Payment of Bonus: Eligibility, Computation and Payment

Read the whole Chapter as a floor, a ceiling and a formula between them.

Some words this chapter uses

Accounting year is the year by reference to which the employer's accounts are made up. Bonus is calculated for an accounting year, not for a calendar year or a wage period.

Gross profits are the employer's profits for the accounting year, computed in the manner prescribed by the Central Government under section 32.

Available surplus is what is left of the gross profits after the prior charges in section 34 are deducted, with the section 33 proviso adding back a direct-tax difference.

Allocable surplus is the share of the available surplus that goes to bonus: sixty per cent. for a banking company, sixty-seven per cent. for anyone else.

Set on is carrying forward a surplus that exceeded the maximum bonus, so a good year helps a later bad one. Set off is carrying forward a deficiency, so a bad year is made good later.

Eight and one-third per cent. is one twelfth, which is why the floor is often described as "one month's wages".

Section 26: eligibility, the floor and the ceiling

Section 26(1) is the operative provision and every phrase in it is examinable.

There shall be paid to every employee, drawing wages not exceeding such amount per mensem, as determined by notification, by the appropriate Government, by his employer, who has put in at least thirty days work in an accounting year, an annual minimum bonus calculated at the rate of eight and one-third per cent. of the wages earned by the employee or one hundred rupees, whichever is higher whether or not the employer has any allocable surplus during the previous accounting year.

Four conditions and one guarantee.

Who. Every employee as defined in section 2(k), drawing wages not exceeding such amount per mensem as the appropriate Government determines by notification. The Code does not state the figure. That is a change of drafting style worth noticing: the eligibility ceiling is now a notified figure that can be revised without amending the statute.

How long. At least thirty days work in the accounting year. Not thirty days of employment: thirty days work, and section 28 then deems certain non-working days to be days worked.

How much, at the least. Eight and one-third per cent. of the wages earned, or one hundred rupees, whichever is higher. Eight and one-third per cent. is exactly one twelfth, so the floor is one month's wages for a full year worked.

And the guarantee: whether or not the employer has any allocable surplus. The minimum bonus is not conditional on profit. This is the single most quoted phrase in the Chapter.

Section 26(2): the calculation ceiling. Where an employee's wages exceed the notified amount, the bonus under sub-sections (1) and (3) is calculated as if his wage were that notified amount or the minimum wage fixed by the appropriate Government, whichever is higher.

Distinguish the two notified figures carefully, because students routinely merge them. The figure in 26(1) decides who is eligible. The figure in 26(2) decides on what sum a high earner's bonus is computed. A worker above the second figure is still entitled; his bonus is simply computed on a notional wage.

Section 26(3): the ceiling. Where the allocable surplus exceeds the minimum bonus payable, the employer is bound to pay, in lieu of the minimum bonus, an amount in proportion to the wages earned, subject to a maximum of twenty per cent. of those wages.

So the band is 8 1/3 per cent. to 20 per cent. Below the floor, never. Above the ceiling, never, whatever the surplus.

Section 26(4): in computing the allocable surplus, the amounts set on or set off under section 36 are taken into account.

Section 26(5): productivity-linked bonus. Any demand for bonus in excess of the minimum, on the basis of production or productivity, is to be settled by agreement or settlement between employer and employees, subject to the condition that the total bonus including the minimum shall not exceed twenty per cent. So collective bargaining may choose the basis of the bonus but cannot break the statutory ceiling.

Sections 26(6) to (9): new establishments. For the first five accounting years following the year in which the employer first sells the goods produced or renders the services, bonus is payable only in respect of an accounting year in which the employer derives profit from the establishment, and is calculated without applying section 36, that is without set on or set off. For the sixth and seventh years, section 36 applies with modifications that look back over the fifth, sixth and seventh years. From the eighth accounting year the Chapter applies normally.

Explanation 1 stops an employer claiming a paper profit: he is not deemed to have derived profit unless he has made provision for that year's depreciation under the Income-tax Act or the agricultural income tax law, and the arrears of depreciation and past losses of the establishment have been fully set off against his profits.

Explanation 2 excludes sales made during the trial running of a factory or the prospecting stage of a mine or oil-field from the reckoning, and gives the appropriate Government the power to decide any question about it after a reasonable opportunity to the parties.

