Payment of Bonus Act, 1965

July 6, 2025

The Payment of Bonus Act, 1965: A Comprehensive Guide

Introduction and Objective

The Payment of Bonus Act, 1965, is a landmark piece of labour legislation in India, enacted with the primary objective of providing for the payment of bonus to persons employed in certain establishments. This Act ensures that employees receive a share in the profits of their employers, thereby fostering industrial peace, enhancing productivity, and providing an additional source of income to the workforce. It reflects the principle that labour should also be a co-sharer in the prosperity of the industry to which it has contributed.

Before the enactment of this Act, bonus payments were largely a matter of custom, agreement, or industrial awards, leading to inconsistencies and frequent disputes. The Act aimed to standardize the payment of bonus, making it a statutory obligation for eligible employers and providing a clear framework for its computation and distribution. It seeks to balance the interests of both employers and employees by linking bonus payments to the profits of the establishment or, in certain cases, to production or productivity.

The Act extends to the whole of India and applies to a wide range of establishments, ensuring a broad coverage of the industrial workforce. It has undergone several amendments since its inception to adapt to changing economic conditions and to address practical challenges in its implementation, most notably the amendments in 2015 that revised the eligibility and calculation limits.

Applicability of the Act

The Payment of Bonus Act, 1965, has a specific scope of application, as outlined in Section 1 of the Act. It applies to:

Every factory: A “factory” as defined under Section 2(m) of the Factories Act, 1948, which generally refers to any premises where a manufacturing process is carried on with the aid of power and ten or more workers are employed, or without the aid of power and twenty or more workers are employed.
Every other establishment in which twenty or more persons are employed on any day during an accounting year: This broad category covers a wide array of commercial, industrial, or agricultural establishments, including shops, commercial establishments, and other organizations that do not fall under the definition of a “factory” but meet the employee threshold.

Important Considerations regarding Applicability:

Once Applicable, Always Applicable: A crucial provision of the Act is that once it applies to an establishment, it continues to be governed by the Act even if the number of persons employed therein falls below twenty (or the specified number for factories) in subsequent years. This ensures continuity and prevents employers from circumventing the Act by reducing their workforce temporarily.
Public Sector Undertakings: The Act also applies to public sector undertakings, unless specifically exempted by the Central Government.
Exempted Establishments: Certain establishments are specifically exempted from the provisions of this Act under Section 32. These typically include:
- Employees of the Life Insurance Corporation of India.
- Employees of general insurance companies.
- Employees of the Reserve Bank of India.
- Employees of financial institutions like IFCI, Deposit Insurance Corporation, Agricultural Refinance Corporation, and other financial corporations established under specific Acts.
- Employees of the Indian Red Cross Society or other educational institutions, institutions (including hospitals, chambers of commerce, and social welfare institutions) established not for purposes of profit.
- Employees employed by a contractor on building operations.
- Employees of any industry controlled by the Central or State Government.
- Employees who have entered into an agreement with their employer for payment of bonus linked to production or productivity in lieu of bonus under this Act, provided such agreement is in accordance with the provisions of the Act.

Key Definitions (Section 2)

Understanding the definitions of key terms used in the Act is crucial for its correct interpretation and application:

