 20 or more people were employed on any day of the accounting year, and does not cover groups such as LIC, RBI, government departments, universities and non-profit hospitals. §41

At a glance

8⅓% (8.33%) of wages or ₹100, whichever is higherMinimum bonusSection 26 20% of wagesMaximum bonusSection 26 At least 30 days' work in the accounting yearDays worked to qualifySection 26 67% of available surplus (60% for banking companies)Allocable surplusSection 31 8 months from close of the accounting yearPayment deadlineSection 39 20 or more persons on any day of the accounting yearEstablishment size coveredSection 41

Earlier law:Payment of Bonus Act, 1965

Eligibility for bonus, etc

In plain words

Employees within the notified wage ceiling who work at least 30 days in an accounting year get a minimum bonus of 8.33% of wages (or ₹100, if higher), rising up to 20% when the allocable surplus allows. Pay above the notified calculation ceiling is counted at that ceiling or the minimum wage, whichever is higher, and any agreed productivity bonus must keep the total within 20%. New establishments pay only in profit years during the five years after their first sale, set on and set off are phased in over the sixth and seventh years, and normal rules apply from the eighth.

(1)

There shall be paid to every employee, drawing wages not exceeding such amount per mensem, as determined by notification, by the appropriate Government, by his employer, who has put in at least thirty days work in an accounting year, an annual minimum bonus calculated at the rate of eight and one-third per cent. of the wages earned by the employee or one hundred rupees, whichever is higher whether or not the employer has any allocable surplus during the previous accounting year.

(2)

For the purpose of calculation of the bonus where the wages of the employee exceeds such amount per mensem, as determined by notification by the appropriate Government, the bonus payable to such employee under sub-sections (1) and (3) shall be calculated as if his wage were such amount, so determined by the appropriate Government or the minimum wage fixed by the appropriate Government, whichever is higher.

(3)

Where in respect of any accounting year referred to in sub-section (1), the allocable surplus exceeds the amount of minimum bonus payable to the employees under that sub-section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year, bonus which shall be an amount in proportion to the wages earned by the employee during the accounting year, subject to a maximum of twenty per cent. of such wages.

(4)

In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 36 shall be taken into account in accordance with the provisions of that section.

(5)

Any demand for bonus in excess of the bonus referred to in sub-section (1), either on the basis of production or productivity in an accounting year for which the bonus is payable shall be determined by an agreement or settlement between the employer and the employees, subject to the condition that the total bonus including the annual minimum bonus referred to in sub-section (1) shall not exceed twenty per cent. of the wages earned by the employee in the accounting year.

(6)

In the first five accounting years following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, bonus shall be payable only in respect of the accounting year in which the employer derives profit from such establishment and such bonus shall be calculated in accordance with the provisions of this Code in relation to that year, but without applying the provisions of section 36.

(7)

For the sixth and seventh accounting years following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, the provisions of section 36 shall apply subject to the following modifications, namely:—

(i)

for the sixth accounting year set on or set off, as the case may be, shall be made, in the manner as may be prescribed by the Central Government, taking into account the excess or deficiency, if any, as the case may be, of the allocable surplus set on or set off in respect of the fifth and sixth accounting years;

(ii)

for the seventh accounting year set on or set off, as the case may be, shall be made, in the manner as may be prescribed by the Central Government, taking into account the excess or deficiency, if any, as the case may be, of the allocable surplus set on or set off in respect of the fifth, sixth and seventh accounting years.

(8)

From the eighth accounting year following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, the provisions of section 36 shall apply in relation to such establishment as they apply in relation to any other establishment.

Explanation

Explanation 1.––For the purpose of sub-section (6), an employer shall not be deemed to have derived profit in any accounting year, unless––

(a)

he has made provision for depreciation of that year to which he is entitled under the Income-tax Act or, as the case may be, under the agricultural income tax law; and

(b)

the arrears of such depreciation and losses incurred by him in respect of the establishment for the previous accounting years have been fully set off against his profits.

Explanation

Explanation 2.––For the purposes of sub-sections (6), (7) and (8), sale of the goods produced or manufactured during the course of the trial running of any factory or of the prospecting stage of any mine or an oil-field shall not be taken into consideration and where any question arises with regard to such production or manufacture, the appropriate Government may, after giving the parties a reasonable opportunity of representing the case, decide upon the issue.

(9)

The provisions of sub-sections (6), (7) and (8) shall, so far as may be, apply to new departments or undertakings or branches set up by existing establishments.

Source: The Code on Wages, 2019, official gazette copy, page 12

In plain words

For employers

Check the latest government notification for both the eligibility ceiling and the calculation ceiling before each bonus run; the Code itself does not fix these amounts.

Did you know?