Section 26(9) applies this infancy protection to new departments, undertakings or branches set up by existing establishments.

Sections 27 and 28: incomplete years and days deemed worked

Section 27: where an employee has not worked for all the working days in an accounting year, the minimum bonus under section 26(1), if it is higher than eight and one-third per cent. of the wages of the days he actually worked, shall be proportionately reduced.

Section 28 then softens that by deeming the employee to have worked on days on which:

• (a) he was laid off under an agreement, or as permitted by standing orders under the Industrial Employment (Standing Orders) Act 1946, or under the Industrial Disputes Act 1947, or any other law applicable to the establishment;
• (b) he was on leave with salary or wages;
• (c) he was absent due to temporary disablement caused by an accident arising out of and in the course of his employment; and
• (d) he was on maternity leave with salary or wages.

Flag the drafting. Clause (a) names the Standing Orders Act 1946 and the Industrial Disputes Act 1947, both of which stand repealed by section 103 of the Industrial Relations Code 2020. The same artefact appears in section 18(2)(k), which still names the Trade Unions Act 1926. The Codes were enacted in successive sittings and the cross-references were not conformed. The provisions still work, because a lay-off permitted under the corresponding provisions of the Industrial Relations Code answers the same description, but it is a legitimate criticism and an examiner rewards noticing it.

The four clauses share a principle. A worker off the job through the employer's decision (lay-off), the contract's own terms (paid leave), an employment injury, or childbirth, is not to lose bonus for it.

Section 29: disqualification

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

(a) fraud; or

(b) riotous or violent behaviour while on the premises of the establishment; or

(c) theft, misappropriation or sabotage of any property of the establishment; or

(d) conviction for sexual harassment.

Read the opening words closely, because they contain two limits. The employee must have been dismissed from service, and dismissed for one of the four listed grounds. A worker who resigns, or who is dismissed for some other misconduct, or who is punished short of dismissal, is not disqualified. Nor does misconduct by itself disqualify: it must have produced a dismissal on one of these four grounds.

Clause (d) is new against the 1965 Act's list and requires a conviction, not merely a finding in a domestic inquiry.

Section 29 disqualifies; section 38 merely deducts. Where an employee is found guilty of misconduct causing financial loss to the employer, section 38 makes it lawful to deduct the amount of the loss from the bonus payable in respect of that accounting year only, and the employee receives the balance. So loss-causing misconduct reduces the bonus; the four grounds in section 29 destroy it.

Sections 30 to 36: the arithmetic

Section 30: what counts as one establishment. Where an establishment has different departments, undertakings or branches, whether in the same place or different places, all of them are parts of the same establishment for computing bonus. Proviso: where a separate balance sheet and profit and loss account are prepared and maintained for a department, undertaking or branch for an accounting year, it is treated as a separate establishment for that year, unless it was, immediately before the beginning of that accounting year, treated as part of the establishment for computing bonus.

The proviso and its exception matter. Without the proviso an employer could hide a profitable unit inside a loss-making group. Without the exception to the proviso, he could split off a unit the moment it turned unprofitable. The rule therefore is: separate accounts make a separate establishment, but you may not change the treatment to suit the year.

Section 31: the allocable surplus. Bonus is paid out of the allocable surplus, which is:

• sixty per cent. of the available surplus in the case of a banking company; and
• sixty-seven per cent. of the available surplus in the case of any other establishment.

Section 31(2): audited accounts of companies shall not normally be questioned. Section 31(3): where the quantum of bonus is disputed, the authority notified by the appropriate Government having jurisdiction may call upon the employer to produce the balance sheet, but shall not disclose any information contained in it unless the employer agrees.

Those two sub-sections are the compromise between transparency and commercial confidence, and they are frequently criticised: a union that may not see what the balance sheet contains is poorly placed to dispute the quantum computed from it.

Sections 32 to 35: getting to the available surplus.

