Is a Bonus Due if Our Company Hasn't Hit the 5-Year Mark Yet? Seeking Advice

Hi,

Please let me know if the payment of the bonus is applicable even if the company has not completed 5 years since its inception. One of our former employees is claiming a bonus for the year 2003-2004. Our company was established in August 1997. I understand there has been an amendment recently.

Please help...

Thank you.

Hi Srinivas,

In the first five accounting years following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, bonus shall be payable only in respect of the accounting year in which the employer derives profit from such establishment. Such bonus shall be calculated in accordance with the provisions of this Act in relation to that year but without applying the provisions of section 15.

As the above abstract from the Act clearly mentions, you need to pay the bonus if you have made a profit in the given year within the first five years. So if the company has posted a profit on the balance sheet during 2003-2004, you need to pay the bonus. In case you have not shown a profit during the said year, you need not pay any bonus amount. The above abstract is only for the first five years only.

Hi Ajmal Mirza,

It was a great help for me. Thank you very much.

Furthermore, a bonus has become a part and parcel of the CTC and is paid monthly along with the salary. Is it technically correct?

Hi R & B Srinivas,

As Mr. A. Mirja rightly quoted the applicability of payment under the Payment of Bonus Act, 1965, one more thing I want to add is: Only a person whose basic pay is 3500.00 or less during the accounting year for which the bonus is to be paid is eligible for the payment of bonus under the Payment of Bonus Act, 1965.

Furthermore, for entitlement to the bonus, one has to have a minimum of 30 days of service during the accounting year.

The calculation for the bonus is to be made assuming the basic pay as Rs. 2500.00.

Making payment of the bonus as a part of CTC is the current practice being practiced by various companies. There is nothing wrong with it. However, if you are making the payment on a monthly basis, it does not align with the objective of payment under the Payment of Bonus Act.

If you are paying it as part of the monthly salary and further on a monthly basis, then it becomes a monthly payment and not as the yearly or Diwali bonus as declared under the Payment of Bonus Act, 1965.

Therefore, before making a payment under the Payment of Bonus Act, please ensure that the employee demanding the bonus is legally entitled to it under the act. We are required to pay only to eligible employees and not to everyone.

Regards,

Anil Anand

Dear Anil,

As you said, a bonus is payable for a salary less than Rs. 3500 and calculated at a maximum of Rs. 2500. My query is, what about the difference of Rs. 1000? Do we need to pay a bonus on this difference? Do we need to pay it as ex-gratia?

My current organization is paying it as ex-gratia. Is it left to the organization to decide about paying this difference? If an employee's salary is more than Rs. 3500, is it that a bonus need not be paid? Or again, for computing the bonus, do we have to assume that the salary is Rs. 2500 and the minimum bonus payable is Rs. 6000 per annum? Or can they be given ex-gratia on similar lines of the Bonus act, but not statutory in nature?

Regards,
Anuradha

Dear Anuradha,

So far, there is nothing on the records for the Rs.1000.00 difference between Rs.3500 and Rs.2500.

The limit of Rs.3500.00 was meant for extending the statutory benefits under the Payment of Bonus Act, 1965. To deem an employee eligible for statutory bonus under the act, their salary should not exceed Rs.3500.00. If there is an increase in salary during the accounting year, the employee will be out of the purview of the statutory provisions from the date of such increase. However, they will still be entitled to a bonus for the period during the accounting year in which the salary was less than Rs.3500.00.

On the other hand, the salary limit was revised to extend the benefit to more employees, but the calculation limit was maintained at Rs.2500.00 per month to avoid imposing a significantly higher financial burden on employers.

Legally, no bonus payment is required on Rs.1000.00, but paying it as ex gratia will not be a statutory requirement.

The minimum bonus should be calculated based on the actual salary received by the eligible employee during the accounting year at the rate of 8.33% of the salary. Therefore, this figure can vary but certainly not be Rs.6000.00.

Rs.6000.00 is the maximum bonus payable under the Payment of Bonus Act, calculated at a rate of 20% of the salary assuming a monthly salary of Rs.2500.00 (30000 * 20% = 6000).

Regarding Ex Gratia, it depends on the company's policy. It is at the discretion of the organization to pay any amount as ex gratia to any or all employees, but it will not be considered a statutory payment under the Payment of Bonus Act. As Ex Gratia payment is discretionary, it can be made to employees even if they are eligible under the purview of the Payment of Bonus Act, 1965.

The employer is obligated to pay the ex gratia if it is a part of the employment terms agreed upon by both employer and employee.

Additionally, bonuses should be paid within eight months of the close of the accounting year, whereas no such condition applies to Ex Gratia payments. Typically, most employers pay bonuses and Ex Gratia during Diwali, which falls in either October or November every year, covering an eight-month period from the close of the accounting year if it runs from April to March.

I hope this clarifies everything.

Regards,

Anil Anand

Dear Anil,

Thank you very much. We are paying on the difference because 20% of the basic is the bonus/ex-gratia amount, and it is included as part of the Cost to the Company.

Regards,
Anuradha Zingade

Kindly let me know all the legal registers that have to be maintained under the Payment of Bonus Act, 1965. This is urgent.