For the five accounting years after the year it first sells its goods or services, a new establishment pays bonus only for years in which it makes a profit, and profit counts only after depreciation is provided for and earlier losses and depreciation arrears are fully set off. Sales during a factory's trial run, or a mine's or oil-field's prospecting stage, do not start this clock.

Proportionate reduction in bonus in certain cases

In plain words

If an employee did not work every working day of the accounting year, the minimum bonus is reduced proportionately, where it is more than 8.33% of the wages for the days actually worked.

Where an employee has not worked for all the working days in an accounting year, the minimum bonus under sub-section (1) of section 26, if such bonus is higher than eight and one third per cent. of the salary or wage of the days such employee has worked in that accounting year, shall be proportionately reduced.

Source: The Code on Wages, 2019, official gazette copy, page 14

Computation of number of working days

In plain words

Days of lay-off allowed by an agreement, standing orders or law, paid leave, paid maternity leave and absence due to a temporary disablement from a work accident count as days worked for the pro-rata calculation.

For the purposes of section 27, an employee shall be deemed to have worked in an establishment in any accounting year also on the days on which,––

(a)

he has been laid off under an agreement or as permitted by standing orders under the Industrial Employment (Standing Orders) Act, 1946, or under the Industrial Disputes Act, 1947, or under any other law applicable to the establishment;

(b)

he has been on leave with salary or wages;

(c)

he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and

(d)

the employee has been on maternity leave with salary or wages, during the accounting year.

Source: The Code on Wages, 2019, official gazette copy, page 14

Disqualification for bonus

In plain words

An employee dismissed for fraud, riotous or violent behaviour on the premises, theft, misappropriation or sabotage of the establishment's property, or after a conviction for sexual harassment, is not entitled to bonus.

Notwithstanding anything contained in this Code, an employee shall be disqualified from receiving bonus under this Code, if he is dismissed from service for––

(a)

fraud; or

(b)

riotous or violent behaviour while on the premises of the establishment; or

(c)

theft, misappropriation or sabotage of any property of the establishment; or

(d)

conviction for sexual harassment.

Source: The Code on Wages, 2019, official gazette copy, page 14

Establishments to include departments, undertakings and branches

In plain words

All departments, units and branches, wherever they are, count as one establishment for bonus. A unit that keeps its own balance sheet and profit and loss account for a year is treated separately for that year, unless it was counted as part of the whole immediately before that year began.

Where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Code:

Proviso

Provided that where for any accounting year a separate balance sheet and profit and loss account are prepared and maintained in respect of any such department or undertaking or branch, then, such department or undertaking or branch shall be treated as a separate establishment for the purpose of computation of bonus, under this Code for that year, unless such department or undertaking or branch was, immediately before the commencement of that accounting year treated as part of the establishment for the purpose of computation of bonus.

Source: The Code on Wages, 2019, official gazette copy, page 14

Payment of bonus out of allocable surplus

In plain words

Bonus is paid out of the allocable surplus, which is 67% of the available surplus (60% for banking companies); a company's audited accounts are normally accepted as they are.

(1)

The bonus shall be paid out of the allocable surplus which shall be an amount equal to sixty per cent. in case of a banking company and sixty-seven per cent. in case of other establishment, of the available surplus and the available surplus shall be the amount calculated in accordance with section 33.

(2)

Audited accounts of companies shall not normally be questioned.

(3)

Where there is any dispute regarding the quantum of bonus, the authority notified by the appropriate Government having jurisdiction may call upon the employer to produce the balance sheet before it, but the authority shall not disclose any information contained in the balance sheet unless agreed to by the employer.

Source: The Code on Wages, 2019, official gazette copy, page 14

Computation of gross profits

In plain words

Gross profits for bonus purposes are calculated in the manner the Central Government prescribes, separately for banking companies and other establishments.

The gross profits derived by an employer from an establishment in respect of the accounting year shall,––

(a)

in the case of a banking company, be calculated in the manner as may be prescribed by the Central Government;

(b)

in any other case, be calculated in the manner as may be prescribed by the Central Government.

Source: The Code on Wages, 2019, official gazette copy, page 15

Computation of available surplus

In plain words

Available surplus is gross profit minus the prior charges in section 34. For accounting years starting after the Code came into force, it also adds the tax benefit of the previous year's bonus: the difference, worked out under section 35, between tax on the previous year's gross profits and tax on those profits after deducting the bonus paid or payable for that year.