• Section 32: gross profits are computed in the manner prescribed by the Central Government, separately for a banking company and for any other case.
• Section 33: the available surplus is the gross profits after deducting the sums referred to in section 34. The proviso adds, for accounting years after the Code's commencement, an amount equal to the difference between the direct tax on the previous year's gross profits and the direct tax on those gross profits after deducting the bonus paid or payable for that year. That difference is the tax the employer saved because bonus is deductible, and it is put back into the pool.
• Section 34: the prior charges deductible from gross profits are depreciation admissible under section 32(1) of the Income-tax Act or the agricultural income-tax law; any direct tax the employer is liable to pay for the accounting year, subject to section 35; and such further sums as may be prescribed.
• Section 35: rules for computing that direct tax, of which the important ones are that no account is taken of a carried-forward loss of a previous accounting year, and none of arrears of depreciation carried forward under section 32(2) of the Income-tax Act.

The point of section 35(a) is to stop past losses from wiping out the current year's bonus. The employer may carry those losses forward for tax; he may not use them to reduce the pool from which bonus is paid.

Section 36: set on and set off.

• 36(1) set on: where the allocable surplus exceeds the maximum bonus payable under section 26, the excess, subject to a limit of twenty per cent. of the total wages of the employees in that accounting year, is carried forward to be set on in the succeeding year and so on up to and inclusive of the fourth accounting year.
• 36(2) set off: where there is no available surplus, or the allocable surplus falls short of the minimum bonus, and there is nothing sufficient set on, the deficiency is carried forward to be set off in the succeeding year and so on up to and inclusive of the fourth accounting year.
• 36(3): the principle applies, as prescribed, to all other cases.
• 36(4): in calculating bonus for a succeeding year, the set on or set off carried forward from the earliest accounting year is taken into account first.

Set on and set off are a four-year smoothing mechanism, and sub-section (4) makes it first-in-first-out. The twenty per cent. limit in sub-section (1) prevents an employer banking an unlimited surplus against future obligations.

Sections 37 to 39: adjustments and time

Section 37: customary and interim bonus. Where in an accounting year the employer has paid a puja bonus or other customary bonus, or has paid part of the statutory bonus before it became due, he may deduct that amount from the bonus payable, and the employee receives only the balance.

Section 38: deduction for loss-causing misconduct, as explained above, and confined to that accounting year only.

Section 39: time limit. All amounts payable by way of bonus shall be paid by crediting them to the employee's bank account within eight months from the close of the accounting year. The appropriate Government or a specified authority may, on the employer's application and for sufficient reasons, extend that period, but the total extended period shall not exceed two years.

39(2): where a dispute regarding payment of bonus is pending before any authority, the bonus is paid within one month from the date on which the award becomes enforceable or the settlement comes into operation. Proviso: if the dispute is about payment at a higher rate, the employer must still pay eight and one-third per cent. of the wages within eight months from the close of the accounting year.

That proviso is the practically important one. An employer cannot withhold the whole bonus by disputing the rate. The undisputed floor is payable on time and only the excess awaits the outcome. Note also that section 39(1) requires bank credit, matching section 15(3)'s treatment of wages generally: cash bonus is no longer contemplated.

Sections 40 and 41: who the Chapter applies to

Section 40: public sector. If in an accounting year an establishment in the public sector sells goods or renders services in competition with an establishment in the private sector, and the income from that sale or those services is not less than twenty per cent. of its gross income for the year, the Chapter applies to it as it applies to a like private-sector establishment. Save as so provided, nothing in the Chapter applies to employees of a public sector establishment.

Section 41(1): the Chapter does not apply to employees of the Life Insurance Corporation; seamen as defined in section 3(42) of the Merchant Shipping Act 1958; dock workers registered or listed under a scheme under the Dock Workers (Regulation of Employment) Act 1948 and employed by registered or listed employers; employees of establishments under the authority of any department of the Central or a State Government or a local authority; employees of the Indian Red Cross Society or a like institution, universities and other educational institutions, and institutions including hospitals, chambers of commerce and social welfare institutions established not for profit; employees of the Reserve Bank of India; employees of public sector financial institutions other than banking companies which the Central Government specifies, having regard to capital structure, objectives, Government assistance and other factors; employees of inland water transport establishments operating on routes passing through another country; and employees of any other establishment the appropriate Government exempts having regard to profit-sharing benefits already available there.

