Am I Missing Out on a Bonus Because My Basic Salary Exceeds INR 21,000?

Hello, Good Afternoon! My total salary is about INR 54,000, and out of this, my basic salary is INR 25,000 per month. My company wants to pay a bonus to all employees, but as per the Payment of Bonus Act, we are exempted as our basic salary is more than INR 21,000. Please advise.

If the company is ready to pay a bonus to all employees irrespective of the salary ceiling fixed under the Act for entitlement, what is the issue? You can pay it. There is nothing wrong with paying a bonus to employees drawing a salary of more than Rs 21,000. Some companies pay it as ex gratia. In my opinion, there is no need to pay it under a separate head, but you can pay it as a bonus itself because there is no such compulsion even under the Income Tax Act that you should not pay a bonus to employees who earn a salary above Rs 21,000.

Profit-sharing bonuses can be of two different types: one is the statutory bonus as per the Payment of Bonus Act 1965, and the other is the non-statutory payment, which is known by different names like Customary Bonus, Special Incentive, Festival Bonus, Diwali Bonus, etc. Companies have evolved schemes to share the profit amongst all employees, including those not covered too.

The company can pay a maximum of INR 50,400 as a 20% bonus. Anything above that amount is taxable for the company. However, any amount in excess of INR 50,400 can be paid as ex-gratia, or the entire amount can be paid as ex-gratia, thereby avoiding the 20% cap.

Regards, Suresh

Dear Suresh,

Can you please state which section of the Payment of Bonus Act or Income Tax Act says that more than 20% of (gross) salary is taxable? I have seen such a provision under the Payment of Gratuity Act that any amount received by way of gratuity over and above Rs 20 lakhs is taxable for the individual. Bonus being a condition of service is an expenditure of an employer and is like any payment made by him. I doubt if the payment over 20% of bonus qualifying salary will be disallowed by the Income Tax Department. If it is to be disallowed, then the entire amount exceeding 20% of minimum wages or Rs 7000, whichever is higher, should be disallowed. This is because under the Payment of Bonus Act, the rate of bonus is arrived at based on allocable surplus, etc. I am afraid any organization will go through such processes when the actual practice is either to declare a percentage of earnings by way of salary as a bonus or arrive at a rate after negotiating with the trade unions.

For income tax purposes, again, the expense is allowed even if it is genuine, and if not genuine, it will be disallowed even if you call it by a different name, like ex gratia for bonus. Therefore, if the employer wishes to pay a bonus, pay it. He can call it a bonus or ex gratia, or whatever he thinks fits.

Suresh, There is no provision under the Income Tax Act that states a bonus higher than a specified amount is taxable for the company. Amounts paid to an employee are a genuine expense for the company and are always considered valid expenditure.

Thank you.

The Bonus Act insists on paying a bonus up to the basic salary of Rs. 21,000 per month. Management can pay it even for employees drawing a basic salary exceeding Rs. 21,000 per month. Management can term that amount as they wish.

What is the meaning of Rs 21,000 basic salary for the bonus?

Does it include HRA, other allowances, and all components or just basic + DA?

Kindly suggest.

Regards, Jony Saini
Gold Plus

Normally, it is the basic salary and Dearness Allowance. You cannot consider the total salary when excluding an employee, only the basic and DA for the calculation of the bonus. After all, the bonus is payable on Rs. 7,000 for employees whose minimum wage is not fixed by the government. In the case of those whose minimum wage is set by the state, then it can be on the sum of the basic and DA only.