Understanding the Bonus Act: When Does the Rs. 3500 Minimum Bonus Apply and Are There Penalties?

Hi Seniors,

I would like to know more details on the Bonus Act.

1. When does the payment of Rs. 3500/- come into effect as the minimum bonus amount?

2. The bonus is actually paid at 8.33 percent or a maximum of 20 percent. Please explain the terms of offset and onset in detail.

3. If the company has been in business for 7 to 8 years (profit earning) and only considers Rs. 3500/- as the payment of the bonus, will there be any penalty?

Kindly provide me with inputs on the above.

Thanks,
Vjaya

Dear Vijaya,

Minimum bonus raised to Rs. 3500 w.e.f 01.04.2006. As per the Bonus Act, the minimum is 8.33% and the maximum is 20%. If the allocable surplus is below 8.33%, it can be adjusted over the forthcoming 4 years, called Set Off. Similarly, if the allocable surplus is more than 20%, the balance amount up to another 20% can be carried forward to the forthcoming 4 years, which is called Set On.

Abbas.P.S

Is payment of bonus mandatory? And if a company is not earning profits, should the company still pay the bonus?

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Is payment of bonus mandatory?

And if a company is not earning profits, should the company still pay the bonus?

Hi Abbas,

I still have queries about this. There is no mention of Rs. 3500 in the Bare Act. I will check the amendment. It is not mandatory to have a 20% bonus. The minimum bonus is mandatory to the best of my knowledge, Nauman.

Thanks,
Vijaya

Dear Vijaya, In reference to your query, I wish to bring to your knowledge that the upper limit of Rs. 3,500/- for the coverage of employees under the Payment of Bonus Act, 1965 has been enhanced to Rs. 10,000/- vide Gazette notification no. 50 dated October 27, 2007. A copy of the notification is attached herewith.

Minimum Bonus Requirements The minimum bonus which an employer is required to pay, even if he suffers losses during the accounting year or there is no allocable surplus, is 8.33% of the salary or wages during the accounting year. If in an accounting year, the allocable surplus, calculated after taking into account the amount 'set on' or the amount 'set off', exceeds the minimum bonus, the employer should pay a bonus in proportion to the salary or wages earned by the employee in that accounting year, subject to a maximum of 20% of such salary or wages.

Penalties for Contravention For contravention of the provisions of the Act or rules, the penalty is imprisonment up to 6 months or a fine up to Rs. 1,000, or both.

Regards,
BS Kalsi

Dear Vijaya,

In the above-cited notification (posted by BS Kalsi), section 2 deals with salary for bonus coverage and section 3 with salary for payment. As per this, the salary for payment is enhanced from Rs. 2500 to Rs. 3500. The minimum bonus is 8.33%, which is the percentage form of 1/12, i.e., the minimum bonus is one month's salary for 12 months' service.

Abbas.P.S

Dear Vijaya,

Your posting is correct with a condition that the allocable surplus is sufficient to pay a 20% bonus. If it is less, the percentage of bonus will be less than 20%, up to 8.33%.

Abbas. P. S

Dear Vijaya, If in an accounting year, the allocable surplus, calculated after taking into account the amount 'set on' or the amount 'set off,' exceeds the minimum bonus, the employer is required to pay a bonus in proportion to the salary or wages earned by the employee in that accounting year, subject to a maximum of 20% of such salary or wages. If excess allocable surplus remains after paying the maximum bonus of 20% on the wage or salary of the employee, the same shall be carried forward to the next following year to be utilized for the purpose of payment of bonus in case of a shortage of the allocable surplus or if losses occur. Similarly, when there are no profits (available surplus or allocable surplus) or the amount falls short or is deficient for payment of the minimum bonus to employees, such deficient amount should be adjusted to the current accounting year from the set-on amount, which was carried forward in case of excess allocable surplus in the previous year.

Regards,
BS Kalsi

Understanding the Bonus Act: Key Points

Below are 14 points to help you understand the Bonus Act:

1. Number of employees (Maharashtra): 10 employees
2. Number of employees (Other): 20 employees as per the Act
3. Salary component: Basic + DA (Special Allowance)
4. Minimum physical working days in the accounting year: 30 days
5. Minimum amount to be paid as a bonus: Rs. 100/-
6. Maximum salary (Basic + DA) considered for bonus calculation: Rs. 3500/-
7. Maximum salary (Basic + DA) considered for bonus eligibility: Rs. 10000/-
8. Percentage: 8.33% to 20%
9. Maximum amount that can be paid as a bonus: Rs. 8400/-
10. Bonus calculation period: April to March
11. Last date of bonus payment: 30th Nov
12. Last date of bonus payment (Dispute): Within 1 month
13. Final liability of bonus payable if the contractor fails to pay: Principal
14. Exemption for newly established organizations (Loss-making year): 5 years

I hope these points clarify the Bonus Act for you.

Provisions and Benefits for Newly Formed Establishments

There are provisions and benefits for newly formed establishments as well. According to these provisions, for the first five accounting years following the accounting year in which a bonus is payable, it is only in respect of the accounting year in which profits are made.

If an organization does not make a profit in the first year, then a bonus cannot be paid. However, if in the next year the company makes a profit, the organization has to pay a bonus as per the act. Again, if in the following year the organization does not make a profit, then the bonus is not payable. This is applicable only for the first five years. After the fifth year, a bonus is payable whether a profit is made or not.

Regards