“Accounting Year” (Section 2(1)):
- In relation to a corporation, the year ending on the day on which the books and accounts of the corporation are to be closed and balanced.
- In relation to a company, the period in respect of which any profit and loss account of the company laid before it in annual general meeting is made up, whether that period is a year or not.
- In any other case:
  - The year commencing on the 1st day of April; or
  - If the accounts of an establishment maintained by the employer thereof are closed and balanced on any day other than the 31st day of March, then, at the option of the employer, the year ending on the day on which its accounts are so closed and balanced.
“Employee” (Section 2(13)): Any person (other than an apprentice) employed in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical, or clerical work for hire or reward, whether the terms of employment be express or implied. This definition is broad and covers most categories of workers.
“Employer” (Section 2(14)): In relation to an establishment which is a factory, the owner or occupier of the factory, and includes the managing agent of such owner or occupier, and in the case of a company, any director or other person in charge of the management of the factory. In relation to any other establishment, the person who has the ultimate control over the affairs of the establishment, and where the said affairs are entrusted to a manager, managing director or managing agent, such manager, managing director or managing agent.
“Salary or Wage” (Section 2(21)): All remuneration (other than overtime earnings) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment. It specifically includes dearness allowance but excludes:
- The value of any house accommodation, supply of light, water, medical attendance, or any other amenity or any service or of any concessional supply of foodgrains or other articles.
- Any travelling concession.
- Any bonus (other than bonus under this Act).
- Any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the employee under any law for the time being in force.
- Any gratuity payable on the termination of his service.
- Any commission payable to the employee.
- Crucially, for bonus calculation purposes, the “salary or wage” is capped. As per the 2015 amendment, if an employee’s salary or wage exceeds ₹7,000 per month or the minimum wage for the scheduled employment, as fixed by the appropriate government, whichever is higher, the bonus payable to him shall be calculated as if his salary or wage were ₹7,000 per month or the minimum wage, whichever is higher.
“Allocable Surplus” (Section 2(4)): This is a key term for bonus calculation. It means:
- In relation to an employer, being a company other than a banking company, 67% of the available surplus in an accounting year.
- In any other case, 60% of such available surplus.
“Available Surplus” (Section 2(6)): This is the gross profits for the accounting year after deducting certain prior charges.

Eligibility and Disqualification for Bonus (Section 8 & 9)

Eligibility:

Every employee is entitled to be paid bonus by his employer in an accounting year if he has worked in the establishment for not less than thirty working days in that year.

Salary Limit for Eligibility:

As per the 2015 amendment, an employee whose salary or wage does not exceed ₹21,000 per month is eligible for bonus. Previously, this limit was ₹10,000 per month. This amendment significantly expanded the coverage of the Act.

Disqualification (Section 9):

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

Fraud
Riotous or violent behaviour while on the premises of the establishment
Theft, misappropriation or sabotage of any property of the establishment
Misconduct causing financial loss to the employer (in such cases, the employer may deduct the amount of loss suffered from the amount of bonus payable to the employee in respect of that accounting year only, and the balance, if any, after such deduction, shall be paid).

Computation of Gross Profits and Available Surplus (Sections 4, 5, 6, and Schedules)

The Act provides a detailed mechanism for computing the gross profits and available surplus, which are fundamental to determining the bonus payable.

Computation of Gross Profits (Section 4):

Gross profits are computed in different ways depending on the nature of the establishment:

For banking companies: Gross profits are computed in the manner specified in the First Schedule to the Act.
For other companies/establishments: Gross profits are computed in the manner specified in the Second Schedule to the Act.

These schedules provide a standardized format for calculating gross profits by adjusting the profit and loss account figures with specific additions and deductions.

Computation of Available Surplus (Section 5):

The available surplus for any accounting year is the gross profits for that year after deducting certain “prior charges” as specified in Section 6.

Sums Deductible from Gross Profits (Prior Charges) (Section 6):

The following sums are deducted from the gross profits to arrive at the available surplus:

Depreciation: Any amount by way of depreciation admissible under the Income-tax Act or the agricultural income-tax law, as the case may be.
Development Rebate/Investment Allowance/Development Allowance: Any amount by way of development rebate or investment allowance or development allowance which the employer is entitled to deduct from his income under the Income-tax Act.
Direct Taxes: Any direct tax payable by the employer for the accounting year in respect of his income, profits, and gains. This includes income tax, corporation tax, and other taxes on income.
Other Sums Specified in the Third Schedule: This schedule specifies additional sums that can be deducted, such as:
- For a company: Dividends payable on preference share capital, and a certain percentage of its paid-up equity share capital or its reserves.
- For a corporation: Interest on its capital.
- For a firm or a proprietor: Interest on capital, remuneration to partners/proprietor, etc.

After deducting these prior charges from the gross profits, the resulting figure is the “available surplus.”

