PAYMENT OF BONUS UNDER THE CODE OF WAGES, 2019 AND THE RULES FRAMED THEREUNDER

Chapter IV of the Code on Wages, 2019 provides for the payment of bonus to the employees by the employers and the same is dealt with from section 26 to Section 41.  The  Code on Wages (Central) Rules, 2026 provides the procedures involved in the payment of bonus from Chapter V from Rule 21 to Rule 28.

Eligibility for bonus

In the earlier period bonus is paid to encourage the workers to do their work in a better way.  After some time, it becomes common to pay bonus in every establishment.  There is no guidelines or Act in this regard.  The Payment of Bonus Act was enacted during the year 1965 and also the rules were made there under.  One establishment is to pay bonus to the eligible employees.

The minimum requirement for a worker to get bonus in a year is he has to work for at least 30 days in an accounting year.

The wages ceiling of the employee for receiving bonus has not been prescribed in the Act.  The same will be notified by the appropriate Government.

The establishment is covered by the bonus provisions of the Code i.e., generally establishments employing 20 of more persons, subject to statutory exceptions.

Wage limit

The wages ceiling of the employee for receiving bonus has not been prescribed in the Code. The appropriate Government may fix the limit of wages up to which bonus can be payable.  An agreement may be made between the employer and the workers for the rate of payment of bonus.  Such limit is restricted to 20% of the wages earned by the employee.

Minimum and maximum bonus

The minimum bonus payable is 8.33% of the wages earned by the employee or Rs.100/- whichever is higher.  The maximum bonus payable is 20% of the wages earned by the employee in the respective accounting year.

Demand of excess bonus

 Any demand for bonus in excess of the bonus, 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 shall not exceed 20% of the wages earned by the employee in the accounting year.

Proportionate bonus

If an employee has not worked for all the working days in an accounting year, the bonus will be paid to him proportionate to his working days.   If an employee has not worked for all the working days in an accounting year and if the minimum bonus payable is higher than 8.33% of the wages of the days the bonus for such employee in that accounting year, shall be reduced proportionately.

Computation of working days

An employee shall be deemed to have worked in an establishment in any accounting year on the days which-

• He has been laid off which is allowed by the respective laws;
• He has been on leave with salary and wages;
• He has been absent due to temporary disablement cause by accidence arising out of and in the course of employment;
•  The employee has been on maternity leave with salary or wages during the accounting year.

Disqualification for getting bonus

An employee shall be disqualified from getting bonus in any accounting year if he is dismissed for-

• Fraud; or
• Riotous or violent behaviour while on the premises of the establishment; or
• Theft, misappropriation or sabotage of any property of the establishment; or
• Conviction for sexual harassment.

Department/branches

Where an establishment consists of different departments or has branches, whether situated in the same place of in different places, all such department/branches shall be treated as part of the establishment for the purpose of this Code.  Before the commencement of the accounting year, the departments/branches are to be treated as part of the establishment; otherwise, the same will be treated as separate establishments.

Payment of Bonus to contractual employees

Where in an establishment, the employees are employed through a contractor and the contractor fails to pay the bonus, the company or firm or association or other person, on the written information of such failure given by the employees or any registered trade union or unions of which the employees are members and on confirming such failure, pay minimum bonus to the employees.

Calculation of allocable surplus

The bonus shall be payable out of allocable surplus in profits.  In any accounting year, if there is no profit, the bonus may be paid out of the reserves maintained under the Companies Act, 2013. The calculation of bonus is to be done in the following steps-

Step 1 – The gross profit of the establishment is to be calculated.  In respect of banking companies, the gross profit is to be calculated as per Schedule I.  In respect of establishment other than companies, the gross profit is to be calculated as per Schedule II.

Step II – Deduct prior charges

Step III – Arrive at the available surplus;

Step III – Compute allocable surplus.

Allocable surplus is 60% of the available surplus in respect of banking companies.  In respect of other establishments, the allocable surplus is 67%.  In this regard, the audited accounts of the establishments are not questioned and the same is presumed as correct and calculated according to the relevant provisions.

If there is any dispute on the quantum of bonus the Authorised Authority may call upon the employer to produce the balance sheet and other details. The particulars of the balance sheet and accounting records shall not be disclosed by the Authority unless agreed to by the employer. 

Basic formula for calculation of bonus =Net Profit + Add backs – deductions.

The following are the typical add backs-

1. Provision for bonus;
2. Provision for taxation;
3. Depreciation not admissible.

The following deductions shall be included-

1. Depreciation admissible under the Income Tax Act;
2. Development rebate/Investment allowances;
3. Direct taxes payable;
4. Further sums specified in the Schedule III.

Illustration:

Gross profit of a banking company is Rs.50 lakhs; depreciation – Rs.5 lakhs; direct tax – Rs.10 lakhs; other prior charges – Rs.5 lakhs.

In this case available surplus is = Rs.50 lakhs – Rs. 20 lakhs = Rs.30 lakhs;

Allocable surplus = Rs.30 lakhs * 60% = Rs.18 lakhs.

The bonus is payable to the employees out of allocable surplus Rs.18 lakhs.

Set on/Set off

When the allocable surplus is in excess of maximum bonus payable, i.e., 20%, then the excess amount shall be carried forward to the next year.  This is called as ‘set on’.  When the allocable surplus is less than the minimum bonus payable i.e., 8.33% then the shortfall amount shall be carried forward to the next year.  This is called as ‘set off’.

Interim/Final bonus

Any bonus payable to an employee before the finalisation of account is called as ‘interim bonus’.  The customary bonus or Pooja Bonus is also treated as interim bonus.  The interim bonus is declared by the Board of Directors of the Company.  Final bonus is approved by the shareholders in the Annual General Meeting by means of a special resolution.   The interim bonus paid already will be deducted from the final payment and the balance will be paid to the employees.

Deduction from bonus

If an employee is found guilty of misconduct causing financial loss to  the employer, then the employer shall deduct such loss from the bonus amount paid to the concerned worker. 

Time limit for payment of bonus

Normally the bonus is paid to the employee by crediting the bonus amount in the account of the employee within 8 months from the last date of the financial year  i.e., the bonus shall be payable on or before 30^th November of the respective year.

The appropriate Government, upon an application made to it by the employer and for sufficient reasons, by order, extend the time limit for the payment of bonus to such period as it deems fit.  However, such extension shall not exceed 2 years.

Bonus payable in the first 8 years

In the first 5 years from the date of commencement of the business, bonus may be paid by the employer only in case profit is earned.  For the 6^th 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 5^th and 6^th accounting years. 

 For the 7^th accounting year set on or set off, 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 5^th, 6^th and 7^th accounting years.

An employer shall be deemed to have derived any profit in any accounting year, unless-

• He has made provisions for depreciation;
• The arrears of depreciation and loss incurred by the employer in the previous financial years have been fully set off against the profit;
• The trial conducted by the factory cannot be taken into consideration for the purposes of bonus.  The appropriate Government may decide this issue after giving a reasonable opportunity to the employer concerned.

Non applicability to bonus

The following are not eligible to receive bonus-

• Employees of LIC;
• Seamen as defined  under Section 3(42) of the Merchant Shipping Act, 1958;
• Employees coming under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948;
• Employees of Central Government and State Governments;
• Employees of Red Cross Society, University and other educational institutions, Chamber of Commerce and Social Welfare Institutions running for non profit;
• Employees of Reserve Bank of India.