Bonus Distribution Dilemma: How Can We Apply a 15% Bonus Under the Bonus Act?

Bonus Distribution Conditions

The minimum bonus is 8.33%, and the maximum is 20% as per the Bonus Act. However, my employer wants to distribute a 15% bonus. On what conditions can we make it applicable?

Regards,
Minakshi

It is entirely at the employer's discretion what the percentage of the bonus should be. Bonuses can fluctuate from a minimum of 8.33% to a maximum of 20%. Therefore, the employer can disburse it ranging from 8.33% to 20%.

Regards,
Arpit Jain

Thanks to Arpit & Suresh for the reply.

1) How is the percentage of bonus connected to profit?
2) If the company is under loss, is the company still bound to pay a bonus?

Regards,
Minakshi

I have a doubt regarding the bonus. Will the bonus be calculated based on the Gross salary or Basic + DA?

Thank you.

Understanding Statutory Bonus

The bonus is 8.33% of the salary, specifically the basic salary of the employee. This is known as the statutory bonus. Some companies include this while drafting the CTC as well.

Chill HR

Dear Minakshi, I am giving a bonus to 500 employees (including workers) of 8.33% on their earned salary (based on their attendance - without any deductions). The bonus will be disbursed one week before Diwali.

Regards,
Mohan Nair

If the company is in loss, then as per the Bonus Act, there is a facility of set off and set on. The minimum bonus payable for this year can be carried forward to the next year (maximum up to three years).

Regards

Even if your company is in loss, the bonus will be decided by the management depending on the union demands, if any. After negotiation with trade unions, they will fix the bonus percentage. 8.33% is to be paid as a bonus. The excess amount, if any, will be treated as ex-gratia. The bonus is calculated based on Basic + DA.

Regards,
S. GANAPATHY

You can distribute the bonus among employees as per the company's profitability. We can distribute the bonus between 8.33% and 20%. Within this range, we can adjust according to our company's profitability. As per the act, the bonus is payable on basic + DA. Normally, the bonus is payable after the final accounts have been prepared. Bonuses are usually not given at the time of Diwali.

Kind Regards,
Bhargavi Solanki - HR

If you have any queries or suggestions, please do revert back.

If an employee is paid a salary above ten thousand, they are eligible for a bonus as per the Payment Act.

Regards,
Mahadeva

As per the Payment of Bonus Act 1965, any employee receiving basic wages up to Rs. 10,000 will be covered under the Payment of Bonus Act, 1965.

Regards

Dear Minakshi, The Bonus Act fixed the percentage of Bonus, i.e., a minimum of 8.33% and a maximum of 20%. An employer can pay any percentage between the two limits. However, it should be a part of collective bargaining through a union or any other negotiation platform.

Thanks & Regards,
Subhas

A company is giving a 20% bonus to all employees for the Diwali festival. However, resigned employees are only receiving 8.33% (i.e., statutory only). Is this correct?

Additionally, one employee completed 2.6 years of service and then resigned. In the first year, he received a 20% bonus, and in the second year, he should have received a bonus as well. If he had worked until the Diwali festival, he would have been eligible for a 20% bonus for the second year. Unfortunately, he resigned before the festival.

Now, the management wants to give him 8.33% only for a total of 1.6 years. Is this the correct approach?

Please clarify my query.

Thanks & Regards,
KAR

As per the Bonus Act, it is correct that the minimum bonus is 8.33% and the maximum bonus is 20%. However, the percentage of the bonus depends on the profitability of the company, which comes from Bonus registers A and B usually maintained by Finance personnel. First, allocate the bonus amount from registers A and B, then calculate the percentage of the bonus. If the company is in a loss, then it must be 8.33%, but in case the company is in profit, then the percentage amount needs to be calculated, which is basically derived from registers A and B.

Regards,
Arun

Thank you for your reply. Further to this, I wanted to ask: can we pay the bonus between 8.33% to 20% as per the company's profitability? How exactly is the percentage of the bonus correlated to profitability, i.e., at which amount of company profit can we decide on the 15% bonus?

Regards,
Minakshi

Let me clarify about the bonus.

Conditions:

1. The bonus will be calculated based on basic + DA.
2. If an employee withdraws basic + DA exceeding 10k, they cannot claim the bonus.
3. An employee must have worked at least 30 days in the assessment year to be eligible for the bonus.
4. The minimum bonus percentage is 8.33%.
5. The maximum bonus percentage is 20%.
6. The bonus is not mandatory for the first 5 years if the company is in a loss. However, the company's accounts department must maintain Form A and Form B, where they state the reason for the loss.
7. After 5 years, regardless of profit or loss, the company is obligated to pay the bonus as per the prescribed percentage.
8. Form C is maintained by the company for bonus distribution.
9. Form D is used for the annual return of the bonus.
10. The minimum bonus amount is 3500.
11. The maximum bonus amount is 8400.
12. If the company decides to offer more than 8400, it will be termed as ex gratia.
13. Here, I am explaining the formulas or calculations for the bonus.