Minimum and Maximum Bonus (Sections 10 & 11)

The Act mandates both a minimum and a maximum bonus that an employer must pay.

Minimum Bonus (Section 10):

Every employer is required to pay to every employee a minimum bonus of 8.33% of the salary or wage earned by the employee during the accounting year, or ₹100, whichever is higher.

This minimum bonus is payable irrespective of whether the employer has any allocable surplus in the accounting year or not, and even if the establishment has incurred losses.
However, for the first five accounting years following the year in which the employer sells the goods produced or manufactured by him or renders services, the minimum bonus is payable only if there is an allocable surplus. From the sixth accounting year onwards, the minimum bonus is mandatory irrespective of profit or loss.

Maximum Bonus (Section 11):

If in any accounting year the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer shall pay to every employee a bonus in proportion to the salary or wage earned by him during the accounting year, subject to a maximum of 20% of such salary or wage.

In computing the allocable surplus for the purpose of the maximum bonus, the amount “set on” or “set off” (explained below) from previous years is taken into account.

Calculation of Bonus

The calculation of bonus involves several steps, considering the eligibility, salary cap, and the minimum/maximum limits.

Key Points for Calculation:

Salary Cap: As mentioned under “Salary or Wage” definition, for bonus calculation, if an employee’s actual salary or wage exceeds ₹7,000 per month (or the minimum wage, whichever is higher), the bonus is calculated as if their salary or wage were ₹7,000 per month (or the minimum wage, whichever is higher). This means the maximum salary considered for bonus calculation is ₹7,000 per month.
Annual Calculation: The bonus is calculated on the total eligible salary/wage earned during the entire accounting year.

Formula:

For employees whose (Basic Salary + Dearness Allowance) is ≤ ₹7,000 per month: Bonus = (Actual Basic Salary + Dearness Allowance) per month × 12 months × Bonus Rate (8.33% to 20%)
For employees whose (Basic Salary + Dearness Allowance) is > ₹7,000 per month (but ≤ ₹21,000 per month for eligibility): Bonus = ₹7,000 per month × 12 months × Bonus Rate (8.33% to 20%)

Examples:

Example 1: Employee A (Salary within cap)

Monthly Basic + DA = ₹6,000
Bonus Rate = 8.33% (minimum)
Annual Eligible Salary = ₹6,000 × 12 = ₹72,000
Bonus Payable = ₹72,000 × 8.33% = ₹5,997.60

Example 2: Employee B (Salary above cap, but eligible)

Monthly Basic + DA = ₹15,000
Bonus Rate = 15% (declared by employer)
Annual Eligible Salary (capped) = ₹7,000 × 12 = ₹84,000
Bonus Payable = ₹84,000 × 15% = ₹12,600

Example 3: Employee C (Salary above eligibility limit)

Monthly Basic + DA = ₹25,000
Result: Not eligible for bonus under the Act, as salary exceeds ₹21,000 per month.

Set On and Set Off of Allocable Surplus (Section 15 and Fourth Schedule)

To ensure stability in bonus payments and to prevent wide fluctuations from year to year, the Act provides for a mechanism of “set on” and “set off” of the allocable surplus. This mechanism allows for carrying forward excess surplus from a good year to a lean year, and carrying forward deficiencies from a lean year to a good year.

Set On: If in any accounting year, the allocable surplus exceeds the maximum bonus payable to the employees (20% of their total salary/wage), then the excess amount, up to a maximum of 20% of the total salary or wage of the employees for that year, can be carried forward to the next accounting year for being “set on.” This carried-forward amount is added to the allocable surplus of the subsequent year for bonus calculation. This can be done for up to four subsequent accounting years.
Set Off: If in any accounting year, there is no allocable surplus, or the allocable surplus is insufficient to pay the minimum bonus (8.33%), then the amount of deficiency is carried forward to the next accounting year for being “set off.” This carried-forward deficiency is deducted from the allocable surplus of the subsequent year. This can also be done for up to four subsequent accounting years.

