Bonus Eligibility Confusion: Should We Use Basic Salary or Total Gross for Calculations?

Understanding Salary or Wages Under Section 2(21)

Section 2(21) states that the definition of "salary or wages" means all the remuneration (other than remuneration in respect of overtime work) payable to an employee in respect of his employment or work done in such employment. It includes dearness allowance (meaning all cash payments, by whatever name called, made to an employee on account of a rise in the cost of living). However, it does not include:

i) any other allowance to which the employee is entitled at the time
ii) the value of house accommodation or the supply of light, water, medical attendance, or other amenities
iii) any traveling allowance
iv) any bonus (including incentive, production, and attendance bonus)
v) any contribution paid or payable by the employer to any pension or provident fund
vi) any retrenchment compensation, gratuity, or retirement benefit payable to the employee
vii) any commission payable to the employee

Company Allowances Structure

Our company provides the following allowances: Basic + HRA + Special Allowance + LTA = Gross.

Bonus Eligibility Query

If we are determining the eligibility of a bonus for our employees, should we consider Basic or Total Gross? Please advise.

Thank you.

Special Allowance in Salary Calculation

For the purpose of calculating bonuses, salary or wages include only the Basic Salary and Dearness Allowance/Special Allowance.

Special Allowance

Special allowance differs from company to company. In some companies, it constitutes any allowance or benefit granted to employees to meet specific expenses towards the efficient performance of duties in an office or employment of profit (as laid down in the IT Rules, 1962).

If it is specifically granted to employees, it is exempt to the extent of actual expenditure incurred.

However, in pay slips given to employees by some companies, any amount labeled as 'special allowance' is usually the leftover component of the salary, after allocations are divided into basic, LTA, transport allowance, HRA, and so forth. Special allowance is, therefore, money that does not fit into any other category in a salary slip or the residual factor. After all the different components of a salary slip, including benefits, are allocated, the remaining sum of money which makes up the annual CTC forms part of the special allowance.

In your case, the eligibility of the bonus for your employees will be Basic + Special Allowance (as Dearness Allowances are not included in the salary slip).