Payment of Bonus Act

The payment of Bonus Act, 1965 aims to regulate the amount of bonus to be paid to the persons
employed in establishments based on its profit and productivity. The act is applicable to the
whole of India for all establishments which had twenty or more persons employed on any day
during the year. In this article, we examine the various aspects of Payment of Bonus Act in
detail.

Important points

1) Section 2(4) of this act is regarding the allocable surplus.nup for Free Mock Test

 As per this section, allocable surplus for other than a banking company shall be sixty-
seven per cent of the available surplus in an accounting year.
 Allocable surplus for a banking company shall be sixty per cent of the available surplus
in an accounting year.

2) Direct tax (Section 2(12)) refers to the tax that is chargeable under the following:

 The Income-tax Act.

 The Online Classroom Program Profits Tax Act, 1963.
 The Companies (Profits) Surtax Act, 1964.
 The agricultural income-tax law.
 Any other tax declared by the Central Government.

3) Employee refers to the person (other than an apprentice) who is employed for hire or rewards
to do any skilled or unskilled manual, administrative, supervisory, managerial, technical, or
clerical work on a salary or wage not more than twenty-one thousand rupees per month.

 The terms of employment may be expressed or implied.

4) An establishment in the public sector refers to an establishment that is owned, controlled, or

managed by the following:

 a government company as defined in section 617 of the Companies Act, 1956.

 a corporation wherein not less than forty per cent of its capital is held by the
government or RBI or any corporation owned by the government or RBI.

5) The gross profits shall be calculated in the manner specified in the:

 The first schedule is in the case of a banking company.

 Second Schedule, in any other case.

6) An employer shall pay a bonus in accordance with the provisions of this act to his employee if
he has worked in the establishment for not less than thirty working days in that year.
  If an employee is dismissed from service for fraud, riotous or violent behaviour on the
premises of the establishment or theft, misappropriation, or damaging the property of the
establishment, then that employee shall not be entitled to receive a bonus under this act.
 The employer shall deduct the amount of loss from the bonus payable if an employee is
found guilty of misconduct that causes financial loss to the employer.

7) The minimum bonus payable shall be 8.33 per cent of the salary or wage earned by an
employee during the accounting year or one hundred rupees whichever is higher.

 If an employee has not completed fifteen years of age at the beginning of the
accounting year, the minimum bonus payable shall be 8.33 per cent of the wage or
salary earned by the employee during the accounting year or sixty rupees whichever is
higher.
 The maximum bonus payable to an employee shall be twenty per cent of the salary or
wage earned by an employee during the accounting year.

8) If the salary of an employee exceeds seven thousand rupees or the minimum wage fixed by
the appropriate government (whichever is higher), then the bonus payable to such employee shall
be calculated as if his salary was seven thousand rupees or the minimum wage fixed by the
appropriate government.

9) For the calculation of bonuses, the following are also considered as working days:

 The period for which an employee has been laid off under the Industrial Employment
(Standing Orders) Act, 1946 or the Industrial Disputes Act,1947, or any other applicable
law.
 Has been on leave or on maternity leave with salary or wage.
 Absent due to interim or temporary disablement caused by accident arising out of and in
the course of his employment.

10) If an employer has paid a puja bonus or any other customary bonus or a part of the bonus
before the date, then the employer shall be entitled to deduct the amount of bonus paid from the
amount of bonus payable to the employee under this act.

11) The bonus shall be paid within a month from the date on which the award becomes
enforceable if there is a dispute regarding the payment of the bonus.

 In any other case, the bonus shall be paid within a period of eight months from the close
of the accounting year.

12) If a person violates any of the provisions of this act or fails to comply with the given
direction or requisition, he shall be punishable with a maximum imprisonment of six months
or with a maximum fine of one thousand rupees or with both.

13) The third schedule is regarding the sums deductible from gross profits.
14) The fourth schedule is regarding the set on and set off of allocable surplus for various
accounting years.

Objectives of the Act

The objectives of the Bonus Act (Payment of bonus Act) are as follows:

 To impose a legal responsibility upon the employer of every establishment covered by

the Act to pay the bonus to employees.
 To designate the minimum and maximum percentage of bonus.
 To prescribe the formula for calculating bonus.
 To provide redressal mechanism.

