Payment of Bonus Act, 1965 – FAQ

Coverage: 

1. Any employee who draws salary/wage (Basic+DA) less than Rs. 10,000/- per month will now, following an amendment, be covered as an employee under the Payment of Bonus Act, 1965. (Earlier this limit was Rs. 3,500/- per month [Basic+DA]).
2. The law stipulates that even when the company makes a loss, it is obliged to pay a bonus of 8.33% and whatever the profits, the company cannot pay bonus exceeding 20%. The first is called the Statutory Minimum Bonus and the other is called the Statutory Maximum Bonus. Subject to other provisions of the Act the percentage of bonus varies between these two levels.
3. Therefore, if the calculated bonus was 20% then in past an employee drawing salary/wage between Rs. 2,500/- and Rs. 3,500/- per month would get Rs. 6,000/- as Bonus (i.e. 2500*12*20%) and now he would get Rs. 8,400/- under same conditions (i.e., 3500*12*20%).
4. Deletion of clause (vi) of Section 32 of the Payment of Bonus Act, 1965 so as to cover the employees employed through contractors on building operations.

Thus the employees, including those employed through contractors on building operations will be entitled to receive bonus as per the revised ceilings, for the year 2006-07 and onward.

Applicability of Act (Sec 1)

Every factory wherein 10 or more persons are employed with the aid of power (electricity) or An establishment in which 20 or more persons are employed without the aid of power on any day during an accounting year.

Establishment:

Establishment includes departments, undertakings and branches, etc.

Computation of available surplus (Sec.5):

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

• 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, as the case may be: Provided that where an employer has been paying bonus to his employees under a settlement or an award or agreement made before the 29th May, 1965, and subsisting on that date after deducting from the gross profits notional normal depreciation, then, the amount of depreciation to be deducted under this clause shall, at the option of such employer (such option to be exercised once and within one year from that date) continue to be such notional normal depreciation;
• Any amount by way of 2 [development rebate or investment allowance or development allowance] which the employer is entitled to deduct from his income under the Income Tax Act;
• Subject to the provision of section 7, any direct tax which the employer is liable to pay for the accounting year in respect of his income, profit and gain during that year;

Components of Bonus:

Sec. 2(21): Salary or wages includes dearness allowance but no other allowances e.g. over-time, house rent, incentive or commission.

Separate establishment (Sec. 3) : If profit loss accounts are prepared and maintained in respect of any such department or undertaking or branch, then such department or undertaking or branch is treated as a separate establishment.

Disqualification and Deduction of Bonus: Sec 1:

• On dismissal of an employee for fraud; or
• Riotous or violent behavior while on the premises of the establishment; or
• Theft, misappropriation or sabotage of any property of the establishment; or
• Misconduct of causing financial loss to the employer to the extent that bonus can be deducted for that year.

Computation of gross profits: For banking company, as per First Schedule. Others, as per Second Schedule.

Eligibility of Bonus: An employee will be entitled only when he has worked for 30 working days in that year. Sec. 8

Payment of Minimum Bonus: 8.33% of the salary or Rs.100 (on completion of 5 years after 1st Accounting year even if there is no profit). Sec. 10.

Eligible Employees: – Employees drawing wages up to Rs.10,000/- per month or less. For calculation purposes Rs.3,500 per month maximum will be taken even if an employee is drawing up to Rs.3500 per month. (Sec. 12)

Time Limit for Payment of Bonus: Within 8 months from the close of accounting year. (Sec. 19)

Set-off and Set-on: As per Schedule IV. Sec. 15

Submission of Return: In Form D to the inspector within 30 days of the expiry of time limit under Section 19. Rule 5.

Maintenance of Registers and Records, etc. Sec. 2(21):

• A register showing the computation of the allocable surplus referred to In clause (4) of section 2, in Form A.
• A register showing the set-on and set-off of the allocable surplus, under section 15, in Form B.
• A register showing the details of the amount of bonus due to each of the employees, the deductions under sections 17 and 18 and the amount actually disbursed, In Form C.

Non applicability of the Act: – Act not applicable to certain employees of LIC, General Insurance, Dock Yards, Red Cross, Universities, Educational Institutions, Chambers of Commerce, Social Welfare Institutions. etc. Sec.32.

