flowchart LR
GP[Gross profits<br/>Section 4 + Schedules] --> PC[Less prior charges:<br/>depreciation · taxes · investment allowance]
PC --> AS[Available surplus<br/>Section 5]
AS --> Alloc[× 67% or 60%]
Alloc --> ALS[Allocable surplus<br/>Section 2 4]
ALS --> B[Bonus to employees<br/>min 8.33% · max 20%]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
50 The Payment of Bonus Act 1965: Bonus Commission 1961, Object, Applicability, Eligibility, the Salary Ceiling (Rs 21,000) and Calculation Cap (Rs 7,000), Gross Profits and Allocable Surplus, Minimum 8.33 % and Maximum 20 % Bonus, Set-On and Set-Off, Disqualification, Recovery and the Code on Wages 2019
50.1 Sharing the Surplus With the Workers Who Created It
A bonus is more than wages — and less than a gift. It is a share of profit that recognises the contribution of labour to value creation. From the 1920s onward, Indian industrial tribunals and the Supreme Court worked out the principles of how that share should be calculated. The Bonus Commission (Mehrishi Commission, 1961) consolidated those principles and recommended a comprehensive statute. The result was the Payment of Bonus Act 1965 — an Act that made the statutory minimum bonus of 8.33 % a legal entitlement for every covered worker, irrespective of whether the firm made a profit, and capped the statutory maximum at 20 %. This chapter pulls together the framework — applicability, eligibility, computation of gross profits and the allocable surplus, set-on and set-off, disqualification, payment time-limit and recovery — and notes the changes brought by the Code on Wages 2019.
50.2 1 · Background — The Path to a Statute
Before the 1965 Act, bonus disputes were settled industry-by-industry through tribunals — most famously through the Full Bench Formula of the Labour Appellate Tribunal in Mill Owners’ Association v. Rashtriya Mill Mazdoor Sangh (1950). The Supreme Court refined this in Associated Cement Companies v. Workmen (1959) and a series of subsequent cases. In 1961 the Government of India set up the Bonus Commission under the chairmanship of M.R. Meher (often called the Mehrishi Commission in popular usage) to put bonus computation on a statutory footing. The Commission reported in January 1964; the Payment of Bonus Ordinance was issued in May 1965 and the Payment of Bonus Act 1965 was enacted in September 1965.
50.3 2 · Object, Extent and Commencement
TipObject and Scope
| Aspect | Detail |
|---|---|
| Year | 1965 (Act 21 of 1965) |
| Commencement | 25 September 1965 |
| Object | To provide for the payment of bonus to persons employed in certain establishments on the basis of profits, productivity or production |
| Extent | The whole of India |
| Successor | Code on Wages 2019 |
50.4 3 · Applicability — Section 1
The Act applies to:
- Every factory (as defined under the Factories Act 1948); and
- Every other establishment in which 20 or more persons are employed on any day during an accounting year.
The appropriate government may extend the Act to establishments employing 10 to 19 persons by notification.
NotePYQ trap — 20-worker threshold
The applicability threshold under the Payment of Bonus Act 1965 is 20 or more persons — every factory (regardless of size) and every other establishment with 20+ workers. NTA stems often confuse this with the 10/20 threshold of the Factories Act 1948.
50.5 4 · Key Definitions — Section 2
TipSection 2 — Important Definitions
| Term | Section | Substance |
|---|---|---|
| Salary or wage | 2(21) | All remuneration including DA, capable of being expressed in money; excludes OT, HRA, conveyance, commission, employer’s contribution to PF, gratuity, retrenchment / lay-off compensation, ex-gratia |
| Allocable surplus | 2(4) | 67 % of available surplus for a company (other than a banking company) that has not made the prescribed arrangements for declaration of dividends; 60 % in other cases |
| Available surplus | 2(6) | Gross profits minus depreciation, development rebate, direct taxes and prior charges |
| Accounting year | 2(1) | Year in which the accounts of the establishment are made up |
| Employee | 2(13) | A person (other than an apprentice) employed on a salary or wage not exceeding the prescribed limit (currently Rs 21,000 per month) |
| Employer | 2(14) | The owner / occupier of the establishment |
50.6 5 · Eligibility — Section 8
Every employee is entitled to be paid bonus by his employer if he has worked in the establishment for not less than 30 working days in that year.
