Can We Legally Add Statutory Bonus to Salary as a Pay Head? Seeking Urgent Advice

Hi everyone, I work as a statutory compliance officer (fresher). I have a doubt regarding the Payment of Bonus (statutory bonus). Can it be added as a pay head in the salary? Is it legal, or is it an addition to the salary of any employee? Can we practice two different approaches in one financial year? For example, for a few months, we were considering the statutory bonus as an addition to the gross salary, and later, we considered it as a part of the gross salary by changing the salary structure. Is it feasible? Urgent, please reply as soon as possible along with supportive documents or links if available.

Statutory Bonus and Salary Components

Statutory Bonus is based on the amount of salary or remuneration, which includes the components of basic and dearness allowance only, as defined under Section 2(21) of the Payment of Bonus Act, 1965.

The bonus contemplated under the Act is related to the performance of the establishment in any given accounting year. The performance of the establishment is assessed only at the close of the accounting year.

Exclusion of Statutory Bonus from Wages

Moreover, Section 2(vi) of the PW Act, 1936, excludes statutory bonus from the definition of wages. Therefore, it cannot be merged with the gross monthly salary as a component by tentatively fixing it at a rate according to one's convenience.

Restrictions on Changes in Wages

The employer is precluded from effecting any unilateral change in wages as and when according to his whims and fancies under Section 9-A read with Schedule IV of the ID Act, 1947.

When you pay a bonus along with the monthly salary, the problem is that you will be deferring the bonus payment beyond 8 months of closing the financial year. That is legally not correct.

Payment of Bonus and Salary Structure

There is nothing wrong with paying a minimum bonus of 8.33% along with the monthly salary as long as you are not violating the provisions of the Payment of Wages Act and the Minimum Wages Act. You need to ensure that the bonus amount is not debited to the Salary or Wages account but to the Bonus account.

At the end of the Financial Year, based on the Profit & Loss account, the company needs to calculate allocable surplus as per the provisions of the Payment of Bonus Act and arrive at the percentage of bonus payable for the respective financial year.

Any difference over and above the 8.33% bonus needs to be paid to the respective employees within 8 months from the date of the close of the financial year. If your company is treating the bonus amount as a part of the salary, then it is a wrong assumption or practice.

Regards, Suresh

Bonuses are issued on a monthly basis and are subject to PF and ESI deductions.

If 8.33% of the bonus amount is debited to the Bonus account in your Books of Account every month, which is a part and parcel of the bonus due to employees, then PF & ESI will not be attracted to a particular monthly bonus amount.

Regards, Suresh