The available surplus in respect of any accounting year shall be the gross profits for that year after deducting therefrom the sums referred to in section 34:

Proviso

Provided that the available surplus in respect of the accounting year commencing on any day in a year after the commencement of this Code and in respect of every subsequent accounting year shall be the aggregate of—

(a)

the gross profits for that accounting year after deducting therefrom the sums referred to in section 34; and

(b)

an amount equal to the difference between––

(i)

the direct tax, calculated in accordance with the provisions of section 35, in respect of an amount equal to the gross profits of the employer for the immediately preceding accounting year; and

(ii)

the direct tax, calculated in accordance with provisions of section 35, in respect of an amount equal to the gross profits of the employer for such preceding accounting year after deducting therefrom the amount of bonus which the employer has paid or is liable to pay to his employees in accordance with the provisions of this Code for that year.

Source: The Code on Wages, 2019, official gazette copy, page 15

Sums deductible from gross profits

In plain words

Before arriving at the surplus, the employer deducts depreciation allowed under section 32(1) of the Income-tax Act (or agricultural income-tax law), the direct tax payable for the year as worked out under section 35, and any other sums the Central Government prescribes.

The following sums shall be deducted from the gross profits as prior charges, namely:—

(a)

any amount by way of depreciation admissible in accordance with the provisions of sub-section (1) of section 32 of the Income-tax Act or in accordance with the provisions of the agricultural income-tax law, for the time being in force, as the case may be;

(b)

subject to the provisions of section 35, any direct tax which the employer is liable to pay for the accounting year in respect of his income, profits and gains during that year;

(c)

such further sums in respect of the employer as may be prescribed by the Central Government.

Source: The Code on Wages, 2019, official gazette copy, page 15

Calculation of direct tax payable by employer

In plain words

Direct tax for bonus purposes is worked out at the rates that apply to the employer's income for the year, but ignoring carried-forward losses, arrears of depreciation, export rebates, and any rebate or allowance other than those given for developing an industry. A religious or charitable employer with tax-exempt income is taxed as if it were a widely held company, and an individual or HUF as if the establishment were their only income.

For the purposes of this Code, any direct tax payable by the employer for any accounting year shall, subject to the following provisions, be calculated at the rates applicable to the income of the employer for that year, namely:—

(a)

in calculating such tax no account shall be taken of,––

(i)

any loss incurred by the employer in respect of any previous accounting year and carried forward under any law for the time being in force relating to direct taxes;

(ii)

any arrears of depreciation which the employer is entitled to add to the amount of the allowance for depreciation for any succeeding accounting year or years under sub-section (2) of section 32 of the Income-tax Act;

(b)

where the employer is a religious or a charitable institution to which the provisions of section 41 do not apply and the whole or any part of its income is exempt from the tax under the Income-tax Act, then, with respect to the income so exempted, such institution shall be treated as if it were a company in which the public are substantially interested within the meaning of that Act;

(c)

where the employer is an individual or a Hindu undivided family, the tax payable by such employer under the Income-tax Act shall be calculated on the basis that the income derived by him from the establishment is his only income;

(d)

where the income of any employer includes any profits and gains derived from the export of any goods or merchandise out of India and any rebate on such income is allowed under any law for the time being in force relating to direct taxes, then, no account shall be taken of such rebate;

(e)

no account shall be taken of any rebate other than development rebate or investment allowance or development allowance or credit or relief or deduction (not hereinbefore mentioned in this section) in the payment of any direct tax allowed under any law for the time being in force relating to direct taxes or under the relevant annual Finance Act, for the development of any industry.

Source: The Code on Wages, 2019, official gazette copy, page 15

Set on and set off of allocable surplus

In plain words

Allocable surplus above the maximum bonus is carried forward as set on, up to 20% of that year's total wage bill. If there is no surplus or it falls short of the minimum bonus, and there is not enough set on to cover it, the shortfall is carried forward as set off. Both are carried up to and including the fourth following year, in the manner the Central Government prescribes.

(1)

Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under section 26, then, the excess shall, subject to a limit of twenty per cent. of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilised for the purpose of payment of bonus in such manner as may be prescribed by the Central Government.

(2)

Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment under section 26, and there is no amount or sufficient amount carried forward and set on under sub-section (1) which could be utilised for the purpose of payment of the minimum bonus, then, such minimum amount or the deficiency, as the case may be, shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in such manner as may be prescribed by the Central Government.

(3)

The principle of set on and set off as may be provided in rules by the Central Government under this Code shall apply to all other cases not covered by sub-section (1) or sub-section (2) for the purpose of payment of bonus under this Code.

(4)

Where in any accounting year any amount has been carried forward and set on or set off under this section, then, in calculating bonus for the succeeding accounting year, the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account.

Source: The Code on Wages, 2019, official gazette copy, page 16

Adjustment of customary or interim bonus against bonus payable under this Code

In plain words

Puja bonus, other customary bonus, or any part of the bonus paid in advance during the year can be deducted from the bonus due under the Code for that year.