Section 41(2) then sets the threshold: subject to sub-section (1), and notwithstanding anything else in the Chapter, the Chapter applies to establishments in which twenty or more persons are employed or were employed on any day during an accounting year.

Section 41(2) is the answer to "does Chapter IV apply to this establishment?" and it is the only place in the Code on Wages where a numerical threshold appears. Chapters II and III, minimum wages and payment of wages, apply to all establishments and all employees. Bonus alone has a twenty-worker floor, and "were employed on any day during an accounting year" means a single day at twenty is enough for the year.

A worked example

The facts. A garment manufacturer employs 40 workers. Anita earns wages of 15,000 rupees a month, works the whole accounting year, and her annual wages are 1,80,000 rupees. Assume she is below the notified eligibility ceiling in section 26(1) and below the calculation figure in section 26(2), so no notional wage arises.

Step one: does the Chapter apply? Yes. Section 41(2): twenty or more persons employed. The establishment is not in any excluded class under section 41(1).

Step two: is Anita eligible? She has put in far more than thirty days work, so yes under section 26(1).

Step three: the floor. Eight and one-third per cent. of 1,80,000 is one twelfth, that is 15,000 rupees, which is higher than one hundred rupees. She is entitled to 15,000 rupees whether or not the employer has any allocable surplus.

Step four: the ceiling. Twenty per cent. of 1,80,000 is 36,000 rupees. Whatever the employer earned, she cannot receive more than that as statutory bonus, and by section 26(5) even a productivity agreement cannot take the total past it.

Step five: where in the band? Suppose the gross profits, after the section 34 prior charges and the section 33 proviso, leave an available surplus of 30,00,000 rupees. The employer is not a banking company, so by section 31(1) the allocable surplus is sixty-seven per cent., that is 20,10,000 rupees. Suppose the total annual wages of all 40 employees come to 72,00,000 rupees. The maximum bonus for all of them is twenty per cent. of that, 14,40,000 rupees. The allocable surplus exceeds it, so section 26(3) requires the full twenty per cent., and Anita receives 36,000 rupees.

Step six: the excess. The allocable surplus of 20,10,000 exceeds the maximum bonus of 14,40,000 by 5,70,000 rupees. By section 36(1) that excess is set on, subject to a limit of twenty per cent. of the total wages, and carried forward for up to four accounting years.

Now change the facts. The next year the establishment makes a loss and there is no available surplus at all. The minimum bonus is still payable: section 26(1), whether or not there is an allocable surplus. Anita gets 15,000 rupees. And because there is a set on from the previous year, it is drawn on first under section 36(4). Had there been no set on, the deficiency would be set off against the next four years under section 36(2).

Three further variations.

Anita worked only seven months. By section 27 the minimum bonus is proportionately reduced, but by section 28 the days she was on paid leave, on maternity leave with wages, laid off, or absent through a temporary disablement from an employment accident, count as days worked.

Anita was paid a puja bonus of 4,000 rupees in October. By section 37 the employer deducts it and pays the balance.

Anita is dismissed in March for theft of the establishment's property. By section 29(c) she is disqualified from receiving bonus. Had she instead been found guilty of negligence causing a loss of 3,000 rupees but not dismissed, section 38 would allow that 3,000 to be deducted from the bonus for that accounting year only, and she would receive the balance.

What this does NOT mean

It does not mean bonus depends on profit. The minimum bonus under section 26(1) is payable whether or not the employer has any allocable surplus. Only the amount above the floor depends on the surplus.

It does not mean an employee above the notified wage gets nothing. Section 26(2) computes his bonus on a notional wage, the notified amount or the minimum wage, whichever is higher.

It does not mean thirty days of employment. Section 26(1) requires thirty days work, and section 28 tells you which non-working days count.

It does not mean any misconduct disqualifies. Section 29 requires dismissal for one of four grounds. Other misconduct causing financial loss only permits a deduction under section 38, for that year alone.

It does not mean a productivity agreement can exceed twenty per cent. Section 26(5) caps the total.

It does not mean a disputed bonus need not be paid. The proviso to section 39(2) requires eight and one-third per cent. within eight months even while the rate is in dispute.

It does not mean every establishment pays bonus. Section 41(2) confines the Chapter to establishments employing twenty or more persons on any day in the accounting year, and section 41(1) excludes ten classes outright.

