Payment of Bonus Act 1965 — Eligibility, Calculation and Employer Compliance

The Payment of Bonus Act 1965 mandates payment of annual bonus to eligible employees — linking bonus to the company's profitability and allocable surplus. Bonus is a statutory obligation, not a discretionary payment, for companies covered by the Act. Here is the complete guide for employers and employees.

Applicability of the Payment of Bonus Act

• Applies to every factory (as defined in the Factories Act) and every other establishment employing 20 or more persons in an accounting year
• Once applicable, continues to apply even if the number of employees falls below 20
• Applies to all employees drawing salary up to ₹21,000 per month
• For calculation purposes (not eligibility), salary is capped at ₹7,000 per month (or the minimum wage for the scheduled employment, whichever is higher)

Eligibility for Bonus

An employee is eligible for bonus if they have worked for at least 30 working days in the accounting year. Employees on probation are eligible if they meet the 30-day condition.

Bonus Rate — Minimum and Maximum

• Minimum bonus: 8.33% of salary (calculated on salary or ₹7,000/month, whichever is higher — or minimum wage, whichever is higher), regardless of profits/losses
• Maximum bonus: 20% of salary (when the allocable surplus is sufficient)
• In loss years: Even if there is no profit, the employer must pay minimum bonus of 8.33% (to be set off against future allocable surplus)

Allocable Surplus — Linking Bonus to Profit

The Act prescribes a formula to calculate the "Available Surplus" from the Gross Profit (as defined in the Act — different from accounting profit). 67% of the Available Surplus is the "Allocable Surplus" for bonus purposes. Bonus paid cannot exceed the Allocable Surplus or 20% of wages, whichever is lower.

Payment Deadline

Bonus must be paid within 8 months from the close of the accounting year (i.e., by 30 November for companies with April-March accounting year). If a dispute is pending before an authority, within 1 month of the dispute resolution.

Exemptions from Bonus Act

• New establishments in the first 5 years are exempt from minimum bonus (unless profitable)
• Employees of LIC are exempt
• Universities, educational institutions, hospitals (partially exempt)
• Seasonal industries (partial application)

Conclusion

Bonus under the Payment of Bonus Act is a statutory right of eligible employees — with minimum bonus payable regardless of profits. SPOTON provides labour law compliance advisory including bonus computation, register maintenance and annual return filing for Kerala employers. Contact us for expert employment compliance services.