Applicability of the Act

The Payment of Bonus Act implements to the establishments which fall under any of the below
listed:

 It applies to any factory or establishment which had twenty or more workers employed on
any day during the year.
 The act does not apply to the non-profit making organisations.
 It is not applicable to establishments such as LIC, hospitals which are excluded under
Section 32.
 It is not applicable to establishments where employees have signed an agreement with the
employer.
 It is not applicable to establishments exempted by the appropriate government like sick
units.
When is Bonus Act applicability (Section 1)

This act applies to;

•      Every Factory
•      Every Establishment in which 20 or more persons are employed on any day during an
accounting year
•      If less than 20, then this act can be applied by ‘Appropriate Government’ by way of
notification in the official gazette

Once the The Payment of Bonus Act 1956 is applicable, then its ‘Forever Applicable’ even the
number of persons falls below 20.

Definition of Act (Section 2)

Accounting Year, means (section 2(1))

•      Corporation : The Year ending day on which the books of accounts are closed and balanced
•      Company : The period in respect of which the Profit and Loss A/c is prepared
•      Others : Financial year 1st April to 31s March

Employee, means (section 2(2))

•      Any person (other than apprentice)

•      Person who receive Salary or Wage or any remuneration
•      Not exceeding Bonus wage Rs.21,000/- per month
•      In any Industry
•      To do any work
•      For hired on reward
•      Whether the terms of employment are expressed or implied

Employer, means (section 2(14))

•      Salary Includes : Basic and Dearness Allowance

•      Salary Excludes: All Other Allowances, Variable Allowance, Commission, Bonus,
Travelling concession, Ex-gratia Payments, etc.

When is Employee Eligible under Bonus Act (section 8)

Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in
accordance with the provisions of this Act, provided he has worked in the establishment for not
less than thirty (30) working days in that year.

When will Employee Disqualification under this Act (section 9)

An employee is disqualified for bonus, if

•      If he has been dismissed from Services
•      If the reason for dismiss are :
1) Fraud,
2) Riotous or violent behaviour while on the premises of the establishment,
3) Theft, misappropriation or sabotage of any property of the establishment.

What should be the minimum Bonus payable (section 10)

If Employee is 15 years old or more;

•      8.33% of salary or wage, or

•      Rs.100
•      Whichever is Higher

If Employee is below 15 years old;

•      8.33% of salary or wage, or

•      Rs.60
•      Whichever is Higher

What will be Ceiling on Salary or on Wage (section 12)

If the salary or wage exceed Rs.7,000/- per month or Minimum Wages whichever is higher, it
shall be taken as Rs.7,000/- or M.W. (higher amount) per month for computing Bonus.

How is the working days computed for Bonus (Section 14)

While calculating the number of working days, the following shall be treated as ‘Deemed
working Days’
•      Laid off under Industrial Dispute Act
•      Paid Leave Salary
•      Maternity Leave
•      Absent due to temporary disablement

What is Special Provision with respect to NEW Establishment (section 16)

For first 5 years, the Payment of Bonus is NOT compulsory for such establishment, only in
respect of the accounting year in which the employer had not derived any profit.

How is the Bonus Adjusted (Section 17)

If in account year the employer had already paid

•      Puja Bonus
•      Interim Bonus
•      Any Other Bonus
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.

When can Employer deduct certain amount from Bonus Payable (Section 18)

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 Act in respect of that accounting
year only and the employee shall be entitled to receive the balance, if any.

What is the Time-Limit of Payment of Bonus (Section 19)

Within a period of eight months from the close of the accounting year.

Departments, Undertakings and Branches

According to the Bonus Act, any different departments or undertakings or branches of an
establishment of whether located in the same place or at different areas should be considered as
parts of the similar establishment for computation of bonus under the Act.

A separate balance sheet regarding profit and loss of the establishment in the year had to be
prepared and maintained concerning such department or undertaking, or branch should be treated
as a separate establishment for computation of bonus for the year.