TipEligibility Test under Section 8
| Requirement | Detail |
|---|---|
| Minimum service | 30 working days in the accounting year |
| Salary ceiling | Drawing salary or wage not exceeding Rs 21,000 per month (revised from Rs 10,000 by the 2015 amendment) |
| Status | Employee, not an apprentice |
| Type of establishment | Covered by Section 1 |
50.7 6 · The Salary Ceiling for Eligibility and the Cap for Calculation
A distinctive feature of the Act is the two-tier salary structure:
TipEligibility Ceiling vs Calculation Cap
| Concept | Section | Amount |
|---|---|---|
| Eligibility salary ceiling | 2(13) | Rs 21,000 per month (post-2015 amendment) — workers above this are not eligible |
| Wage cap for calculation | 12 | Rs 7,000 per month or the minimum wage for the scheduled employment (whichever is higher) — bonus is computed as if the wage were equal to this cap, even if the actual wage is higher |
NotePYQ anchor — Two-tier Rs 21,000 / Rs 7,000
Eligibility = Rs 21,000/month; Calculation cap = Rs 7,000/month (or minimum wage, whichever is higher). Both were raised by the 2015 amendment — earlier limits were Rs 10,000 and Rs 3,500. NTA stems frequently test the two figures.
50.7.1 Worked Illustration
If a worker draws Rs 18,000/month (below ceiling, so eligible), and the minimum-wage rate is Rs 6,000/month, bonus is computed on the higher of Rs 7,000 and Rs 6,000 — that is, Rs 7,000 × 12 = Rs 84,000 per year as the notional wage base. At minimum bonus 8.33 %, the bonus would be approximately Rs 7,000.
50.8 7 · Computation of Gross Profits — Sections 4 and Schedules I & II
TipComputation of Gross Profits
| Section | Substance |
|---|---|
| 4 | Computation of gross profits |
| First Schedule | Computation of gross profits in the case of a banking company |
| Second Schedule | Computation in the case of any other establishment |
The Schedules provide line-by-line adjustments — starting from net profits per profit-and-loss account, adding back certain items (provisions, depreciation if not allowed, donations) and deducting others (capital receipts, bonus paid to employees).
50.9 8 · Available and Allocable Surplus — Sections 5 and 2(4)
TipFrom Gross Profits to Allocable Surplus
| Step | Substance |
|---|---|
| Gross profits | Computed under Section 4 / Schedules I or II |
| Less prior charges | Depreciation; development rebate or investment allowance; direct taxes; share of profit to partners |
| = Available surplus (Section 5) | The pool available for sharing |
| × Share for bonus | 67 % (companies not having made prescribed dividend arrangements) or 60 % (others) |
| = Allocable surplus (Section 2(4)) | The pool actually used to compute bonus |
50.10 9 · Minimum and Maximum Bonus — Sections 10 and 11
TipStatutory Bonus Range
| Provision | Substance |
|---|---|
| Section 10 — Minimum bonus | 8.33 % of salary / wage (or Rs 100, whichever is higher; Rs 60 for employees below 15) — payable even if the firm makes no profit or a loss in the accounting year |
| Section 11 — Maximum bonus | If the allocable surplus exceeds the minimum-bonus amount, the employer must pay bonus in proportion — subject to a maximum of 20 % of salary / wage |
The statutory floor of 8.33 % regardless of profit is the Act’s most distinctive feature. Eight-and-a-third per cent is exactly one month’s wage out of twelve — a “thirteenth month” of pay. The maximum of 20 % caps the employer’s exposure even in extraordinarily profitable years.
NotePYQ anchor — 8.33 % minimum / 20 % maximum
Minimum bonus = 8.33 % of salary even if no profit; maximum bonus = 20 %. The 8.33 % figure = 1/12 (one month’s wage out of twelve). NTA stems test both numbers and the principle that the minimum is payable even with no profit.
50.11 10 · Set-On and Set-Off — Section 15
If the allocable surplus in a year exceeds the amount needed for 20 % bonus, the excess is carried forward as a set-on for use in lean years. If the allocable surplus in a year is less than the amount needed for 8.33 % bonus, the deficiency is treated as a set-off to be deducted in the next year.
TipSet-On and Set-Off Rules
| Mechanism | Description | Carry-forward limit |
|---|---|---|
| Set-on | Surplus over and above 20 % bonus in a good year is carried forward | Carried forward up to 4 succeeding accounting years, capped at 20 % of total salary |
| Set-off | Deficiency below minimum 8.33 % bonus carried forward | Carried forward up to 4 succeeding accounting years |
The smoothing mechanism is meant to stabilise bonus payments across the business cycle — workers should not get full 20 % in boom years and nothing in lean years.
50.12 11 · Time-Limit for Payment of Bonus — Section 19
TipSection 19 — Time-Limit
| Situation | Time-limit |
|---|---|
| Where there is a dispute about bonus pending before an authority under Section 22 | Within one month from the date on which the award becomes enforceable / the settlement comes into operation |
| In any other case | Within eight months from the close of the accounting year |
| Extension | The appropriate government may extend the period (in any other case) by up to a further two years for sufficient cause |
50.13 12 · Disqualification for Bonus — Section 9
An employee is disqualified from receiving bonus if he has been dismissed from service for:
- Fraud;
- Riotous or violent behaviour while on the premises of the establishment; or
- Theft, misappropriation or sabotage of any property of the establishment.