Limits, criticism and amendments

Chapter IV is the Payment of Bonus Act 1965 carried forward with few changes of substance, and the criticisms of that Act carry forward with it.

The twenty-worker threshold in section 41(2) is the largest one. Chapters II and III were deliberately made universal, and the Code's own Statement of Objects speaks of extending statutory protection to all employees. Bonus alone retains a numerical floor, so the very workers in the smallest establishments, who are least able to save, are outside it.

The accounting provisions are opaque to the people they benefit. Section 31(2) says audited accounts "shall not normally be questioned", and section 31(3) forbids the authority from disclosing what the balance sheet contains without the employer's consent. A union disputing quantum is asked to challenge a figure it may not see the basis of.

The floor has not moved. Eight and one-third per cent. and one hundred rupees are the 1965 figures. The hundred-rupee alternative is now of no practical effect.

The cross-references were not conformed. Section 28(a) still routes lay-off through the Standing Orders Act 1946 and the Industrial Disputes Act 1947, both repealed by section 103 of the Industrial Relations Code 2020, exactly as section 18(2)(k) still names the Trade Unions Act 1926.

Against that, three improvements are real. Section 26(1)'s eligibility figure is now notified rather than enacted, so it can be revised without amending the statute. Section 39(1) requires payment by bank credit, which creates a record. And the proviso to section 39(2) stops an employer from using a dispute about the rate as a reason to pay nothing.

Quick revision

• Section 26(1): minimum bonus, eight and one-third per cent. of wages earned or one hundred rupees, whichever is higher, to every employee below the notified wage who has put in thirty days work, payable whether or not the employer has any allocable surplus.
• Section 26(2): an employee above the notified figure has his bonus computed as if his wage were that figure or the minimum wage, whichever is higher.
• Section 26(3): where the allocable surplus exceeds the minimum, bonus in proportion to wages, maximum twenty per cent. Section 26(5): even a production or productivity agreement cannot exceed twenty per cent.
• Section 26(6) to (9): new establishments pay bonus only in a year of profit for the first five years, without set on or set off; sections 26(7) and (8) phase section 36 in over the sixth to eighth years.
• Section 27: proportionate reduction for an incomplete year. Section 28: days deemed worked, lay-off, paid leave, temporary disablement from an employment accident, and paid maternity leave.
• Section 29: disqualification where dismissed for fraud, riotous or violent behaviour on the premises, theft, misappropriation or sabotage, or conviction for sexual harassment.
• Section 30: departments and branches are one establishment, unless separate accounts are maintained, and even then not if they were previously treated as part.
• Section 31: allocable surplus is sixty per cent. of available surplus for a banking company and sixty-seven per cent. for others. Audited accounts not normally questioned; the balance sheet's contents not disclosed without consent.
• Sections 32 to 35: gross profits as prescribed; available surplus is gross profits less the section 34 prior charges, plus the direct-tax difference under the section 33 proviso; carried-forward losses and arrears of depreciation are ignored in computing that tax.
• Section 36: set on the excess over maximum bonus, capped at twenty per cent. of total wages, and set off a deficiency, each for up to four accounting years, earliest first.
• Section 37: puja, customary and interim bonus are adjustable. Section 38: loss from misconduct deductible, that accounting year only.
• Section 39: credited to the bank account within eight months of the close of the accounting year, extendable to a total of two years; where a dispute is pending, one month from the award or settlement, but eight and one-third per cent. must still be paid within eight months.
• Section 40: public sector covered where it competes with the private sector and that income is at least twenty per cent. of gross income. Section 41(1): ten excluded classes. Section 41(2): the Chapter applies where twenty or more persons are employed on any day in the accounting year.

Test yourself

1. Who is entitled to the minimum bonus, and at what rate? Under section 26(1) of the Code on Wages 2019, every employee drawing wages not exceeding such amount per mensem as the appropriate Government determines by notification, who has put in at least thirty days work in an accounting year, is entitled to be paid by his employer an annual minimum bonus calculated at eight and one-third per cent. of the wages earned by him or one hundred rupees, whichever is higher. The entitlement arises whether or not the employer has any allocable surplus during the previous accounting year. Where the wages exceed the notified amount, section 26(2) directs that the bonus be calculated as if the wage were that notified amount or the minimum wage fixed by the appropriate Government, whichever is higher.

