Can Bonuses Be Included in Monthly Salaries? Seeking Clarity on Salary Over 10,000

Hi,

Can anybody tell me the following:
1. Can a bonus be paid in the monthly salary?
2. What happens if the employee's salary is more than 10,000?

Regards,
Preethi.

Dear Preethi,

Please check the attachment for detailed information. If you still have specific doubts, feel free to ping me.

Dear Preeti,

Bonuses cannot be paid monthly because they are a yearly component given to employees. However, you can deduct bonuses monthly from employees' salaries. Additionally, if an employee's salary is above 10k, you can pay them an annual bonus of 8400, i.e., 3500*20%.

Warm Regards,
Sumiksha

Dear Maheesh,
With due respect to your answer I would like to submit as under:
According the attachment on Bonus Act the definition of 'employee' runs as under:
2(13) “employee” means any person (other than an apprentice) employed on a salary or wage not exceeding [three thousand and five hundred rupees] per mensem in any industry to do any skilled or unskilled manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied;
While the Govt. have already amended this section along with some other sections. Thus this attachment can not be stated to be updated.
Submitted only for information.
With Regards,
R.N.Khola

Dear Preethi,

1. A bonus can be included in the monthly salary as a component. However, if it is considered part of the salary, it will attract ESI and will be termed as an incentive bonus, as held by the Honorable Bombay High Court in the case of Maharashtra Transport Company.

2. If the employee's salary is more than Rs 10,000 (basic + DA), then the Bonus Act does not apply to such employees.

I hope this answers your questions.

Yes, bonuses can be paid only to those with a salary slab equal to or less than 10k per month. Bonuses should be a minimum of 8.33% of the basic salary (including DA) and a maximum of up to 20% of the basic salary.

Thanks,
Arun Kumar Vijayamoorthy

1) Bonus can be paid monthly but it attracts ESI contributions. In any event, the entire bonus has to be paid before November of every year.

2) Employees' wages exceeding Rs. 10,000/- are not covered by the Bonus Act; however, shall be paid as Ex-gratia.

Bonus can be paid monthly. However, if there was a prevalent practice of payment of Annual Bonus or Customary Bonus, the same can only be changed to a monthly basis after a Notice under Sec. 9 A of the I.D. Act. The bonus year can be from April to March, January to December, or any other prevalent practice of the management. So there is no hard and fast rule that it should be paid before November. However, it must be paid within 8 months immediately after the Bonus Year is calculated. To avoid ESI contribution, it is advisable to pay the Bonus bi-monthly. Employees drawing wages more than Rs. 10,000 are not statutorily eligible for Bonus. However, there is no bar for the employer to pay the same, naming it either Bonus or ex-gratia. In such a case, the employer can calculate the Bonus Ceiling as per the PB Amendment Act, 2007, as Rs. 3500 only for the sake of his benefit. Regards.

Mr. Pradeep Mohanty,

Correct me if I'm wrong... Bonus Act states that the bonus must be paid within 8 months from the close of the accounting year, which means it should be paid before November, as the accounting year closes in March and the eighth month falls in November.

Thank you, Pradeep. Could you please explain how it is possible to avoid ESI contributions by paying monthly bonuses? If you have any materials or examples, please share them with me.

To avoid ESI:

1) Bonus payment should not be made monthly but can be made "at least at the interval of two months."

2) Bonus payment should not form part of "terms of contract of employment."

Bonus is an annual component. After finalizing the profit & loss of an establishment, it is fixed at a rate of 8.33% to 20% through mutual understanding between the employer and employee.

'Accounting year' in relation to the Payment of Bonus Act is defined under Section 2(1) of the Act. In regard to (i) a corporation: the accounting year ends on the day of closing of the book of accounts, (ii) a company: on the day on which the Profit and Loss account is presented at its annual general meeting, (iii) in any other case: the year runs from April 1st to March 31st. However, the employer can choose a different accounting year other than mentioned in (iii) provided that any change requires prior permission from the prescribed authority. The authority for granting a change of the accounting year is under Rule 3 of the Payment of Bonus (Central) Rules, 1975.

