Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965, is a law in India that aims to provide for the payment of bonus to employees based on their performance and productivity. The objective of the act is to ensure that employees receive a share of the profits earned by their employers.

As per Oxford Dictionary, Bonus means “something good that you get in addition to what you expect”. So, bonus is payment made to employees over & above to their base salary as an incentive or reward for good performance.

The bonus payable to an employee is a percentage of the employee’s salary, subject to certain conditions.

The act applies to establishments that employ 20 or more employees. The act also stipulates that an employer must pay a minimum bonus of 8.33% of the employee’s salary or wages earned during the accounting year, and a maximum bonus of 20% of the employee’s salary or wages earned during the accounting year.

However, there is a myth in majority people that maximum bonus payable under payment of bonus act, 1965 as amended by bonus act, 2015 is Rs 16,800.

In this article, we will discuss whether maximum bonus payable under payment of bonus act, 1965 as amended by bonus act, 2015 is Rs 16,800 or not.

Before we proceed further, let us analyse some import definition, terminology and import section of the act.

 What is the coverage of Payment of Bonus Act, 1965

It is applicable to whole of India. Payment of Bonus Act, 1965 does not define meaning of India. However, Article 1 of the Constitution of India defines India as a Union of States and includes the territories of the states, union territories, and any territory that may be acquired by the Government of India at any time. The territory of India includes the mainland, as well as islands, and any other territories that may be a part of India from time to time.

Therefore, for the purposes of the Payment of Bonus Act, 1965, India refers to the entire territory of India as defined in the Constitution of India.

So, Payment of Bonus Act, 1965 is also applicable to entities operating beyond land boundaries of India i.e, Water & Air space. Example, Oil exploration companies operating in offshore like ONGC.

 What type of establishment is covered in this Act?

it shall apply to-
(a) every factory registered under factories Act; and
(b) every other establishment in which twenty or more persons are employed on any day during an accounting year:
 Based on the above, it appears that there has to be minimum 20 or more persons for applicability of Payment of Bonus Act. Now, question arises, these 20 or more persons criterion is applicable for “other establishment” only or for factory & other establishment both.

Before answering the same, let us understand the meaning of Factory: –

As per sec 2(m) of the factories Act, 1948, “factory” means any premises including the precincts thereof—

• whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on, or
• whereon twenty or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on,—

but does not include a mine subject to the operation of the Mines Act, 1952, or a mobile unit belonging to the armed forces of the Union, railway running shed or a hotel, restaurant or eating place.

From the above definition of factory, it is clear that in case of factories, payment of bonus act is applicable if ten or more workers are working with the aid of power (with the help of machine).

 In all other case 20 or more persons criteria is applicable including mine, a mobile unit belonging to the armed forces of the Union, railway running shed or a hotel, restaurant or eating place.

Note: – The section also includes a proviso, which allows the appropriate government to extend the provisions of the Act to certain establishments that employ less than twenty persons. The government must provide a notice of at least two months before such an extension, and the number of persons specified in the notification cannot be less than ten.

What if number of persons employed during the year falls below 20 or 10 persons?

 An establishment to which this Act applies shall continue to be governed by this Act notwithstanding that the number of people employed therein falls below twenty.

For e.g, an establishment has 25 persons during the year. Accordingly, Payment of Bonus Act is applicable. Now, due to any reason, the number of persons fell down to 8 in subsequent year. Though number fell down below 20, the payment of bonus act is still applicable due to the fact that once this Act is applicable to an establishment, this continues to be applicable till the time establishment is in existence.

Note: – Payment of Bonus Act is applicable even if during the accounting year number of persons employed exceeds 10 or 20 as the case may be, even for one day.

Definition of an Establishment and treatment of Departments, Undertakings and Branches of an Establishment:

Under the Payment of Bonus Act, an establishment refers to a single entity or enterprise. If an employer has multiple departments, undertakings, or branches that are situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act.

However, if a separate balance-sheet and profit and loss account are prepared and maintained in respect of any such department or undertaking or branch, then, such department or undertaking or branch shall be treated as separate and distinct from such establishments for the purpose of calculating and distributing bonus.

Coverage Exclusions:

The Act does not apply to government establishments and local authorities.

It excludes establishments that are purely charitable, religious, or educational in nature.

Industries regulated by other specific bonus provisions (e.g., the Life Insurance Corporation Act, 1956, Merchant Shipping Act, 1958, Dock Workers (Regulation of Employment) Act, 1948) are also exempt.

What is meant by Accounting Year?

“Accounting Year” means –

For corporation: – Year ended on the day on which the books and accounts of the corporation are to be closed and balanced. (Normally, it is 31st March. Accounting year will start from 1st April & end on 31st March.)

For company: – the period in respect of which any profit and loss account of the company laid before it in annual general meeting is made up, whether that period is a year or not; (If P&L presented in AGM is from 01.04.21 to 31.03.22, this 12 month period will be called the accounting Year. However, If P&L presented in AGM is from 01.01.21 to 31.03.22, this 15 month period will be called the accounting Year).

Any other case – (a) the year commencing on the 1st day of April & ending on 31st day of March. However, if the employer closed and balanced their books of accounts on any day other than the 31st day of March, then, the year ending on the day on which its accounts are so closed and balanced. (if accounts closed on 31st Dec then accounting period will be from 1st April to 31st Dec of that year).

Meaning of Employee:

As per Section 2(13) The Payment of Bonus Act, 1965, an “employee” means any person (other than an apprentice) employed on a salary or wage not exceeding a specific limit. The present limit is Rs 21,000 per month.

