Statutory bonus under the Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 requires eligible employers to pay an annual bonus to employees, loosely linked to the company's profits. Many growing companies treat bonus as discretionary and are surprised to learn that a minimum bonus is a legal obligation, backed by registers an inspector can demand.

Who the Act covers

The Act applies to factories and to establishments employing 20 or more people. Once it applies, it continues to apply even if the number later falls below 20. Within a covered establishment, the bonus is a statutory right for eligible employees, not a favour.

Who is eligible

An employee is eligible if their wages (Basic + DA) are up to ₹21,000 per month and they have worked at least 30 days in the accounting year. Employees earning above ₹21,000 fall outside the statutory scheme, though employers often pay them a discretionary bonus or performance incentive instead.

How much bonus is payable

The bonus ranges between a minimum of 8.33% and a maximum of 20% of the calculation wage.

Item	Value
Minimum bonus	8.33%
Maximum bonus	20%
Eligibility ceiling	₹21,000 per month (Basic + DA)
Calculation ceiling	₹7,000, or the minimum wage for the employment, whichever is higher

The calculation ceiling is important. Even if an eligible employee's Basic + DA is ₹18,000, the bonus is computed on the lower of that and ₹7,000 (or the minimum wage). So the bonus base is capped, which keeps the statutory bonus modest.

Worked example

An eligible employee with Basic + DA of ₹18,000, a bonus rate of 8.33%, and 12 months worked:

• Calculation wage = min(18,000, 7,000) = ₹7,000
• Monthly bonus = 7,000 × 8.33% = ₹583
• Annual bonus = 583 × 12 = ₹7,000 (approximately)

At the maximum 20% rate, the same employee would receive about ₹16,800 for the year.

Allocable surplus: what sets the rate

Whether you pay the 8.33% minimum or something up to 20% depends on the allocable surplus, computed under the Act's schedules. In simple terms, you start from gross profit, subtract prescribed prior charges (depreciation under section 32, direct taxes, and other allowances), and apply an allocable percentage to arrive at the surplus available for bonus. A loss-making unit still pays the 8.33% minimum. A highly profitable one may reach 20%.

Set-on and set-off rules let surplus be carried forward or backward across years, which is why the registers matter.

The registers you must keep

The Act requires four forms:

• Form A: computation of the allocable surplus.
• Form B: set-on and set-off of the allocable surplus.
• Form C: the bonus paid to each employee.
• Form D: the annual return filed with the authority.

These are the documents an inspector will ask to see. Reconstructing them at audit time from scattered spreadsheets is painful.

Common mistakes to avoid

• Treating statutory bonus as fully discretionary.
• Computing on full Basic + DA instead of the ₹7,000 calculation ceiling.
• Missing eligible employees who worked at least 30 days.
• Not maintaining Forms A to D through the year.

Frequently asked questions

When is bonus paid? Within eight months of the close of the accounting year.

Do new joiners get a bonus? Yes, pro-rated, if they worked at least 30 days in the year.

Is the statutory bonus taxable? Yes, it is part of salary income.

Key takeaways

• Bonus is a legal obligation for covered establishments, not a discretionary payout.
• Eligibility is up to ₹21,000 per month; the calculation ceiling is ₹7,000 or minimum wage.
• The rate is between 8.33% and 20%, set by the allocable surplus.
• Forms A to D must be maintained and the annual return filed.

NeevHR configures the statutory bonus plan, previews eligible employees, computes the payout on the correct calculation wage, and generates Forms A to D, so the annual bonus run is quick and audit-ready.