Understanding Bonus Act Compliance: Can We Choose a Bonus Percentage Between 8.33% and 20%?

Bonus Act Compliance Query

As per the Bonus Act, "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 wages earned by the employee during the accounting year subject to a maximum of twenty percent of such salary or wage."

Query: We have enough allocable surplus. Can we declare a bonus percentage between 8.33% and 20%, or are we liable to pay 20% flat?

Dear,

Even if you have a surplus fund in any account year, it is mandatory to pay a bonus at 8.33%. There is no compulsion to pay 20% if the surplus is higher; however, if the management is willing to pay at 20%, no one will stop them.

Dear Anonymous friend,

I believe that if an employer has allocable surplus, they can pay a maximum bonus of twenty percent of the total salary or wages of the employees of the establishment in that accounting year. The remaining surplus will be carried forward for use in the succeeding years to be utilized for the payment of bonuses, as illustrated in the Fourth Schedule of Section 15 of the Payment of Bonus Act, 1965.

BS Kalsi,
Member Since August 2011

You are required to pay a bonus to the extent you have money in your allocable surplus account. If you don't have a profit or have inadequate profit, the minimum you have to pay is 8.33%. If you have a profit exceeding 20% of annual wages (subject to a specified limit), you need to pay 20%. If your profits are between the two limits above, you need to pay the maximum amount that will be accommodated in the allocable surplus for that year (subject to set-off rules).

Can pay 8.33% and the remaining as ex-gratia as you like.

Pon

Pon,

If the allocable surplus is more than 20% of annual wages, they do not have an option but to pay a 20% bonus. It's not a choice. It's dictated by the act.

I think you misread the post.

Dear All, we have been providing a 20% bonus to all employees for a long time. Now, the management wants to reduce it to 8.33%. Since this has been a long-standing practice, can we change it to a minimum bonus of 8.33% without needing permission from the Labour Department?

Dear Colleague,

The bonus paid by organizations depends on the company's profits based on "Allocable Surplus" and "Available Surplus." You may refer to this document, which might be available with your Accounts department and is prepared in line with the provisions of the Bonus Act.

If your profits and the surplus for the bonus are reduced drastically compared to the years during which you paid a 20% bonus earlier, then you have every right to reduce the bonus proportionately. The Bonus Act stipulates 8.33% as the minimum bonus below which you cannot pay. Hence, the suggestion is to plot your profit trend and bonus percentage trend of the past. Compare it with the current year's profit and work out on a pro-rata basis. The bonus percentage may come anywhere, for example, 14% or 18%, and try to pay that. If you have no profit, then you may try for 8.33% after aligning with your Trade Union or Workers internally.

As long as there is no dispute, there is no problem if both Management and Workers/Trade Unions agree on a lower percentage of the bonus. If there is a dispute, then it will go for Conciliation. Hence, you may align with the Labour Commissioner of your area well in advance and seek his guidance.

There is no need for any legal permission from the Labour Department on this matter.

Bonus Calculation as per the Payment of Bonus Act

The bonus percentage as per the Payment of Bonus Act is scientific. From the gross profit, after arriving at the available surplus and the allocable surplus (usually determined by the finance/accounts department), the percentage of the bonus has to be calculated. According to the latest amendment, the minimum bonus must be paid based on the actual salary of ₹7000 per month or more, or the minimum wages, whichever is higher.

Firstly, based on minimum wages and allocable surplus (considering any set-on or set-off), determine the exact amount to be disbursed for the payment of the minimum bonus of 8.33%. If the allocable surplus exceeds that amount, then calculate the bonus percentage as follows:

If ₹X is required to pay an 8.33% bonus across the board, then ₹Y (more than X) from the allocable surplus can pay 8.33*Y/X = Z%. If the value of Z exceeds 20, then the bonus percentage will be capped at 20% as per the Payment of Bonus Act, and the remaining amount, up to a maximum equivalent to 20%, will be set aside.

When conducting these calculations, it is essential to remember that the bonus is deferred wages, and all values should be based on a specific financial year basis, not on a payable year basis.

Regards, S K Bandyopadhyay

Dear Padmakar_marudkar,

First, please ensure in the future you put your query in a new post. Otherwise, it is likely it will be ignored by the members if you put it in a post that is 5 years old.

Understanding Bonus Calculation

To answer your question, a bonus is a function of profit. The basis of computation is given in the act. You do not have a choice of lowering it on your own or even with the approval of the union. I am assuming you are in India, and the bonus is covered under the Payment of Bonus Act.

If your profit, as computed under the act, is more than 20% of your annual salary (check ceiling and eligibility), you have to pay a 20% bonus. If it is lower, then only you can pay a lower bonus but not below 8.33%.

Altering Bonus Terms

If you are referring to a bonus other than that under the Payment of Bonus Act, then lowering it unilaterally is an alteration of the terms of employment and can be raised as an industrial dispute. In that case, you need the approval of your union.