Bonus Calculation Dilemma: Should It Be Based on Basic or Gross Wages?

Hi, kindly guide on the following for the bonus payable.

Bonus calculation basis

Bonus calculation should be made on the basic wage or on gross wages. For example, the basic wage is 15,000 and the gross wage is 35,000, for which we have to consider the bonus calculation.

If the company does well, it means the available surplus and allocable surplus are good.

Dear Colleague, The Payment of Bonus Act 1965 defines wages or salary as detailed below. For easy understanding, the components—BASIC + Dearness Allowance—are to be accounted for when calculating the Bonus.

From the year 2015, employees whose salary or wages are up to Rs. 21,000/- are covered under the Bonus Act. The calculation of wages is restricted to Rs. 7,000 or the minimum wage for scheduled employment, as fixed by the appropriate Government, whichever is higher, for the purpose of making payment of bonus at 8.33% or such higher percentage of wages.

Components of Salary or Wage

Kindly read the details below for understanding the included and excluded components:

2(21) "salary or wage" means all remuneration (other than remuneration in respect of overtime work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment or of work done in such employment and includes dearness allowance (that is to say, all cash payments, by whatever name called, paid to an employee on account of a rise in the cost of living),

but does not include:

(i) any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or supply of light, water, medical attendance, or other amenity or of any service or of any concessional supply of food grains or other articles;
(iii) any traveling concession;
(iv) any bonus (including incentive, production, and attendance bonus);
(v) any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the employee under any law for the time being in force;
(vi) any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex gratia payment made to him;
(vii) any commission payable to the employee.

Bonus Eligibility and Calculation

An employee whose salary exceeds Rs. 21,000 per month shall be excluded from the payment of a bonus. Salary for the purpose of the bonus means the total salary as per the agreement with the employee. However, allowances like HRA will be excluded. Therefore, conventionally, the basic salary and dearness allowances are considered as bonus-qualifying salary. In case you do not pay DA, then consider the basic salary only.

Even in the case of those who come under bonus brackets, for instance, if the basic salary is Rs. 15,000, the bonus will be calculated based on a salary of Rs. 7,000 or the statutory minimum wage fixed by the respective state government for the particular employment. For example, if your establishment falls under any scheduled employment and the minimum wage is Rs. 10,000, then the bonus should be calculated on that Rs. 10,000 and not on Rs. 7,000.

Bonus Rate Determination

The rate of the bonus shall vary from 8.33% to 20%. The rate is decided based on the available surplus, but in practice, it will be determined through negotiations with the union or workers, or by the employer solely unless there is any objection.

What Dr. Sivakumar and Mr. Madhu T K have posted, I would like to add the following:

1. Bonus is a deferred wage. Therefore, the bonus for the financial year 2021-2022 will be payable by 30th November 2022, which is within 8 months after the completion of the financial year.

2. Most of the states publish minimum wages twice a year. So, the average minimum wages should be determined for different skill grades USK, SSK, SK & HSK for the financial year 2021-22 to pay the bonus in 2022.

3. As mentioned in the original post that there is enough Available Surplus and allocable surplus, the percentage of bonus across the board should be determined first by the determination of the minimum bonus (8.33%) in each grade based on the minimum wages of each grade, and then the total bonus disbursement amount by multiplying the number of eligible employees in each grade and summing up the total disbursement for all skill grades for the organization.

4. We will arrive at the total amount required to be disbursed across the board for the minimum bonus, let's say the amount is x and the total allocable surplus is A. Therefore, the percentage of bonus will be (8.33/x) * A. Before doing the calculation, any Set on or Set off, if any, has to be considered. If the percentage is below 20, then the said percentage should be paid across the board. If the percentage is more than 20, then 20% will be across the board, and if any surplus amount is left after the disbursement of the bonus, the said amount, subject to a maximum of 20% of the value of the amount, will be Set on.

5. If the organization has business in more than one state and has only one balance sheet, then in the above way, first determine the amount of 8.33% bonus, which is the minimum bonus for all locations for all grades, and then determine the percentage of bonus for the organization.

Regards, S K Bandyopadhyay

Hey, Bonus is a kind of reward to an employee for their hard work, dedication, and excellent performance.

Bonus calculation

Bonus calculation can be a bit tricky if you do not know the right way to do it! That being said, for the bonus calculation, remember that basic salary, as well as dearness allowance, are included. Also, the following components are not used for the same:

- HRA
- Travelling costs
- Overtime payment
- Employee contribution to provident fund
- Gratuity

Things to consider during bonus calculation

If an employee’s wage is equal to or less than Rs. 7,000, then their bonus will be computed on the actual amount with this formula: B = TP * 8.33 / 100. If an employee’s wage is more than Rs. 7,000, then their bonus will be computed this way: B = 7,000 * 8.33 / 100. Here, B stands for bonus and TP is for total payment or salary.

Hope this answer helps you!

As per the amendment in 2015, it was mentioned, "7000/- rupees or minimum wages whichever is higher" instead of 3500/- for the purpose of Bonus Calculation.

In the above calculation, it is mentioned that wages equal to or less than 7k are not specified in the 2015 amendment. Therefore, equal to 7k will not be applicable; it will be only less than 7k.

In the second condition, as per the amendment, it should be 7k or minimum wages whichever is higher instead of only 7k.

Bonus % may be anything between 8.33% to 20%, not only 8.33%.

For determining 7k or less, only Basic and DA (In the absence of DA - ONLY Basic should be considered) should be considered as mentioned above for other posts.

In the exclusion list, it is also mentioned that any other allowance to which the employee is currently entitled.

S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To strive towards excellence with effort and integrity