Understanding Bonus Limits: Can Profitable Companies Increase Employee Bonuses?

Hi everyone,

I have a concern regarding the current bonus threshold limit of 21,000/-. Employees with fixed wages exceeding 21,000/- will not be eligible for the bonus. Providing a bonus for wages surpassing 21,000/- is not compulsory.

I am worried that my current organization has set this rule based on gross wages. If an individual's gross wages exceed 21,000/-, they are ineligible for a bonus. Some companies apply this rule considering the bonus threshold limit of 21,000 as basic and DA only. If the basic and DA amount to more than 21,000/-, no bonus is granted.

Clarification on Bonus Threshold

I would like clarification on what the law stipulates. Is the 21,000/- ceiling applicable to BASIC+DA or GROSS?

Bonus Distribution and Legal Requirements

Additionally, my firm, which is 20 years old, consistently earns profits each year but only distributes a bonus of 8.33%. Are there procedures to increase the bonus percentage when a company earns regular profits? What are the legal requirements in this scenario?

Thank you.

Bonus Eligibility and Calculation Under the Law

As per the law, employees with a salary of more than Rs 21,000 are not entitled to receive a bonus. The salary for the purpose of bonus eligibility shall mean basic wage and dearness allowance. If you have a salary structure without DA but with basic salary and allowances like HRA, the basic salary alone will be considered as the bonus qualifying salary.

Calculation of Bonus Based on Minimum Wages

In respect of employees whose salary (bonus qualifying salary, i.e., Basic and DA) exceeds Rs 7,000, the bonus shall be calculated on Rs 7,000 or the statutory minimum wages fixed by the government. For instance, if the minimum wages fixed for a particular category of employees are Rs 13,000, then the bonus should be calculated as if the salary is Rs 13,000. If no minimum wages are fixed, then you can calculate the bonus on Rs 7,000.

Exclusion from Bonus Calculation

You cannot take the gross salary for excluding an employee from the bonus and only take the basic salary for calculating the amount of bonus payable.

Percentage and Distribution of Bonus

The percentage of the bonus shall vary from 8.33% to 20%. The rate of the bonus is decided by the profitability of the organization. The Payment of Bonus Act has provided for the method of distributing the bonus from the available surplus. In a unionized atmosphere, the rate of the bonus is fixed after lengthy discussions and procedures, debating on profitability and future expansion programs, etc. However, a company in existence for twenty years should pay a higher rate of the bonus than the minimum 8.33%.

Thank you for sharing this valuable information regarding bonus eligibility and calculation as per the law. It's crucial for both employers and employees to understand the guidelines outlined by the Payment of Bonus Act. Ensuring compliance with these regulations not only fosters transparency but also promotes fair treatment in the workplace.

Understanding how bonus amounts are determined, based on factors like salary structure and profitability, helps to establish a balanced approach to bonus distribution. It's commendable that you've provided clarity on these matters, which can often be complex and subject to interpretation.

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As a bonus is a form of deferred wages, the eligibility criteria for a bonus should be based on the Basic & DA or only Basic if DA is absent for the previous year, not the current rate.

Bonus Calculation Method

The bonus percentage has to be calculated based on factors such as Gross profit, available surplus, allocable surplus, Set On, and Set Off. This detailed calculation method is explained in the Bonus Act Schedule.

In most organizations nowadays, it is calculated based on Minimum Wages as the recent past Basic rate is 7000/- or more as per the Act.

Advisory on Bonus Payment

Bonuses cannot be paid on an ad hoc basis of 8.33% every year regardless of profit or loss. It is advisable to ask your auditor, through your finance department, to audit the bonus account to determine the percentage of bonus for each financial year accurately.

In the absence of the above, you may face issues during inspections by the bonus authority under the act.

S K Bandyopadhyay (WB, Howrah)
CEO - USD HR Solutions
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www.usdhrs.in