2. When is a bonus higher than the minimum payable, and what is the ceiling? Under section 26(3), where in respect of an accounting year the allocable surplus exceeds the amount of minimum bonus payable, the employer is bound to pay, in lieu of the minimum bonus, an amount in proportion to the wages earned by the employee during that year, subject to a maximum of twenty per cent. of those wages. By section 26(4) the amounts set on or set off under section 36 are taken into account in computing the allocable surplus, and by section 26(5) any demand for a higher bonus on the basis of production or productivity is to be determined by agreement or settlement, the total including the minimum not exceeding twenty per cent.

3. How is the allocable surplus arrived at? By section 32 the gross profits are computed in the manner prescribed by the Central Government. By section 33 the available surplus is the gross profits after deducting the prior charges listed in section 34, which are depreciation admissible under section 32(1) of the Income-tax Act or the agricultural income-tax law, any direct tax payable for the year subject to section 35, and such further prescribed sums; the proviso to section 33 adds, for years after the Code's commencement, the difference between the direct tax on the preceding year's gross profits and the direct tax on those profits after deducting the bonus paid or payable. Section 35 requires that in computing that tax no account be taken of carried-forward losses or arrears of depreciation. By section 31(1) the allocable surplus is then sixty per cent. of the available surplus for a banking company and sixty-seven per cent. for any other establishment.

4. On what grounds is an employee disqualified from bonus? Section 29 provides that, notwithstanding anything in the Code, an employee is disqualified from receiving bonus if he is dismissed from service 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. Both elements are necessary: there must be a dismissal, and it must be on one of those four grounds. Misconduct short of dismissal on those grounds does not disqualify, though where an employee is found guilty of misconduct causing financial loss to the employer, section 38 permits the amount of the loss to be deducted from the bonus payable for that accounting year only.

5. Explain set on and set off. Under section 36(1), where for an accounting year the allocable surplus exceeds the maximum bonus payable under section 26, the excess, subject to a limit of twenty per cent. of the total wages of the employees in that year, is carried forward to be set on in the succeeding year and so on up to and inclusive of the fourth accounting year, to be used for paying bonus. Under section 36(2), where there is no available surplus or the allocable surplus falls short of the minimum bonus and there is no sufficient amount set on, the minimum amount or the deficiency is carried forward to be set off in the succeeding year and so on up to and inclusive of the fourth accounting year. Section 36(4) provides that in calculating bonus for a succeeding year, the set on or set off carried forward from the earliest accounting year is taken into account first.

6. Within what time must bonus be paid? Section 39(1) requires all amounts payable by way of bonus to be paid by crediting them to the employee's bank account within eight months from the close of the accounting year, with a proviso permitting the appropriate Government or a specified authority, on the employer's application and for sufficient reasons, to extend that period, so long as the total extended period does not exceed two years. Section 39(2) provides that where a dispute regarding payment of bonus is pending before an authority, the bonus is paid within one month from the date the award becomes enforceable or the settlement comes into operation; but its proviso requires that where the dispute is about payment at a higher rate, the employer must still pay eight and one-third per cent. of the wages within eight months from the close of the accounting year.

7. To which establishments does the bonus Chapter apply? Section 41(2) provides that, subject to section 41(1) and notwithstanding anything else in the Chapter, the Chapter applies to establishments in which twenty or more persons are employed or were employed on any day during an accounting year. Section 41(1) excludes employees of the Life Insurance Corporation; seamen; registered or listed dock workers; establishments under the authority of a department of the Central or a State Government or a local authority; the Indian Red Cross Society and like institutions, universities and other educational institutions, and non-profit hospitals, chambers of commerce and social welfare institutions; the Reserve Bank of India; notified public sector financial institutions other than banking companies; inland water transport establishments on routes passing through another country; and establishments exempted by notification where a profit-sharing scheme already gives comparable benefits. Section 40 brings a public sector establishment within the Chapter where it sells goods or renders services in competition with the private sector and that income is at least twenty per cent. of its gross income.