Suppose your basic salary is 6000, and your company provides an 8.33% bonus. If you work full days every month, you will earn 72000 as the basic salary annually. According to the bonus percentage, 72000 * 8.33% = 5998.

However, the company only offers 3500 as the bonus, which might be confusing to you.

The reason for this is that the standard bonus basic is considered 3500 as per the act. Even though your basic salary is 6000, the bonus basic will be 3500 if you are present for a full day every month.

So, the calculation is 3500 * 12 = 42000.

42000 * 8.33% = 3500.

42000 * 20% = 8400.

Ultimately, it is entirely at the company's discretion whether they choose to provide the bonus based on your actual basic salary.

I hope, Minakshi, that this concise explanation clarifies the concept of the bonus.

Thanks and regards,

Vikas Khatter.

Thank you for your response, Vikas. Would you please review my query once again? It's quite different from what you told me. My question is, how is the bonus percentage of either 8.33%, 15%, or 20% correlated to the company's profit?

Regards,
Minakshi

Reply to your query is given in Section 11 of the Payment of Bonus Act which reads as under:

Payment of Maximum Bonus

11. (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.

(2) In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section.

Hence, you have to calculate the allocable surplus of your unit and work out the bonus payable accordingly.

Dear Minakshi,

As per the provisions of the act, the percentage of bonus is entirely at the employer's discretion (8.33% - 20%).

Bonus is a statutory obligation, and ex-gratia is optional. I do not agree with Mr. Suresh's opinion.

It is rightly said by Ms. Manasi that there is a provision for set on and set off to address the loss situation.

According to the provisions of the Bonus Act, if your salary is less than Rs. 10,000 (Basic) and you have worked for 30 days in an accounting year, you will be entitled to a bonus. The bonus will be calculated on an amount less than or equal to Rs. 3,500 per month (sec 12) at a minimum rate of 8.33% (sec.10) and a maximum of 20% (sec.11). The percentage depends on the allocable surplus of the company, but an employer must pay a mandatory 8.33% even if they are not making a profit. There is also a provision that for a new company, the act provides a 5-year relaxation. However, if the company earns a profit during the year, it must pay a bonus for that particular year (sec.16).

With Regards,

Regards

Hi Minakshi, I wanted to let you know that there is no specific criterion for distributing the percentage of bonus based on profitability. It entirely depends on the employer's discretion. The employer can choose to give any percentage of bonus.

Thank you.

Sir, I have a doubt regarding the bonus. Will the bonus be calculated based on Gross salary or Basic + DA? Bonus should be calculated on BASIC, which should not be less than ₹3500 per month. For example, if an employee's basic is ₹2600, then it should be calculated as ([2600 * 8.33% * 12 / 12]). If an employee's basic is more than ₹3500 per month, then only ₹3500 should be considered ([3500 * 8.33% * 12 / 12]). Full attendance is the only consideration for such calculations.

Every year, a calculation for the bonus is to be done as per the Payment of Bonus Act, which is normally based on profits as per the profit and loss account. Depending on that calculation, the percentage of the bonus is calculated, which can vary from a minimum bonus of 8.33% to a maximum of 20% of the basic salary earned during the year. The maximum slab for the calculation of basic salary is Rs 3500/-, and the eligibility for the bonus ceiling is Rs 10000/- basic salary.

If the company is in loss, then as per the Bonus Act, there is a facility of set-off and set-on. The minimum bonus payable for this year can be carried forward to the next year (maximum up to three years).

Whether the company is in loss or profit, as per the act, the employer should pay a minimum bonus of 8.33%. The bonus is calculated based on Basic + DA.

Clarification on Bonus Calculation

Can anybody help me clarify if the bonus is calculated based on the company's profit or employees' basic pay + dearness allowance (DA)? What are the criteria used for the calculation?

If you need further assistance or have any other questions, feel free to ask!

I have gone through all the above postings and seen that nobody has correctly responded to your query. Firstly, the employer has to calculate the available surplus after applying direct taxes, developmental rebate, depreciation, etc., on the gross profit. (Better consult an expert in this regard).