In essence, the date of bonus payment changes according to the accounting year in practice. Therefore, there is no strict rule that it must be paid by November, although it should be paid within 8 months of the end of the accounting year as per practice. According to M/s. Whirlpool India Ltd. v ESIC (JT 2003(3) SC 247: 2000LLR), additional remuneration becomes wages under the ESI Act if not paid at intervals exceeding 2 months. However, in United Breweries Ltd. v ESIC (2003(I) LLJ 900 (HC-KER-DB): 2003 LLR 272, it was determined that incentive bonuses paid as per settlement will attract ESI contributions regardless of periodicity. Therefore, if you wish to avoid ESI contribution on a bimonthly incentive bonus scheme, do not enter into any settlement. I hope this clarifies. Regards

Categories of Bonus and ESI Contribution

The categories of Bonus and ESI contribution, if any, payable thereon are discussed below:

Annual Bonus

Bonus paid to the employees could not be treated as a wage for the purpose of charging a contribution under Sec.2(22), provided the periodicity of the payment is more than 2 months. This issue was also considered in the meeting of the ESI Corporation held on 19.12.1968, and the Corporation agreed to the recommendations of the Standing Committee that bonus may not be treated as a wage. Hence, no contribution is payable on the annual bonus.

(Earlier instructions were issued via memo No.Ins.III/2(2)-2/67/ESIC dated 8.2.1967).

Incentive Bonus

As per the decision of the Supreme Court delivered on 8.3.2000 in the case of M/s. Whirlpool India Ltd. Vs. ESIC in civil appeal No.1903 of 2000, additional remuneration to become wages has to be paid at intervals not exceeding two months as distinguished from being payable. Thus, there has to be actual payment, and the payment of production incentive does not fall either under the 1st part or last part of the definition of the term wages as defined in Sec.2(22) of the Act; hence, no contribution is payable on the incentive bonus, provided the periodicity of payment is more than 2 months.

(Earlier instructions were issued by this office via Memo No.T-11/13/53/19-84-Ins.IV/ESIC dated 19.9.84, Memo No.Ins.III-2(2)/2/69/ESIC dated 26.12.73, Memo No.T-11/13/54/18/82-Ins.IV dated 14.7.82, & Memo No.D/Ins.5(5)/68/ESIC dated 18.9.88.)

Production Bonus

Production Bonus, like incentive bonus, is paid to the workers as additional remuneration and hence like incentive bonus, such additional remuneration to become wages has to be paid at intervals not exceeding 2 months as distinguished from being payable. Thus, there has to be actual payment, and hence no contribution is payable, provided the periodicity of the payment is more than 2 months.

(Earlier instructions issued via letter dated 4(2)/13/74-Ins.IV dated 2.9.85)

Inam/Ex-Gratia Payment

Inam represents a payment made by the employer to any employee as a reward for the services rendered by him for which he is/was not under obligation to render the same under the contract of service, which is expressed or implied but does not include the payment which has been made to an employee in fulfillment of the contract of service. This may include ex gratia payment.

Where Inam is being paid for special skill or higher responsibilities/additional duties, it may be taken as remuneration, and contribution is payable.

Where the employer has introduced the scheme of Inam but according to terms and conditions, the employer has no right to withdraw it or revise it, the same may be treated as wages, and contribution is payable.

Where the employer has introduced the scheme of Inam and he has the right to revise or withdraw it at his discretion, the payment of Inam under such a scheme may not be treated as wages, and contribution is not payable provided the payment is made at an interval exceeding two months.

Where there is no scheme of Inam in writing but still the employer might be making payment under the head Inam based on some understanding between the parties, in such cases, the nature of payment and its periodicity may be ascertained and whether the payment of Inam is an ex gratia payment not covered by the contract of service. If the periodicity is more than 2 months, no contribution may be charged.

(Last instructions were issued via letter No.D-Ins.5(5)/68/ESIC dated 21.2.1975).