NotePYQ trap — Section 9 grounds
Section 9 disqualification turns on three grounds — fraud; riotous / violent behaviour; theft / misappropriation / sabotage. Mere absence, indiscipline or insubordination does not disqualify. NTA stems test whether other forms of misconduct count.
50.14 13 · Other Important Provisions
TipOther Provisions
| Section | Provision |
|---|---|
| 6 | Sums deductible from gross profits |
| 7 | Calculation of direct tax payable by the employer |
| 12 | Wage cap of Rs 7,000 or minimum wage for calculation |
| 13 | Proportionate reduction in bonus where employee has not worked all working days |
| 14 | Computation of number of working days |
| 16 | Special provision for new establishments — exempt from bonus during the first 5 years unless profit is made (then bonus payable for that year) |
| 17 | Adjustment of customary or interim bonus against statutory bonus |
| 18 | Deduction of certain amounts (compensation for proven loss, customary bonus advance) from bonus payable |
| 21 | Recovery of bonus due — within one year through the labour court; appropriate government may issue a certificate to the collector for recovery as arrears of land revenue |
| 22 | Reference of disputes about bonus to industrial tribunals |
| 23 | Presumption about accuracy of balance sheet |
| 27 | Inspectors |
| 28 | Penalty — up to 6 months’ imprisonment or fine up to Rs 1,000 |
| 30 | Cognisance of offences |
| 31A | Productivity-linked bonus — by agreement between employer and employees; can be in lieu of statutory bonus |
| 36 | Power of central government to exempt establishments in public interest |
50.14.1 Section 16 — New Establishments
A newly set up establishment is exempt from paying bonus during the first five accounting years, unless it derives profit in any of those years — in which case it must pay bonus for that profit-making year. From the sixth year onward, the regular bonus provisions apply.
50.15 14 · Excluded Categories — Section 32
The Act does not apply to:
- Employees of the Life Insurance Corporation of India.
- Seamen.
- Dock workers.
- Government servants.
- Employees of the Indian Red Cross Society, universities and educational institutions.
- Employees of hospitals, chambers of commerce, social-welfare institutions (specified categories).
- Employees of the Reserve Bank of India.
- Employees of certain public-sector financial institutions (IDBI, NABARD, EXIM Bank, NHB, etc.).
- Employees engaged through contractors on building operations.
50.16 15 · Position under the Code on Wages 2019
The Code on Wages 2019 subsumes the Payment of Bonus Act 1965 with framework largely preserved.
TipPayment of Bonus Act 1965 vs Code on Wages 2019
| Provision | 1965 Act | Code on Wages 2019 |
|---|---|---|
| Applicability threshold | 20+ workers | Same — 20+ workers |
| Eligibility salary ceiling | Rs 21,000/month (post-2015) | To be notified — may be revised |
| Calculation cap | Rs 7,000 or minimum wage | Continued |
| Minimum bonus | 8.33 % | Continued |
| Maximum bonus | 20 % | Continued |
| Set-on / set-off | Section 15 | Continued |
| Time-limit | 8 months | Continued |
| Section 9 disqualifications | Three grounds | Continued; adds conviction for sexual harassment |
| Penalties | Modest | Substantially enhanced (up to Rs 1 lakh) |
The Code on Wages 2019 retains the bonus framework largely intact but adds conviction for sexual harassment as a fourth disqualification ground — a significant addition in light of evolving workplace-protection norms.
50.17 16 · Significance and Critique
- The 8.33 % minimum bonus regardless of profit is the Act’s most distinctive feature — gave Indian workers a statutory floor that few other countries provide.
- The set-on / set-off mechanism is designed to smooth bonus payments across the business cycle.
-
Critique:
- Rs 21,000 ceiling excludes a growing share of white-collar workers — the 2015 revision was overdue and may need further revision.
- The calculation cap of Rs 7,000 means even high-wage covered workers get bonus on a notional figure that is well below their actual wages.
- The exclusion of contract labour engaged through building-operations contractors is a longstanding gap.
- Profitability requirement makes the 20 % maximum effectively elusive for many firms.
50.18 Practice Questions
Q 01
Year
Easy
The Payment of Bonus Act was enacted in:
View solution
Correct Option: C
1965 — following the Bonus Commission report of 1964.
Q 02
Threshold
Medium
The Act applies to every factory and every other establishment employing at least:
View solution
Correct Option: B
20 persons threshold.
Q 03
Eligibility days
Medium
An employee is eligible for bonus under Section 8 if he has worked at least:
View solution
Correct Option: B
30 working days in the accounting year.
Q 04
Minimum bonus
Easy
Under Section 10, the minimum bonus is:
View solution
Correct Option: B
8.33 % = 1/12 of annual wages.