Calculate the Allocable Surplus

For Banking Institutions, the allocable surplus is 60% of the available surplus, and for others, it is 67%. If there is any amount to be adjusted towards set on/set off, that also needs to be considered.

Distribute the Allocable Surplus

Distribute the allocable surplus among the eligible employees, i.e., those who draw a salary up to Rs. 10,000. Bonus payment is statutory, and bargaining is not mandatory. If you want to get an excess, bargaining is required.

Regards,
Abbas.P.S

You have asked such a question in which the whole theory/concept of the Bonus Act is involved. It is very difficult to answer your question in any short form. However, I would like to try to explain/answer your query in the following manner, and hope you will be able to understand the concept of the Bonus Act.

Minimum Bonus Obligation

First of all, I would like to address your second query which is whether the company is bound to pay a bonus even if it is making losses. If so, what is the minimum bonus payable by the employer to their employees every year? The employer is obligated to pay their employees a minimum bonus of 8.33% of the salary or wage or $100.00, whichever is higher, every year, regardless of whether there is any allocable surplus or not (Section 10).

Maximum Bonus and Profitability

Moving on to your first question - What is the maximum bonus payable by the employer to their employees in any year? Is the bonus amount linked to the profitability of the company? Yes, the maximum bonus amount is indeed linked to the profitability of the company. When the allocable surplus in any year exceeds the amount of the minimum bonus payable to the employees, the maximum bonus that the employer can pay to their employees in that year is 20% of the salary or wage (Section 11).

To fully understand the concept, it is essential to grasp the meanings of "available surplus" and "allocable surplus" and their connection to the bonus. Bonus payment under the Act is tied to profits. The employer must calculate the "gross profits" of their establishment as specified in Section 4. From the gross profits calculated, they deduct the sums mentioned in Section 6 as prior charges. The remaining amount is referred to as the "available surplus." A percentage of the available surplus, calculated following the provisions of subsection (4) of Section 2, is termed the "allocable surplus." If the allocable surplus for a year surpasses the minimum bonus amount payable to the employees, the employer must pay each employee a bonus proportionate to their salary or wage earned, up to a maximum of twenty percent (Subsection 2(4), 4, 5, 6 & 11).

The principle behind setting minimum and maximum limits for bonus payment is to ensure that the bonus rate does not fluctuate widely from year to year.

Principle of Set On and Set Off

Regarding the principle of set on and set off of allocable surplus: Where the allocable surplus for a year exceeds the maximum bonus payable to employees, the excess (up to twenty percent of total salary or wages) can be carried forward to the next year for bonus payment. Conversely, if there is no available surplus for a year or if the allocable surplus falls short of the minimum bonus payable, any shortfall can be carried forward to subsequent years for offsetting (Section 15).

I hope this explanation helps you understand the concept of bonuses and answers your questions.

Regards,
Pkjain

The concept of CTC and the Bonus Act is quite different. When we are talking about the provisions of the Bonus Act, we have to be firm with the provisions of the Act, which shall be followed by the employers as a mandatory condition. Violation of the same will be punishable, and even the statutory authorities can intervene in the matter if there is any dispute.

What I have narrated is all about the Act. Moreover, if any percentage is provided in the CTC, it would be treated as part and parcel of the package salary, and the company is bound to pay it without any condition as a part of CTC, even if the employee concerned is not entitled as per the Bonus Act (in such a case, the calculation of available & allocable surplus is not necessary). In other cases, the employee is to be paid only if he/she is entitled as per the statutory provisions of the Bonus Act.

While considering/deciding the CTC, every employer keeps in mind this aspect. That is why some companies (which are not sure about the payment of Bonus Payment) do not include it in CTC.

Regards,
Pkjain

Could you please inform me about the amount of the bonus that is subject to sealing, and what is the minimum limit set by the employer that must be paid to the employee within a one-year working period?

As per the Bonus Act, employees earning up to ₹10,000 per month are entitled to a bonus. The calculation should be based on a salary of ₹3,500 per month, with the minimum limit set at 8.33% and the maximum limit at 20%.

1. The Act enables employees to receive a minimum bonus equivalent to one month's salary or wages (8.33% of annual earnings) regardless of whether the employer generates any profit. However, the Act also imposes a cap on the bonus, with the maximum amount payable being approximately 2 1/2 months' salary or wages (20% of annual earnings).

2. It should be noted that employees earning a salary or wage exceeding Rs. 10,000.00 per month are not eligible for any bonus under the Act (effective from 1 April 2006).

3. An employee becomes eligible for the bonus only after working for 30 days in that particular year. {Section 8}