flowchart LR GP[Gross Profit<br/>Schedule I/II] --> AS[Available Surplus<br/>§5-6] AS --> AL[Allocable Surplus<br/>67% / 60%] AL --> B[Bonus<br/>min 8.33% — max 20%] B --> SO[Set-on / Set-off<br/>§15] style GP fill:#FFF3E0,stroke:#E65100 style AS fill:#E8F5E9,stroke:#2E7D32 style AL fill:#E3F2FD,stroke:#1565C0 style B fill:#F3E5F5,stroke:#6A1B9A style SO fill:#FCE4EC,stroke:#AD1457
49 The Payment of Bonus Act, 1965
This chapter covers the Payment of Bonus Act, 1965 — the statute that mandates a minimum annual bonus and caps a maximum, based on the firm’s profits. The Act emerged from the Bonus Commission report of 1964 and gave statutory shape to a long-standing industrial demand.
49.1 Background and Object
Annual bonus had been an industrial demand since the 1930s. The Bombay Industrial Disputes Act of 1947 (state) and several tribunal awards recognised it. The 1962 Bonus Commission (chaired by M.R. Meher) recommended a comprehensive statute; the Payment of Bonus Act, 1965 followed.
TipObject of the Act
| Object | What it does |
|---|---|
| Provide statutory bonus | Establishes a worker’s right to share in firm’s prosperity |
| Link bonus to profits | Mathematical formula based on available and allocable surplus |
| Set minimum and maximum | Floor of 8.33%; ceiling of 20% of wages |
49.2 Coverage — Section 1
The Act applies to:
- Every factory (as defined in the Factories Act, 1948); and
- Every other establishment in which 20 or more persons are employed on any day during an accounting year.
Eligibility for individual workers — Section 8: An employee earning up to ₹21,000 per month (revised in 2015) and having worked at least 30 working days in the accounting year is eligible for bonus.
The Code on Wages, 2019 has retained this regime with periodic revisions to the wage ceiling.
49.3 Definitions — Section 2
TipKey Definitions
| Section | Term | Meaning |
|---|---|---|
| 2(13) | Employee | Any person other than apprentice employed for hire or reward, drawing wages up to the prescribed ceiling |
| 2(21) | Salary or wage | Basic pay + DA, but excludes most allowances |
| 2(4) | Allocable surplus | 67% of available surplus (60% for foreign companies); the pool from which bonus is paid |
| 2(6) | Available surplus | Gross profits minus permissible deductions (depreciation, development rebate, taxes, return on capital) |
49.4 Minimum and Maximum Bonus — Sections 10 and 11
TipMinimum and Maximum Bonus
| Provision | Rate |
|---|---|
| §10 — Minimum bonus | 8.33% of salary OR ₹100 (₹60 for under-15s), whichever is higher; payable even if there are no profits |
| §11 — Maximum bonus | 20% of salary; payable from allocable surplus |
The minimum bonus is a guaranteed payment — even loss-making firms must pay it. The maximum caps the entitlement; allocable surplus exceeding 20% of wages is carried forward to the next year (set-on / set-off mechanism).
49.5 Calculation of Bonus — Sections 4 to 9
The bonus calculation is a multi-step process — the most-tested mathematical procedure under any Indian labour statute.
TipSix Steps in Bonus Calculation
| # | Step | Section |
|---|---|---|
| 1 | Compute gross profit using formula in First (banking companies) or Second (other companies) Schedule | §4 |
| 2 | Deduct depreciation, development rebate, direct taxes, and return on capital per the Third Schedule to compute available surplus | §5, §6 |
| 3 | Compute allocable surplus — 67% (60% for foreign companies) of available surplus | §2(4) |
| 4 | Allocate to bonus subject to the 8.33% minimum / 20% maximum bound | §§10-11 |
| 5 | If surplus exceeds 20%, carry forward to next year (set-on); if surplus is short of 8.33%, draw from previous years’ set-on (set-off) | §15 |
| 6 | Calculate individual bonus — proportionate to wages and days worked | §13 |
49.6 Set-On and Set-Off — Section 15
The set-on / set-off mechanism smooths bonus payments across years.
TipSet-On and Set-Off
| Mechanism | What it does |
|---|---|
| Set-on | If allocable surplus in a year exceeds the 20% maximum, the excess is carried forward up to 4 years for use in deficit years |
| Set-off | If allocable surplus in a year falls short of the 8.33% minimum, set-on from previous years is drawn down to make up the shortfall |
49.7 Disqualification from Bonus — Section 9
An employee is disqualified from receiving bonus if she is dismissed for:
- Fraud;
- Riotous or violent behaviour while on the premises;
- Theft, misappropriation or sabotage of any property of the establishment.
