Introduction
Bonus is an additional payment made by an employer to his employees over and above their regular wages or salary. In India, the payment of bonus is governed by the Payment of Bonus Act, 1965. This Act was enacted by the Indian Parliament to provide for the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity and for matters connected therewith.
Before the enactment of this Act, the payment of bonus was not regulated by any specific law and was largely dependent on the goodwill of the employer or the outcome of industrial disputes. The Supreme Court of India in the landmark case of Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union (1955) laid down certain principles for payment of bonus, which eventually led to the enactment of the Payment of Bonus Act, 1965.
The Act came into force on 25th September, 1965 and applies to factories and establishments employing 20 or more persons. The Act was amended several times, most notably in 2015, to increase the eligibility limit and the calculation ceiling for bonus.
Object and Purpose of the Act
The Payment of Bonus Act, 1965 was enacted with the following objectives:
- To provide a statutory right to bonus for eligible employees
- To ensure that workers share in the prosperity of the establishment
- To provide a uniform law for payment of bonus across industries
- To prevent industrial disputes arising from claims for bonus
- To ensure that even in years of loss, workers receive a minimum bonus
Applicability of the Act
The Payment of Bonus Act, 1965 applies to:
- Every factory as defined under the Factories Act, 1948
- Every other establishment in which 20 or more persons are employed on any day during an accounting year
Once the Act becomes applicable to an establishment, it continues to apply even if the number of employees falls below 20.
Eligibility for Bonus
Who is Eligible?
Under Section 8 of the Payment of Bonus Act, every employee who has worked for at least 30 working days in an accounting year is entitled to bonus, provided his salary or wage does not exceed the prescribed limit.
As per the 2015 Amendment, the eligibility limit for bonus has been increased:
- Employees drawing salary up to ₹21,000 per month are eligible for bonus
- Previously the limit was ₹10,000 per month
Who is NOT Eligible?
Under Section 32, the following employees are not entitled to bonus:
- Employees of the Life Insurance Corporation of India
- Seamen as defined under the Merchant Shipping Act
- Employees registered or listed under any scheme for dock workers
- Employees of the Indian Red Cross Society
- Employees of universities and educational institutions
- Employees of hospitals and chambers of commerce
- Employees of the Reserve Bank of India
- Employees of certain other establishments specified in the Act
Disqualification for Bonus
Under Section 9 of the Act, an employee shall be disqualified from receiving bonus if he is dismissed from service for:
- Fraud
- Riotous or violent behaviour while on the premises of the establishment
- Theft, misappropriation, or sabotage of any property of the establishment
- Conviction for sexual harassment
Types of Bonus
1. Minimum Bonus
Under Section 10 of the Act, every employer is bound to pay a minimum bonus to every eligible employee, regardless of whether the establishment has made a profit or loss in that year.
The minimum bonus is:
- 8.33% of the salary or wage earned by the employee during the accounting year, OR
- ₹100 (for employees above 15 years) or ₹60 (for employees below 15 years), whichever is higher
This minimum bonus must be paid even if the employer suffers losses during the accounting year. This is why it is also called the "statutory minimum bonus."
2. Maximum Bonus
Under Section 11 of the Act, where in any accounting year the allocable surplus exceeds the amount of minimum bonus payable, the employer shall pay bonus up to a maximum of 20% of the salary or wage earned by the employee during the accounting year.
Procedure of Computation of Bonus
The computation of bonus under the Payment of Bonus Act involves the following steps:
Step 1 — Calculation of Gross Profit
The first step is to calculate the gross profit of the establishment for the accounting year. Gross profit is calculated differently for:
(a) Banking Companies — As per the Second Schedule of the Act (b) Other Establishments — As per the Third Schedule of the Act
For other establishments, gross profit is calculated as: Gross Profit = Net Profit (as per Profit & Loss Account) + Depreciation + Development Rebate + Other Specified Additions
Step 2 — Calculation of Available Surplus
From the gross profit, certain prior charges are deducted to arrive at the available surplus. These prior charges include:
- Depreciation as per the Income Tax Act
- Development allowance
- Direct taxes payable by the employer (calculated at the prescribed rate)
- Sums specified in the Fourth Schedule (such as dividends payable on preference shares, bonus paid in previous years, etc.)
Available Surplus = Gross Profit − Prior Charges
Step 3 — Calculation of Allocable Surplus
From the available surplus, the allocable surplus is calculated. The allocable surplus is the portion of the available surplus that is available for distribution as bonus.