The Fourth Schedule to the Act provides a detailed table and rules for the application of the set on and set off principles. The principle is that the amount carried forward from the earliest accounting year shall first be taken into account.

Time Limit for Payment of Bonus (Section 19)

The Act specifies a clear timeframe within which the bonus must be paid to the employees:

General Rule: The bonus must be paid within a period of eight months from the close of the accounting year.
In case of Dispute: If there is a dispute regarding the payment of bonus pending before any authority (e.g., Labour Court, Tribunal, or Arbitrator), the bonus must be paid within one month from the date on which the award becomes enforceable or the settlement comes into operation.

Deductions from Bonus (Section 18)

Where an employee is found guilty of misconduct causing financial loss to the employer, the employer can deduct the amount of loss suffered by him from the amount of bonus payable to the employee in respect of that accounting year only. The balance, if any, after such deduction, shall be paid to the employee.

Offences and Penalties (Sections 28 & 29)

The Act provides for penalties for non-compliance to ensure its enforcement.

Failure to Comply with the Act or Rules (Section 28): Any employer who contravenes any of the provisions of this Act or any rule made thereunder, or fails to comply with any direction or requisition made under this Act, shall be punishable with imprisonment for a term which may extend to six months, or with a fine which may extend to one thousand rupees, or with both.
Offences by Companies (Section 29): If the person committing an offence under this Act is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. However, such a person shall not be liable to any punishment if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

Maintenance of Registers, Records, etc. (Section 26)

Every employer is required to prepare and maintain such registers, records, and other documents in such form and in such manner as may be prescribed. The rules framed under the Act specify the forms for these records, including:

Form A: For the computation of the allocable surplus.
Form B: For the set-on and set-off of allocable surplus.
Form C: For the details of bonus payments, deductions, and disbursements to employees.

These records are crucial for ensuring transparency and compliance with the Act and are subject to inspection by the appropriate authorities.

Amendments and Their Impact

The Payment of Bonus Act, 1965, has been amended multiple times to reflect economic changes and address practical issues. The most significant recent amendments came into effect from the accounting year 2014-15:

Increase in Eligibility Limit: The wage ceiling for eligibility for bonus was increased from ₹10,000 per month to ₹21,000 per month. This brought a larger section of the workforce under the purview of the Act.
Increase in Calculation Cap: The salary or wage limit for calculation of bonus was increased from ₹3,500 per month to ₹7,000 per month or the minimum wage for the scheduled employment, whichever is higher. This resulted in a higher bonus amount for eligible employees.

These amendments were aimed at providing greater financial benefits to employees in line with rising living costs and wages.

Conclusion

The Payment of Bonus Act, 1965, remains a cornerstone of labour welfare legislation in India. By mandating bonus payments and providing a structured framework for their calculation and distribution, it plays a vital role in ensuring fair financial benefits for employees, promoting industrial harmony, and recognizing labour’s contribution to an establishment’s success. Employers must ensure strict compliance with its provisions, including maintaining proper records and adhering to the prescribed timelines, to avoid legal consequences. The Act, with its periodic amendments, continues to evolve to meet the contemporary needs of the Indian workforce and industrial landscape.

Frequently Asked Questions (FAQs) about The Payment of Bonus Act, 1965

Here are 20 frequently asked questions regarding the Payment of Bonus Act, 1965:

