Module 4

Bonus
 The Payment of Bonus Act, 1965.

Meaning of Bonus.
Eligibility for Bonus
Disqualification for bonus
Determination of Bonus
Special Provisions with Respect to Certain  Establishments
Inspectors
Penalties
Offences
Recovery of Bonus due from the Employer
 Meaning of Bonus

• The Dictionary meaning of the word bonus is something to the

good, extra dividend to the  shareholders of a company or
gratuity to  workmen beyond their wages‟. 
• It is the last  meaning of the word which has acquired the 
significance for the labour-management relations  in India. 
• Till recently, bonus was regarded as the  ex-gratia payment made
by the employer to his  workers for the extra effort by them in
production  process. 
• From this limited connotation of the  word, we have travelled a
long way to reach the  stage of enactment of the Payment of
Bonus Act,  1965, which makes this annual payment  obligatory
on the employers.
Eligibility and Disqualification for  Bonus
• Eligibility for bonus: Every employee shall be entitled
to be  paid by his employer in an accounting year,
bonus, in  accordance with the provisions of the Act,
provided he has  worked in the establishment for not
less than 30 working  days in that year. Where an
employee has not worked for  all the working days in
an accounting year, the bonus  payable to him shall
be proportionately reduced.
 Disqualification for bonus
• Disqualification for bonus: Notwithstanding anything 
contained in the Act, an employee shall be disqualified  from
receiving bonus under the Act, if he is dismissed from  service
for:
• Fraud
• Riotous or violent behavior while on the premises of the
• establishment
• Theft, misappropriation or sabotage of any property of  the
establishment.
 Determination of Bonus

• Bonus under the Payment of Bonus Act, 1905,  cannot be

claimed by the workers as a matter of  right. The Bonus
Formula under the Act rests on  the Calculation of the
„available surplus‟ and it  envisage the following steps.
• Computation of Gross profits
• Determination of Available Surplus.
• Allocable Surplus:
• The rules followed for distribution of allocable  surplus are:
• 1. Amount of Bonus: How much to pay, and has to be  paid
even in losses also.
• Minimum Bonus: As per the act that is 8.33% of the  wages or
salary or Rs.100 whichever is higher.
• Maximum Bonus: Bonus at a rate higher than the  minimum is
payable only when the allocable surplus  in a particular
accounting year exceeds the amount  of minimum bonus
payable to employees.
• Maximum bonus paid can be 20% of such salary or  wages.
• 2. Calculation of bonus with respect to certain  employees: If
an employees salary exceeds  Rs.3500 p.m. than for purpose of
calculation of  bonus his salary will be taken as Rs.3500/- p.m.
 Calculation of Bonus
1 Where the salary or wages of an employee  exceeds
Rs.3500 p.m the bonus payable will be  calculated as if
his salary or wages were Rs.3500  p.m.
2 Accordingly, if any employee‟s salary is  Rs.5000p.m.
and the bonus declared by the  employer is 15%, he
will be entitled to the amount  of the bonus of
Rs.6300, calculated in the  following manner:
• =3500 * 15 * 12 = 6300
• 100
• 3.  Set on     & Set of  f      of allocable surplus:
• Set on: In any accounting year if the allocable  surplus exceeds the
amount of maximum bonus  than then the excess will be carried
forward for  being „set on‟ to the succeeding accounting year  and
so on up to and inclusive of the 4th accounting  year.
• Set off: in any accounting year if there is no  allocable surplus , or
where the allocable surplus  falls short of the amount of minimum
bonus, and  there is no amount of sufficient amount carried
• forward and „set on‟ which could be utilize for the  purpose of
payment of minimum bonus. In such  cases, the minimum amount of
deficiency, as the  case may be, shall be carried forward for being
„set-  off‟ in the succeeding accounting year and so on,
4 Proportionate reduction in bonus in certain cases: When  an employee
has not worked for all the working days in  any accounting year, the
minimum bonus of Rs100 or  Rs.60 as the case may be, if such bonus is
higher than the  8.33% of his salary for the days he has worked I that 
accounting year shall be proportionately reduced.
5 Adjustment of customary or interim bonus against bonus payable
under the Act.
6 Deduction of certain amounts from bonus.
7 Time limit for payment of bonus: All amounts, payable to  an
employee by his employer by way of bonus under the  Act, must be
paid in cash. Further, the amount of bonus  must be paid in the
following manner in respect of the  relevant cases:
• In the cases where a dispute regarding the payment of  bonus is
pending before any authority, the amount of  bonus must be paid
within one month from the date on  which the award becomes
enforceable, or settlement  comes into operation, in respect of such
dispute.
• In other cases, however, the amount of bonus must be  paid within a
period of 8 months from the close of the accounting year.
 Special Provisions with respect to  certain
Establishments
• Provision regarding New Establishments: In such  new
establishments, the employees of such  establishments
shall be entitles to be paid bonus  as per the provisions:
• First 5 accounting years: In case of newly  establish
firms, in the first 5 accounting year,  following the
accounting year in which,the  employer sells the goods
produced ,  manufactured by him or render services as
the  case maybe, the bonus shall be payable by such 
firm only in respect of the accounting year in  which the
employer earns profits from such newly  set-up
establishments.
• 6th & 7th Accounting Years: The provision of „set-on‟ 
and „set-off‟ will be allowed for the 5th & 6th year.
• And in case of 7th year again set on and set off will be 
allowed of allocable surplus for 5th, 6th and 7th year.
•
8th Accounting year: From the 8th a/c year, following 
accounting year in which the employer sells the 
goods produced or manufactured by him, or renders 
the services, from such establishment, the
provisions  of the Act will apply in respect of such
establishments  also as they apply in respect of any
other  establishment.
 Bonus Linked with Production or 
Productivity
• In some cases, there maybe an agreement  between the
employee and the employer for  bonus linked to production or
performance before the commencement of Bonus Act 1975,
then such  employees shall be entitled to receive bonus due  to
them under such agreement. 
• But any such  agreement or settlement whereby the employees 
relinquish there right to receive the minimum  bonus, shall be
null & void in so far as it purports  to deprive them of such right. 
• Further, such  employees shall not be entitled to be paid any 
bonus in excess of 20% of the salary or wages  earned by them
during the relevant accounting  year.
 Inspectors
• The appropriate Government may appoint
such  persons as it thinks fit to be Inspectors
for the  purpose of the Act and define the
limits within  which they shall exercise
jurisdiction.
• Powers of the Inspectors: Same that of
Factories  & Wages Act.
 Penalties
• If any person contravenes any of the
provisions of  the Act or any rule made there
under, he shall be  punishable with
imprisonment for a term which  may extend to
6 months, or fine which may  extend to
Rs.1000 or with both.
Recovery of Bonus due from  Employer
• In cases where any amount is due to an  employee
by way of his bonus under an  agreement, a
settlement or an award, the  employee himself or
any other person authorised  by him , or in the case
of death of employee his  assignee or heirs may
make an application to the  appropriate Govt. for
the recovery of the amount  of bonus due to him.
• But such application has to be made within 12 
months of the amount due.