Why Are Bonus and Gratuity Ceilings Still So Restrictive Despite Salary Increases?

Bonus and Gratuity: Understanding the Ceilings

Whether a bonus is payable only as per the ceiling or if there are other provisions that require an organization making a profit to declare a bonus despite the coverage is an important question.

Bonus is considered a deferred salary, while gratuity is a reward for good service, as the saying goes. Then why is it restricted? The ESI Act ceiling, Bonus Act ceiling, and Gratuity Act ceiling used to be revised simultaneously or one after another, as they are benefits meant to be adjusted with the enhancement of salary. Despite the raise in salaries and the purview of Gratuity ceiling and ESI coverage, why is the Bonus kept where it is?

What is the way forward, and are there any scopes or provisions that are not widely known? Many industries pay ex-gratia in lieu of a Bonus despite the ceiling.

Dear Nazir, the concept and payment of bonuses originally stemmed from the abnormal profits earned by industries during the World Wars while wage levels remained constant at the minimum. Eventually, the practice became permanent, and bonuses came to be treated as deferred wages even in the absence of profits. The cumbersome process involved in calculating profits, applying tax laws to company revenues, and ensuring equity by giving employees a share in profits led to the need for a special law exclusively for this purpose. As you are aware, any law regarding financial matters would essentially be regulatory due to practical difficulties such as financial calculations, performance ratios, pecuniary advantages in earnings, and uniform application. Hence, the restrictions on applicability, provisions for periodic earmarking of bonuses, and the range of rates.

Now, addressing your queries directly, paying bonuses within set limits would not increase the employer's tax liability. Just as space is defined by occupancy and freedom by reasonable restrictions, fringe benefits with a statutory nature should also have limitations, subject to revision based on circumstances. If you find the time and patience to thoroughly review the amendments made to the Payment of Bonus Act, 1965, you will discover more convincing answers to your questions and some that may have been hidden.

Please let me know if you need any further assistance or clarification.

Best regards