49.8 Time of Payment — Section 19
TipTime for Payment of Bonus
| Situation | Deadline |
|---|---|
| Where there is a dispute regarding bonus | Within 1 month from the date of award becoming enforceable |
| In any other case | Within 8 months from the close of the accounting year (extendable to 2 years on application) |
49.9 New Establishments — Section 16
A new establishment is exempt from bonus payment for the first 5 accounting years unless the establishment derives profits in any of those years (in which case bonus is payable for that year).
49.10 Disputes — Section 22
Disputes about bonus are industrial disputes under the ID Act, 1947 — referable to the prescribed authorities.
49.11 Penalties — Sections 28 and 29
TipPenalties
| Section | Offence | Penalty |
|---|---|---|
| 28 | Contravention | Imprisonment up to 6 months or fine up to ₹1,000 or both |
| 29 | Offences by companies | Persons in charge liable |
49.12 Position under the Code on Wages, 2019
The Code on Wages, 2019 has subsumed the Bonus Act with key continuities:
- 8.33% minimum and 20% maximum retained;
- Eligibility wage ceiling continues (revised by rules);
- Calculation method retained;
- Set-on / set-off retained;
- Penalties revised upward.
49.13 Important Case Law
TipSelected Cases
| Case | Year | Holding |
|---|---|---|
| Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai | 1976 | Bonus is deferred wage and not gratuitous; bonus has a statutory basis |
| Jalan Trading Co. v. Mill Mazdoor Sabha | 1967 | Constitutional validity of the Act upheld |
| Workmen of Williamson Magor v. Williamson Magor | 1981 | Eligibility provisions liberally construed |
49.14 Practice Questions
Eight questions to test the chapter. Each card hides the answer — click Show answer to reveal it.
Q1
Minimum bonus under §10 is
Minimum bonus under §10 is:
A5% of wages
B8.33% of wages OR ₹100, whichever is higher
C10%
D20%
Show answer
Correct answer
B. 8.33% of wages OR ₹100, whichever is higher
Q2
Maximum bonus under §11 is
Maximum bonus under §11 is:
A8.33%
B15%
C20% of wages
D25%
Show answer
Correct answer
C. 20% of wages
Q3
Allocable surplus is what percentage of
Allocable surplus is what percentage of available surplus (Indian companies)?
A50%
B60%
C67%
D75%
Show answer
Correct answer
C. 67%
Q4
Eligibility for bonus requires having worked
Eligibility for bonus requires having worked at least:
A7 days
B15 days
C30 working days in the accounting year
D60 days
Show answer
Correct answer
C. 30 working days in the accounting year
Q5
Set-on / set-off carries surplus forward
Set-on / set-off carries surplus forward for up to:
A1 year
B2 years
C4 years
D10 years
Show answer
Correct answer
C. 4 years
Q6
A new establishment is exempt from
A new establishment is exempt from bonus for the first:
A1 accounting year
B3 years
C5 accounting years (subject to profit)
D7 years
Show answer
Correct answer
C. 5 accounting years (subject to profit)
Q7
Bonus must be paid within
Bonus must be paid within:
A30 days
B60 days
C8 months of close of accounting year
D1 year
Show answer
Correct answer
C. 8 months of close of accounting year
Q8
Mumbai Kamgar Sabha v. Abdulbhai (1976)
Mumbai Kamgar Sabha v. Abdulbhai (1976) held that bonus is:
AGratuitous
BDeferred wage with statutory basis
CA loan to be repaid
DCustomary only
Show answer
Correct answer
B. Deferred wage with statutory basis
ImportantQuick recall
- Payment of Bonus Act, 1965 — Bonus Commission (Meher) recommendation.
- Coverage: factories + 20+ employees. Eligibility wage ceiling: ₹21,000/month; 30 days of work.
- Min bonus 8.33% / Max 20%.
- Allocable surplus = 67% (60% for foreign companies) of available surplus.
- Schedules I, II, III for calculation.
- Set-on / set-off — 4 years carry-forward.
- New establishments — exempt for 5 years (subject to profit).
- Time for payment — 8 months from accounting year close.
- §9 disqualification — fraud, violence, theft, sabotage.
- Disputes — ID Act, 1947.
- Subsumed under Code on Wages, 2019 (substantively retained).