Hence, if salary or wages of an employee exceeds Rs 21,000, he/she will not be eligible for payment of bonus as per the Act.

However, company, at their discretion, may voluntarily pay the bonus to their employee having salary or wages exceeding Rs 21,000 as ex-gratia.

What is meant by salary or wage for the purpose of calculating bonus?

A salary or wage includes a basic salary or wage and dearness allowance but does not include other allowances, overtime salary or wage, house rent allowance, traveling concessions, bonus, employer’s contribution to provident fund, retrenchment compensation, gratuity or commission.

So, only Basic Salary & DA is considered while calculating bonus.

Note:- Where an employee is given in lieu of the whole or part of the salary or wage payable to him, free food allowance or free food by his employer, such food allowance or the value of such food shall, be deemed to form part of the salary or wage of such employee for calculation of bonus.

Employment Period: An employee must have worked for at least 30 working days in an accounting year to be eligible for bonus. This includes both regular and temporary employees.

Minimum Bonus Calculation Sec 10 (8.33%):

For the accounting year in which the employer has allocable surplus: If the allocable surplus (defined as the available surplus after certain deductions) of an establishment is positive, the employer is required to pay a minimum bonus of 8.33% of the employee’s salary or wages or Rs. 100, whichever is higher. This means that even if the profits of the establishment are low, the minimum bonus payable to an employee is 8.33% of their salary or wages or Rs. 100, whichever is more.

If there is no allocable surplus: If the establishment has no allocable surplus, but there is a shortfall in that particular year, then this shortfall will be carried over till fourth accounting year. In this case, the minimum bonus would be calculated based on this treated allocable surplus.

Maximum Bonus Calculation Sec 11 & Sec 12 (20%):

As per sec 11 of the Payment of Bonus Act,1965, maximum bonus payable will 20% of proportionate salary or wages earned by employee during the accounting year subject to condition specify in the sec 12 of the Act.

As per sec 12 of the Payment of Bonus Act, 1965 as amended by the Payment of Bonus Act, 2015, where the salary or wage of an employee exceeds

• seven thousand rupees or
• the minimum wage for the scheduled employment, as fixed by the appropriate Government, whichever is higher per month

the bonus payable to such employee under section 10 or, as the case may be, under section 11, shall be calculated as if his salary or wage were seven thousand rupees or the minimum wage for the scheduled employment, as fixed by the appropriate Government, whichever is higher per month.

This means that if an employee’s actual salary or wages exceeds Rs. 7,000 per month or minimum wages for the scheduled employment as fixed by appropriate government, whichever is higher, the maximum amount on which bonus is calculated under the Payment of Bonus Act, 1965, is Rs. 7,000 per month or the minimum wages for the scheduled employment as fixed by appropriate government, whichever is higher.

Similarly, if an employee’s actual salary or wages does not exceeds Rs. 7,000 per month or minimum wages for the scheduled employment as fixed by appropriate government, whichever is higher, the bonus will be calculated on actual wages earned during the accounting period.

However, it is subject to maximum wages limit of Rs 21,000.

Illustration:

Let’s go through an example to understand how the Payment of Bonus Act works:  

Scenario	Wage Ceiling limit as per Bonus Act/ Month	Minimum Wage as per scheduled employment/ Month	Actual Wages/ Month	Wages for Bonus calculation/ Month	Wages for accounting year (12 months)	Maximum Bonus @20%	Remarks
A	B	C	D	E	F=Monthly Wages*12	G=F*20%
Scenario A	7,000	11,000	6,000	6,000	72,000	14,400	Since actual wages does not exceeds Rs 7000 or minimum wages, sec 11 applies. Hence, bonus calculated on actual wages
Scenario B	7,000	11,000	10,000	10,000	1,20,000	24,000	Since actual wages does not exceeds Rs 7000 or minimum wages, sec 11 applies. Hence, bonus calculated on actual wages
Scenario C	7,000	11,000	12,000	11,000	1,32,000	26,400	Since actual wages exceeds Rs 7000 or minimum wages, sec 12 applies. Hence, bonus calculated on Rs 7000 or minimum wages, whichever is higher
Scenario D	7,000	6,500	12,000	7,000	84,000	16,800	Since actual wages exceeds Rs 7000 or minimum wages, sec 12 applies. Hence, bonus calculated on Rs 7000 or minimum wages, whichever is higher

 Time-limit for payment of bonus:-

Amounts payable to an employee by way of bonus under this Act shall be paid in cash by his employer—

• where there is a dispute regarding payment of bonus pending before any authority under section 22, within a month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute;
• in any other case, within a period of eight months from the close of the accounting year

Maintenance of registers, records:-

Every employer shall prepare and maintain such registers, records and other documents in such form and in such manner as may be prescribed.

Penalty:-

If any person—

(a) contravenes any of the provisions of this Act or any rule made thereunder; or

(b) to whom a direction is given or a requisition is made under this Act fails to comply with the direction or requisition,

he shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both

Annual return:-

Every employer shall, on or before the 1st day of February in each year, upload unified annual return in Form D on the web portal of the Central Government in the Ministry of Labour and Employment giving information as to the particulars specified in respect of the preceding year:

 Conclusion:-

From the above explanations, it is clear that maximum bonus can be higher / lower than Rs 16,800 depending on various conditions along with what salary or wage an employee earned during the accounting year. The Payment of Bonus Act is an important piece of legislation in India that ensures that employees receive a share of the profits earned by their employers. Employers must comply with the provisions of the act, and make the necessary arrangements for the payment of bonus to eligible employees.