Calculation of a Bonus
Calculation of a bonus involves different steps. First, the establishment should be covered under the Payment of Bonus Act. Second, we have to decide who all are entitled to get a bonus and the salary that would qualify for the bonus. Third, we have to determine how much amount can be appropriated for the payment of the bonus. This will depend on the profit of the organization, surplus available for the payment of the bonus, and the amount that can be allocated for it for the financial year. Accordingly, the rate of the bonus shall vary from 8.33% to 20%.
Coverage Under the Payment of Bonus Act
A factory is covered by the Payment of Bonus Act without reference to the number of employees working in it, but other establishments will come under the purview of the Act when they employ 20 employees. Under any case, there is infancy protection available for five years. But if the establishment makes profits in any of these years, the establishment becomes liable to pay a bonus to its employees. Obviously, it will continue once covered, even if the company suffers a loss thereafter.
Eligibility for Bonus
An employee whose salary does not exceed Rs 21,000 per month and who has worked at least 30 days in the preceding financial year would be entitled to get a bonus. Therefore, all employees whose salary exceeds Rs 21,000 will be out of the purview of the bonus. However, the entire amount of salary would not qualify for a bonus. In respect of employees whose salary is more than Rs 7,000, the bonus will be calculated on Rs 7,000 or the minimum wages fixed by the government. Therefore, if the government has notified minimum wages for your industry, that minimum wage will be the base for calculating the bonus. Suppose that for your industry, the government has notified a minimum wage of Rs 15,000 for a class of employees. Then, his bonus shall be calculated as if his salary is Rs 15,000. Even if his salary is less than Rs 15,000, you should calculate the bonus with Rs 15,000 as the base. This is because you are not expected to pay a salary less than the notified minimum wage. This applies to the calculation of Gratuity (at the time of discharge) as well. The leave days in the financial year without pay (LOP) shall be deducted proportionately from this Rs 15,000. Very simply, it will be Rs 15,000 X 12 (months or such lesser months he was with the organization) LESS the wages for LOP days would be the gross salary qualifying for a bonus. If there were no LOP, the gross salary would be Rs 180,000. In the case of an employee who joined during the year or in the case of left employees, there will not be a 12 months' payout, and the amount of gross salary would be less accordingly.
Minimum Wage and Bonus Calculation
Suppose that your industry is not in the scheduled employment for which minimum wages have been notified, then in respect of employees whose salary exceeds Rs 7,000, the bonus qualifying salary would be Rs 7,000 per month. From this Rs 7,000, you can make a proportionate deduction for the loss of pay leaves to arrive at the annual gross salary. If there is no LOP, the gross salary would be Rs 84,000.
In case the minimum wage is more than Rs 21,000 (as in Kerala where the revised minimum wages are almost above Rs 23,000), no one would be entitled to any bonus.
Statutory Minimum Bonus
The statutory minimum bonus payable is 8.33% of the annual gross salary earned by each employee in the financial year. If the establishment has sufficient profits, they can pay a higher percentage. In larger organizations where the employees have Unions for their collective bargaining, the rate is decided after long discussions with the Union(s). Once the rate of the bonus is decided, the Personnel department shall proceed with the calculation of the bonus payable to each employee. It is just getting the amount by multiplying the rate of the bonus with the annual gross salary arrived at as explained above. As such, if the minimum wage is Rs 15,000, and the employee has worked all the days in the year, and the rate of the bonus is 8.33%, then the amount of the bonus will be approximately Rs 14,996, almost Rs 15,000.