Eligibility for Bonus

Any employee is eligible for availing bonus if the following conditions are satisfied:

 The employee receiving salary or wages up to Rs.21,000 per month

 The employee engaged in any work whether skilled, unskilled, managerial, supervisory
etc. 
 The employee who have worked not less than 30 working days in the same year.

Disqualification of Bonus
The employees cannot avail the bonus if any action taken by the management in case of
dishonesty, theft, sabotage of any property of establishment, violent behaviour while on the duty
within premises of the establishment.
Number of Working Days
An employee will be considered “working” in a year if the following conditions are satisfied:

 The employee who is under an agreement or as permitted by standing orders under the
Industrial Employment (Standing Orders) Act, 1946,  the Industrial Disputes Act, 1947 or
any other law applicable to the establishment.
 The employee during employment has taken leave with salary.
 The employee who has been absent due to temporary disablement caused by accident
during the work.
 The employee has been on maternity leave with salary in the accounting year.

Payment of Minimum and Maximum Bonus

 The minimum bonus will be 8.33% of the salary during the year, or
o 100 rupees will be given in case of employees above 15 years and sixty rupees in
the case of employees below 15 years, whichever is higher.
 The maximum bonus is 20% of the salary during the accounting year.

Timeline for Payment of Bonus

The payment of bonus should be paid in cash within eight months from the end of the accounting
year or within a month from the date of enforcement of the act.

Computation of Bonus
As per the Section 4 and Section 7 together with the Schedule 1 and two deal with the calculation
of gross profit and available surplus out of which 67% in case of companies and 60% in other
cases would be allocable surplus.

To compute the available surplus the sums, so deductible from the gross profits are:

 All direct taxes under Section 7

 The sums which are particularised in the schedule
  The allowance for investment or development in which the employer is allowed to deduct
from his income under the Income Tax Act.

Available Surplus = Gross Profit – ( deduct) the following :

 Depreciation is allowable in Section 32 of the Income-tax Act.

 Development Allowance.

Inspectors under Section 20

Section 20 enables the relevant government to appoint Inspectors for this Act after notification in
the official gazette.

Powers of inspectors:

 Making an employer to furnish information.

 Able to visit any establishment at any reasonable time.
 Able to order certain production documents and examine the same.
 Able to take extracts from the records
 To examine the employers, his agent or servant or any other person found in charge of
the establishment.
 To execute such other powers as may be prescribed under the rules.

Duties of the Employer

The following duties to be carried out by the employer:

 To estimate and pay the annual bonus as required under the Act.

To maintain the following registers:

 The register should show the computation of allocating surplus in respective Form.
 The register should be maintained with the payment of the bonus to the employees.
 The records should be maintained before inspection and such other information should be
stored.

Rights of Employers
The following rights to be claimed out by the employers:

 Right to notice any disputes relating to application or interpretation of any provision of

the Act, to the Labour Court or Labour Tribunal.
 Right to make a valid deduction from the bonus due to an employee, such as festival
bonus paid and financial loss created by the misbehaviour of the workers.
  Right to take the bonus of an employee, who has been dismissed from service for
misbehaviour, violent behaviour, fraud, misappropriation or sabotage of any property of
the establishment.

Rights of Employees
The following rights to be claimed out by the employees:

 Right to claim bonus due under the Act and to request an application to the Government
for the redemption of bonus amount which is unpaid, within one year of its being due.
 Right to notice any dispute to the Labour Court/Tribunal.
o Employees who are not eligible for the Payment of Bonus Act, cannot raise a
dispute about the bonus under the Industrial Disputes Act.
 Right to seek clarification and obtain information, on any item in the accounts of the
establishment.

Offences and Penalties

In case of violation of the provisions under the Act or rules, then the penalty is imprisonment for
six months or may impose fine of Rs.1000 or both.

In case of failure to comply with the directions or requisitions made, then the penalty is
imprisonment for six months or may impose fine of Rs.1000 or both.

In case of offences by companies, firms, body corporate or association of individuals, its

director, partner or a principal or officer responsible for the conduct of its business, should be
deemed to be guilty of that offence, unless the person concerned proves that the crime was
committed out of his knowledge or that he exercised all due diligence.