Penalty:- For contravention of any provision of the Act or the Rules: Up to 6 months or with fine up to Rs.1,000. Sec.28

Payment of Bonus Act, 1965

Construction workers are entitled for bonus by amendment 2007
Liability of contract employees is not with the principal employer.

As per this Act, employer, employing 20 or more employees at any day of financial year/ 10 for factories, is bound to pay bonus provided wages of employee should be below or equal to Rs. 10,000/- per month. Every employee should get minimum of 8.33% of wages, capped at Rs. 3,500/-, even if there is loss and maximum of 20% of wages, capped at Rs. 3,500/-, in an accounting year.

Who are eligible for Bonus?

Every employee whether on probation, part time, contractual, permanent, supervisor or manager whose wage is less than or equal to Rs. 10,000/- and has completed 30 days in an accounting year is eligible for bonus. Apprentice under Apprentice Act are not eligible.

On which salary components Bonus is calculated?

Bonus is calculated on Basic and DA.

Do a startup organization need to pay bonus?

In the first five 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, 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 act in relation to that year but the concept of set off and set on will not apply.

When should a new unit is considered as separate unit?

As per Supreme Court judgment, any unit where Profit and Loss account and Balance sheet are maintained separately should be considered as separate establishment.

What is the concept of set on and set off?

• Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment, then, the excess shall, subject to a limit of 20% 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 utilized for the purpose of payment of bonus.
• 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, and there is no amount of sufficient amount carried forward and set on which could be utilized 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.
• 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.

Example:

In the Example, the total amount of bonus equal to 8.33 per cent of the annual salary or wage payable to all the employees is assumed to be Rs. 1,04,167. Accordingly, the maximum bonus to which all the employees are entitled to the paid (twenty per cent of the annual salary or wage of all the employees) would be Rs. 2,50,000.

Notes-

* Maximum.

+ The balance of Rs. 1,10,000 set on from year-2 lapses.

** Minimum

What is the time limit to pay bonus?

Bonus should be paid within 8 months from end of financial year.

Can Bonus be paid on monthly basis?

Many company follow the practice of paying bonus on monthly basis, some pay minimum 8.33% of Rs. 3,500, i.e. Rs. 292/- or some 20% of Rs. 3,500/- i.e. Rs. 700/- per month.

They do it for achieving following purpose:

• In hand salary of employee will increase as we are paying statutory bonus up front on monthly basis.
• Company liability of bonus payment is taken care of.

Now the question is whether this is a right practice or not? If you go out to find out answer of this question you will get two opinions as follows:

1. Yes, we can do this as there is no mention in the act that we cannot pay it on monthly basis.
2. No, we cannot do this. How can company calculate percentage of bonus to be paid in the starting of financial year? Also when you pay any money on monthly basis it becomes part of your salary which means statutory bonus is yet to be paid. ESI will also be deducted on such payments. If you ask me, I would not recommend paying bonus on monthly basis as it can create problem in future and employer pay need to pay statutory bonus again.

What are the circumstances when an employee is not eligible for bonus?

An employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for —

• fraud; or
• riotous or violent behavior while on the premises of the establishment; or
• theft, misappropriation or sabotage of any property of the establishment.

Which institutions are exempted from payment of bonus?

Hospitals, Social welfare institutions, Chambers of the Commerce, Indian Red Cross society or other institutions of a like nature, universities and educational institutions.

How working days of an employee calculated for computing bonus?

Computation of number of working days.— An employee shall be deemed to have worked in an establishment in any accounting year also on the days on which —

• he has been laid off under an agreement;
• he has been on leave with salary or wage;
• he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and
• the employee has been on maternity leave with salary or wage, during the accounting year.

Interim bonus paid to employee be adjusted against statutory bonus?

When:

• an employer has paid any puja bonus or other customary bonus to an employee; or
• an employer has paid a part of the bonus payable under this Act 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 Act in respect of that accounting year and the employee shall be entitled to receive only the balance.

Organization pay different % of bonus to different set of employees?

No, bonus percentage should be same for every employee who is eligible under the Act. No discrimination.