Under Section 2(4) of the Act:
- For foreign companies — Allocable Surplus = 67% of Available Surplus
- For Indian companies and other establishments — Allocable Surplus = 60% of Available Surplus
Allocable Surplus = 60% (or 67%) of Available Surplus
Step 4 — Calculation of Individual Employee's Bonus
Once the allocable surplus is determined, the bonus payable to each individual employee is calculated as follows:
Individual Bonus = (Salary of Employee / Total Salary of all eligible employees) × Allocable Surplus
However, the individual bonus is subject to the following limits:
- Minimum: 8.33% of salary (or ₹100/₹60 whichever is higher)
- Maximum: 20% of salary
Step 5 — Salary/Wage Ceiling for Calculation
As per the 2015 Amendment, for the purpose of calculating bonus, the salary or wage of an employee shall be taken as ₹7,000 per month or the minimum wage notified for that establishment, whichever is higher, even if the employee actually earns more than this amount.
This means that even if an employee earns ₹15,000 per month, the bonus will be calculated on ₹7,000 per month (or the applicable minimum wage, whichever is higher).
Set On and Set Off of Allocable Surplus
The Act contains special provisions for Set On and Set Off to deal with years of high profit and years of loss:
Set On (Section 15)
When the allocable surplus in any accounting year exceeds the maximum bonus payable (20%), the excess amount is "set on" and carried forward to be utilized in subsequent years when the allocable surplus is insufficient to pay the minimum or maximum bonus.
The amount set on can be carried forward for a maximum of 4 accounting years.
Set Off (Section 15)
When there is no available surplus or insufficient surplus in any accounting year to pay even the minimum bonus, the deficiency is "set off" against the amount set on in previous years. If no amount has been set on, the minimum bonus must still be paid and the amount is set off against future profits.
Time Limit for Payment of Bonus
Under Section 19 of the Act, bonus must be paid within:
- 8 months from the close of the accounting year
- If there is a dispute regarding bonus pending before any authority, within 1 month of the settlement of the dispute
Recovery of Bonus
Under Section 21, if any bonus due to an employee is not paid, he can make an application to the appropriate government within 1 year from the date on which bonus became due. The government will then direct the Inspector to investigate and recover the bonus.
Registers and Records
Every employer must maintain the following registers under the Act:
- Register A — Register showing computation of allocable surplus
- Register B — Register showing set on and set off of allocable surplus
- Register C — Register showing details of bonus due and paid to each employee
Important Case Laws
1. Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union (1955)
The Supreme Court laid down the Full Bench Formula for computation of bonus, which became the basis for the Payment of Bonus Act, 1965. The court held that bonus is payable out of the available surplus after meeting prior charges.
2. Jalan Trading Co. v. Mill Mazdoor Sabha (1967)
The Supreme Court upheld the constitutional validity of the Payment of Bonus Act and held that the Act is a valid piece of social legislation aimed at ensuring that workers share in the profits of the enterprise.
3. Dharangadhra Chemical Works v. State of Saurashtra (1957)
The Supreme Court held that bonus is not a gift or ex-gratia payment but a deferred wage and workers have a legal right to receive it.
4. Ispat Industries Ltd. v. Commissioner of Customs (2006)
The Supreme Court held that the provisions of the Payment of Bonus Act must be interpreted in a manner consistent with the object of the Act, which is to ensure that workers receive a fair share of the profits generated by their labour.
2015 Amendment — Key Changes
The Payment of Bonus (Amendment) Act, 2015 made the following important changes:
- Eligibility limit increased from ₹10,000 to ₹21,000 per month
- Calculation ceiling increased from ₹3,500 to ₹7,000 per month or minimum wage, whichever is higher
- These changes were made retrospectively from 1st April, 2014
Conclusion
The Payment of Bonus Act, 1965 provides a comprehensive and detailed framework for the computation and payment of bonus to eligible employees. The procedure of computing bonus through the steps of calculating gross profit, available surplus, and allocable surplus ensures that workers receive a fair share of the profits generated by the establishment. The provisions for minimum and maximum bonus, set on and set off, and the 2015 amendments reflect the continuing evolution of Indian labour law in its quest to ensure social justice and economic security for workers. Bonus is not a bounty from the employer but a statutory right of every eligible worker, and the law ensures that this right is protected and enforced.
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