Understanding Bonus Calculations: Which Salary to Use and Is Bonus Part of Final Settlement?

The Payment of Bonus Act, 1965

I have two questions related to "The Payment of Bonus Act, 1965." As per the amendment in 2014, the new wage/salary limit is Rs. 21,000/- per month. Those who are receiving wages/salary up to Rs. 21,000/- are eligible to receive a bonus. The minimum bonus wage/salary limit for bonus calculation is Rs. 7,000 or the state schedule minimum wages, whichever is higher.

Bonus Calculation Criteria

Now, my question is, if an employee is appointed as an operator and is receiving Rs. 15,000/- per month as salary, and the state schedule employment rate for his category is Rs. 11,000/-, then which amount should be considered for the calculation of the bonus? Should it be Rs. 15,000 or Rs. 11,000/-?

Bonus Inclusion in Full and Final Settlement

My second question is, during the payment of full and final settlement, should we include the bonus as a part of the full and final settlement or not, considering that the bonus payment percentage depends on the company profit?

Dear Rahul, please go through the amended Section 12 of the PB Act, 1965, which clearly states that where the salary or wage of an employee exceeds Rs. 7000-00 p.m., the bonus payable to such employee under Section 10 or, as the case may be, under Section 11, shall be calculated as if his salary or wage were Rs. 7000/= p.m. or the minimum wage for the scheduled employment as fixed by the appropriate Government, whichever is higher.

Coming to the case you cited, since the operator's salary is Rs. 15000-00 p.m., it exceeds the notional limit fixed under Section 12 of the Act. Hence, for the purpose of calculating the bonus, it should be treated as Rs. 7000-00 only - this is the basic point. However, since the operator's job comes under the scheduled employment of the Minimum Wages Act, 1948, and the minimum wages fixed for the job are admittedly Rs. 11000-00 p.m., which is higher than the notional wages of Rs. 7000-00, his bonus should be calculated on the basis of Rs. 11000/= only.

Bonus Payment

Bonus is a payment determined at the close of the Accounting Year and paid later to the employee for the services he rendered during the A.Y. If he leaves the organization before the declaration and payment of the bonus, he certainly has the right to claim it later. Therefore, it becomes part and parcel of the F&F Settlement due to him on his exit. The employer may indicate that the bonus for the services rendered during the AY prior to the date of his exit would be paid to him later when it is announced and payable.

There is one supplementary question as well. I continue with the above-mentioned example with a modification in salary. If an operator is getting a salary of Rs. 25,000 per month, whereas the state schedule rate for the operator category is Rs. 11,000, then in such a case, will he be covered under the Payment of Bonus Act or not?

Regards,
Rahul Sindhwani

Dear Rahul,

Whenever the salary of an employee exceeds Rs. 21,000.00 per month, they cease to be considered an "employee" under the Payment of Bonus Act, 1965, as per the definition in clause 2(13) of the Act from the day their salary exceeds the limit.

Thank you.

Sir,

We are facing an issue with this limit. Actually, a few of our employees are demanding a bonus as per their actual salary because we excluded a few of them due to high salaries (more than Rs. 21,000/-). Now, their demand is that if we exclude some of them due to high salaries, then we should consider the rest of the employees as per their actual salary for bonus payment. They are saying that management is showing double standards in the matter of bonus payment.

Dear Rahul, eligibility for a bonus and the calculation of a bonus are entirely different. For eligibility for a bonus, those who are receiving wages/salary up to 21,000 are eligible to receive a bonus. For the calculation of a bonus, the minimum bonus wages/salary limit is 7,000 or the state-scheduled minimum wages, whichever is higher. Therefore, for the bonus calculation, you should consider the minimum wages/salary limit of 7,000 or the state-scheduled minimum wages, whichever is higher. However, for the bonus calculation, you should not consider the salary threshold set for the eligibility of the bonus, i.e., 21,000.

Kind regards