What is the primary objective of the Payment of Bonus Act, 1965? The Act aims to provide for the payment of bonus to persons employed in certain establishments, based on profits or production/productivity, ensuring employees share in the prosperity of their employers.
To which establishments does the Payment of Bonus Act apply? It applies to every factory and every other establishment in which twenty or more persons are employed on any day during an accounting year.
If an establishment once covered by the Act later has fewer than 20 employees, does the Act still apply? Yes, once the Act applies to an establishment, it continues to be governed by it, even if the number of employees falls below twenty in subsequent years.
What is the eligibility criteria for an employee to receive a bonus under the Act? An employee is eligible if their salary or wage does not exceed ₹21,000 per month and they have worked for not less than thirty working days in the accounting year.
What is included in “salary or wage” for bonus calculation purposes? It includes basic salary and dearness allowance. It excludes overtime pay, HRA, incentives, commissions, and employer contributions to PF/pension funds.
What is the maximum salary considered for bonus calculation if an employee earns more? If an employee’s salary or wage exceeds ₹7,000 per month (or the minimum wage, whichever is higher), the bonus is calculated as if their salary or wage were ₹7,000 per month.
What is the minimum bonus an employer must pay? The minimum bonus is 8.33% of the salary or wage earned by the employee during the accounting year, or ₹100, whichever is higher.
Is the minimum bonus payable even if the establishment incurs losses? Yes, generally, the minimum bonus of 8.33% is mandatory irrespective of profit or loss, except for the first five accounting years of a new establishment.
What is the maximum bonus an employer can pay? The maximum bonus payable is 20% of the salary or wage earned by the employee during the accounting year.
What is “Gross Profits” under the Act? Gross profits are computed as per the First Schedule (for banking companies) or the Second Schedule (for other establishments) by making specific adjustments to the profit and loss account.
What is “Available Surplus”? Available surplus is the gross profits for the accounting year after deducting certain prior charges like depreciation, direct taxes, and other sums specified in the Third Schedule.
What is “Allocable Surplus”? Allocable surplus is a percentage of the available surplus (67% for banking companies, 60% for others) that is actually distributed as bonus.
Can an employee be disqualified from receiving a bonus? Yes, an employee can be disqualified if dismissed for fraud, riotous/violent behaviour, theft, misappropriation, sabotage, or misconduct causing financial loss to the employer.
What is the “set on” provision in the Act? “Set on” allows an employer to carry forward excess allocable surplus (beyond the 20% maximum bonus) from a profitable year to subsequent years (up to four years) to be utilized for bonus payments.
What is the “set off” provision in the Act? “Set off” allows an employer to carry forward a deficiency in allocable surplus (when it’s insufficient for minimum bonus) from a lean year to subsequent years (up to four years) to be adjusted against future surpluses.
What is the time limit for paying the bonus to employees? Generally, the bonus must be paid within eight months from the close of the accounting year. If there’s a dispute, it’s one month from the award becoming enforceable.
Can an employer make deductions from the bonus payable to an employee? Yes, if an employee is dismissed for misconduct causing financial loss to the employer, the amount of loss can be deducted from the bonus for that specific accounting year.
What are the penalties for non-compliance with the Act? Non-compliance can lead to imprisonment for up to six months, or a fine up to ₹1,000, or both, for the employer and responsible persons in a company.
Are there any establishments exempted from the Act? Yes, certain establishments like LIC, RBI, educational institutions not for profit, and specific financial institutions are exempted under Section 32.
What was the impact of the 2015 amendments to the Act? The 2015 amendments significantly increased the eligibility limit for bonus from ₹10,000 to ₹21,000 per month and the calculation cap from ₹3,500 to ₹7,000 per month (or minimum wage, whichever is higher), expanding coverage and increasing bonus amounts for many employees.

Disclaimer

The information provided in this document regarding the Payment of Bonus Act, 1965, is for general informational purposes only. While every effort has been made to ensure the accuracy and completeness of the content, it is not intended to constitute legal advice and should not be relied upon as such.

Labour laws, including the Payment of Bonus Act, are complex and subject to interpretation, amendments, and specific case law. The application of the Act can vary based on the specific facts and circumstances of an establishment and its employees.

Therefore, readers are strongly advised to:

Consult with a qualified legal professional or labour law expert for advice pertaining to their specific situation or for any legal interpretation of the Act.
Refer to the official gazette notifications and the latest amended text of the Payment of Bonus Act, 1965, and relevant rules for the most accurate and up-to-date information.
Not take any action or refrain from action based solely on the information contained herein without seeking independent professional legal counsel.

The author and publisher of this document disclaim all liability for any loss or damage, direct or indirect, arising from the use of, or reliance on, the information provided herein.