Where in any accounting year,—

(a)

an employer has paid any puja bonus or other customary bonus to employee; or

(b)

an employer has paid a part of the bonus payable under this Code to an employee before the date on which such bonus becomes payable,

then, the employer shall be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him to the employee under this Code in respect of that accounting year and the employee shall be entitled to receive only the balance.

Source: The Code on Wages, 2019, official gazette copy, page 16

Deduction of certain amounts from bonus payable

In plain words

If an employee is found guilty of misconduct that caused the employer a financial loss, the loss can be deducted from that year's bonus, and the employee gets any balance.

Where in any accounting year, an employee is found guilty of misconduct causing financial loss to the employer, then, it shall be lawful for the employer to deduct the amount of loss from the amount of bonus payable by him to the employee under this Code in respect of that accounting year only and the employee shall be entitled to receive the balance, if any.

Source: The Code on Wages, 2019, official gazette copy, page 16

Time limit for payment of bonus

In plain words

Bonus must be credited to the employee's bank account within eight months of the close of the accounting year; the government or an authority it names can extend this on application (extensions totalling no more than two years), and bonus under dispute is due within one month of the award becoming enforceable or the settlement coming into operation.

(1)

All amounts payable to an employee by way of bonus under this Code shall be paid by crediting it in the bank account of the employee by his employer within a period of eight months from the close of the accounting year:

Proviso

Provided that the appropriate Government or such authority as the appropriate Government may specify in this behalf may, upon an application made to it by the employer and for sufficient reasons, by order, extend the said period of eight months to such further period or periods as it thinks fit; so, however, that the total period so extended shall not in any case exceed two years.

(2)

Notwithstanding anything contained in sub-section (1), where there is a dispute regarding payment of bonus pending before any authority, such bonus shall be paid, within a period of one month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute:

Proviso

Provided that if, there is a dispute for payment at the higher rate, the employer shall pay eight and one-third per cent. of the wages earned by the employee as per the provisions of this Code within a period of eight months from the close of the accounting year.

Source: The Code on Wages, 2019, official gazette copy, page 17

Application of this Chapter to establishments in public sector in certain cases

In plain words

A public sector establishment is covered by this chapter in a year when it competes with private firms and that business brings in at least 20% of its gross income; otherwise public sector employees are outside it.

(1)

If in any accounting year an establishment in public sector sells any goods produced or manufactured by it or renders any services, in competition with an establishment in private sector, and the income from such sale or services or both, is not less than twenty per cent. of the gross income of the establishment in public sector for that year, then, the provisions of this Chapter shall apply in relation to such establishment in public sector as they apply in relation to a like establishment in private sector.

(2)

Save as otherwise provided in sub-section (1), nothing in this Chapter shall apply to the employees employed by any establishment in public sector.

Source: The Code on Wages, 2019, official gazette copy, page 17

Non-applicability of this Chapter

In plain words

The chapter applies to establishments with 20 or more people employed on any day of the accounting year. It excludes employees of LIC and RBI, seamen, registered dock workers, establishments under government departments and local authorities, the Red Cross and similar bodies, universities and educational institutions, non-profit hospitals, chambers of commerce and social welfare institutions, inland water transport on routes through another country, public sector financial institutions the Central Government notifies, and establishments the government exempts because of their own profit-sharing schemes.

(1)

Nothing in this Chapter shall apply to––

(a)

employees employed by the Life Insurance Corporation of India;

(b)

seamen as defined in clause (42) of section 3 of the Merchant Shipping Act, 1958;

(c)

employees registered or listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948, and employed by registered or listed employers;

(d)

employees employed by an establishment under the authority of any department of the Central Government or a State Government or a local authority;

(e)

employees employed by––

(i)

the Indian Red Cross Society or any other institution of a like nature including its branches;

(ii)

universities and other educational institutions;

(iii)

institutions including hospitals, chamber of commerce and social welfare institutions established not for purposes of profit;

(f)

employees employed by the Reserve Bank of India;

(g)

employees employed by public sector financial institution other than a banking company, which the Central Government may, by notification, specify, having regard to —

(i)

its capital structure;

(ii)

its objectives and the nature of its activities;

(iii)

the nature and extent of financial assistance or any concession given to it by the Government; and

(iv)

any other relevant factor;

(h)

employees employed by inland water transport establishments operating on routes passing through any other country; and

(i)

employees of any other establishment which the appropriate Government may, by notification, exempt having regard to the overall benefits under any other scheme of profit sharing available in such establishments to the employees.

(2)

Subject to the provisions of sub-section (1) and notwithstanding anything contained in any other provisions of this Chapter, the provisions of this Chapter shall apply to such establishment in which twenty or more persons are employed or were employed on any day during an accounting year.

Source: The Code on Wages, 2019, official gazette copy, page 17

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