Is It Legal to Pay Bonuses Over 20%? What to Do If You've Already Exceeded the Cap

Dear Sanjay,

I recently learned that there is a cap on bonuses paid to employees at 20% of their salary. I have a couple of questions:

i) Is it legally allowed to pay bonuses higher than the 20% cap?
ii) What should my company do if employees have been given more than 20%?

Any advice will be greatly appreciated!

Best Regards,

Sanjay

2[11. Payment of maximum bonus.—(1) Where in respect of any accounting year referred to in section 10, the allocable surplus exceeds the amount of minimum bonus payable to the employees under that section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year a bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent of such salary or wage. (extracts from THE PAYMENT OF BONUS ACT, 1965)

2 Section 11 omitted by Act 23 of 1976, sec. 8 (w.r.e.f. ) and ins. by Act 66 of 1980, sec. 6 (w.r.e.f. 21.8.1980)

Dear,

In my view, you cannot pay a bonus of more than 20% of the salary as per the Bonus Act. If you still want to pay, you can do so under the ex gratia head.

On bonus, the company receives tax exemption, but on ex gratia, there is no tax exemption.

Thanks,
J.S. Malik

Dear JS,

Thanks for your advice. What is the consequence to the company if we used to pay 20.8% or equivalent to 2.5 month salaries? Would there be any penalties for the past years? Where can I check the tax rates of ex gratia and the legal consequences of paying bonuses exceeding 20%?

Best regards, Sanjay

Dear Sanjay,

If you have paid a bonus that is more than the maximum percentage, i.e., 20%, then the extra amount paid will be considered as an ex-gratia amount. This will be taxable. You may seek advice from your CA or tax consultant in this regard.

Regards,
R.N.Khola
Sr. Associate
Skylark Associates, Gurgaon

Hello Khola,

Sorry for the late response as I was out of town. Would it be taxable to the employees or employers? I want to do more self-studies before seeking advice from the tax advisor.

Thanks for your information!!!

Sanjay

Dear,

Whatever amount is paid to employees, whether ex-gratia or bonus, will be taxable to the individual. Employers will be exempt from tax on bonuses but will have to pay tax on ex-gratia.

Thank you.
JS Malik

Employers can pay more than a 20% bonus to employees. The minimum bonus is 8.33%.

Whether paid as a bonus or ex-gratia, the bonus amount is taxable. Statutory bonus is included in income tax.