How Do Bonuses Work? Understanding Eligibility and Calculations with Examples

Understanding the Concept of a Bonus

Please help me understand the concept of a bonus, including its eligibility criteria, with a simple illustration. For example, how much bonus would a person be entitled to if they have a gross salary of Rs. 15,000 and joined an established organization on 1.03.2008?

Your help is greatly appreciated.

Thanks,
Sarmistha

Understanding the Payment of Bonus Act 1965

As per the Payment of Bonus Act 1965:

1. If an employee receives less than ₹10,000 as basic salary, they are entitled to receive a bonus.
2. An employee must work at least 30 days in a financial year to be eligible for a bonus.
3. Bonus calculation is based on a presumed basic salary of ₹3,500 per month. Therefore, all employees whose basic salary falls between ₹3,500 and ₹10,000 will receive the same bonus.
4. The minimum bonus is 8.33%, and the maximum is 20% of the basic salary earned in a year.

He is not entitled to a bonus because he is out of the purview of the Act. Persons drawing Rs. 10,000/- per month only are eligible for a bonus as per the Bonus Act.

Regards,
D. Gurumurthy HR/IR Consultant

I agree with Malik Sir. Here is another important point to note: an establishment that has not completed six years from the date of establishment need not go for a bonus. This is determined based on the surplus and deficit of the company's balance sheet.

In your case, kindly look into the wage definition of the Bonus Act: if an employee's BASIC + D.A is less than ₹10,000/-, then he/she is eligible for a bonus, even if the gross salary is more than ₹10,000/-. For calculation purposes, it is restricted to ₹3,500/-, considering the earned wages of individual months.

Thanks,
Naresh

Rule 1
The organization should have completed 5 years or made a profit, whichever is earlier.

Rule 2
All employees who have earned wages for a minimum of 30 days in an accounting year are eligible for a bonus.

Rule 3
All employees drawing Basic plus DA not more than Rs 10,000 per month are eligible for a bonus.

Rule 4
If an employee draws Basic plus DA of Rs 10,000 or less for part of the period, then he or she is eligible for a bonus for those months.

Rule 5
The percentage of the bonus is dependent on the allocable surplus. Please consult your auditor to find out what the allocable surplus is in your organization.

Rule 6
If the percentage works out to be less than 8.33, then the organization needs to pay 8.33 as the minimum bonus, and the principle of setoff and set on will be applied.

Rule 7
It is calculated on actual Basic plus DA or Rs 3,500, whichever is lower. That means employees drawing wages more than Rs 3,500 but up to Rs 10,000 will get the same bonus.

There are a few more finer points in the Payment of Bonus Act:

- The minimum was 4% in 1965, then revised to 8.33%, and then brought down to 4% in 1972, and then again revised to 8.33%.
- The salary limit was Rs 750, then raised to Rs 1,600, then to Rs 2,500, and now to Rs 3,500.

Regards,
Sivasankaran