Q 05
Maximum bonus
Easy
Under Section 11, the maximum bonus payable is:
View solution
Correct Option: C
20 % of salary / wage.
Q 06
Salary ceiling
Medium
After the 2015 amendment, the eligibility salary ceiling for bonus is:
View solution
Correct Option: D
Rs 21,000/month — raised from Rs 10,000 in 2015.
Q 07
Calculation cap
Hard
After the 2015 amendment, the wage cap for calculation of bonus under Section 12 is:
View solution
Correct Option: B
Rs 7,000 or minimum wage — whichever higher.
Q 08
Allocable surplus
Hard
Under Section 2(4), the allocable surplus for a company that has not made prescribed dividend arrangements is:
View solution
Correct Option: C
67 %; 60 % otherwise.
Q 09
Time of payment
Medium
Bonus must be paid within how many months from the close of the accounting year?
View solution
Correct Option: C
8 months — Section 19.
Q 10
Match
Hard
Match the section with its content:
| (i) | Section 8 | (a) | Set-on and set-off |
| (ii) | Section 10 | (b) | Eligibility |
| (iii) | Section 11 | (c) | Minimum bonus |
| (iv) | Section 15 | (d) | Maximum bonus |
View solution
Correct Option: A
8-eligibility; 10-min; 11-max; 15-set-on/off.
Q 11
Minimum even no profit
Medium
The minimum bonus under Section 10 is payable:
View solution
Correct Option: B
Distinctive feature — minimum bonus is a statutory floor.
Q 12
Set-on years
Hard
Set-on under Section 15 may be carried forward to:
View solution
Correct Option: B
4-year carry-forward.
Q 13
Section 9
Hard
Which is not a Section 9 disqualification from bonus?
View solution
Correct Option: D
Absence alone is not a Section 9 disqualification.
Q 14
New establishment
Hard
Under Section 16, a newly set up establishment is generally exempt from bonus for how many accounting years?
View solution
Correct Option: B
First 5 years (unless profits arise).
Q 15
Bonus Commission
Medium
The Bonus Commission whose 1964 report led to the 1965 Act was chaired by:
View solution
Correct Option: A
Bonus Commission chaired by M.R. Meher.
Q 16
Recovery
Hard
Recovery of unpaid bonus under Section 21 may be effected through:
View solution
Correct Option: B
Arrears of land revenue.
Q 17
First Schedule
Hard
The First Schedule of the Payment of Bonus Act 1965 deals with:
View solution
Correct Option: A
First Schedule — banking; Second Schedule — others.
Q 18
Excluded
Medium
Under Section 32, the Act does not apply to:
View solution
Correct Option: A
LIC, RBI, dock workers, seamen, government servants excluded.
Q 19
8.33 % meaning
Medium
The minimum bonus rate of 8.33 % corresponds to:
View solution
Correct Option: B
1/12 = "thirteenth month" of pay.
Q 20
Subsumed
Easy
The Payment of Bonus Act 1965 is subsumed under:
View solution
Correct Option: A
Code on Wages 2019.
50.19 Quick Recall
ImportantQuick recall
- Payment of Bonus Act 1965 — based on the Bonus Commission (M.R. Meher) 1961/1964 report; in force 25 September 1965.
- Applicability: every factory and every other establishment with 20 or more persons.
- Eligibility (Section 8): minimum 30 working days in the accounting year.
-
Salary structure:
- Eligibility ceiling — Rs 21,000/month (post-2015 amendment; earlier Rs 10,000).
- Calculation cap — Rs 7,000/month or minimum wage, whichever is higher (earlier Rs 3,500).
- Computation: gross profits (Section 4 / First Schedule — banking; Second Schedule — others) → minus prior charges → available surplus (Section 5) → × 67 % (companies) or 60 % (others) → allocable surplus (Section 2(4)).
- Minimum bonus (Section 10) — 8.33 % of salary/wage, payable even with no profit (= 1/12 = “thirteenth month”).
- Maximum bonus (Section 11) — 20 % of salary/wage.
- Set-on / Set-off (Section 15) — carry-forward up to 4 succeeding accounting years.
- Time-limit (Section 19) — within 8 months of accounting year close; extendable up to 2 more years.
- Section 9 disqualifications — fraud, riotous or violent behaviour, theft / misappropriation / sabotage; Code on Wages 2019 adds sexual-harassment conviction.
- Section 16 — newly set-up establishments exempt for first 5 accounting years unless profit-making.
- Section 21 — recovery as arrears of land revenue.
- Section 32 — exclusions: LIC, RBI, seamen, dock workers, government servants, certain financial institutions, etc.
- Code on Wages 2019 — framework largely preserved; eligibility ceiling may be notified afresh; sexual-harassment conviction added to disqualifications; penalties enhanced.