How Can Our Firm Start Giving Bonuses Without Changing Basic Wage Structure?

There is no CTC structure in the firm. Employees are given a salary based on a monthly basis as finalized during joining. Now, the firm wants to start giving bonuses, so how should they start? The present salary sheet is maintained by the firm in Excel, which has only basic salary, no DA and no HRA, so basic = gross salary. Then it has net salary based on the number of days worked, and ESI and PF are deducted as per the rules.

Questions Regarding Bonus Implementation

1) What should be changed in this structure, how should a bonus be added, and when should it be given since the firm is planning to start this system now?

2) The firm wants to give bonuses only to those whose salary is below 21k. So, how do we show that and how do we show that bonuses are not given to those above 21k?

3) Is no DA and no HRA allowed? If DA and HRA are 0, but basic wages are way above minimum wages, what are the implications for the firm?

4) What paperwork is to be done to give a bonus?

5) The firm pays some employees online and some in cash, so how should the bonus be shown for such different categories?

6) Is bonus amount = net salary amount?

7) Is ESI on basic wage or gross wage? Since the firm wants to start the initiative of giving bonuses every year, it does not want to increase its costs just because of a lack of knowledge. So, can the firm change the basic wage structure and bring back DA and HRA, and if yes, how?

I hope I get a clear response from learned professionals here. My English is not that good, so I may have asked a simple question in a complicated manner. Hope you help me out.

There is no need to have a CTC structure. CTC is only a concept but does not have any legal backing. Therefore, if your basic salary itself is the gross salary, there is no issue as long as the total amount does not fall below the statutory minimum wages fixed by the government. You can pay ESI and EPF on that gross salary itself.

Bonus is a mandatory payment for an organization that has been in existence for five years, or since the year of its first profit, whichever comes first. The minimum amount of bonus is equal to 8.33% of the gross salary of each employee. It can extend to 20% depending upon the profitability.

Bonus is payable to employees whose salaries do not exceed Rs. 21,000 per month. For an employee whose salary exceeds Rs. 7,000, the salary qualifying for a bonus should be Rs. 7,000 or such amount as declared by the state government as statutory minimum wages applicable to the industry. If minimum wages are declared for your industry and are above Rs. 7,000, then that amount should be assumed wages for the calculation of the bonus. Suppose the statutory minimum wages for a particular category of employment are Rs. 13,000, then the bonus should be calculated on a salary of Rs. 13,000. On the other hand, if no minimum wages are fixed for your industry, you can calculate the bonus on Rs. 7,000. It is not required that you should pay a bonus calculated on the actual salary.

Now coming to the queries:

1. Bonus as a component of remuneration shall be shown separately, after the gross salary portion. Normally, in a pay structure that showcases the remuneration and contributions payable by the employer, the employer's contribution towards ESI, EPF, etc., will also be added to the gross salary so that the employee will get an idea of how much the employer costs by employing him. You can also add the amount of bonus at the prescribed rate. When you start paying a bonus, it shall be 8.33% of salary, or virtually one month's salary per year.

2. Only employees whose salary is not more than Rs. 21,000 are eligible to get a bonus. Therefore, employees earning more than that amount need not be compensated. Moreover, the amount of the bonus being Rs. 7,000 or one month's minimum wages per year, the same would be negligible when converted into a monthly salary. Even if we accept that it would make those earning more than Rs. 21,000 unhappy, you can consider a payment of a performance-linked incentive or ex gratia to them.

3. The law does not insist that DA and HRA should be paid over and above the basic salary which is above the notified minimum wages. Employers and Personnel Managers bifurcate the gross wages with an amount put as HRA just because the component of house rent allowance is not considered as part of wages/salary for the payment of certain contributions and payments like PF, Bonus, Leave encashment, and gratuity. But the HRA excluded should be HRA paid as a compensatory allowance and not just a component of wages. Therefore, ultimately, HRA will be part of wages only. Therefore, if you do not pay any HRA, it is not going to make any difference.

4. You need not make any paperwork for paying a bonus. But you can just communicate that henceforth the employees getting a salary not more than Rs. 21,000 will be paid an annual bonus as per the Payment of Bonus Act.

5. If any employee is receiving a salary in cash, the bonus shall also be paid to him in cash. As per the instructions from the appropriate government, all payments to workers should be made digitally. Therefore, make arrangements to transfer the salary and bonus to the employees' bank account.

6. The bonus amount need not necessarily be the net salary but it is a percentage of bonus qualifying wages paid to each worker. Bonus qualifying salary means Rs. 7,000 or the minimum wages fixed. Any day for which no wage was paid due to absence without leave during the year shall be deducted from these wages. The year shall mean the financial year.

7. ESI is payable on gross wages. But if you have given uniforms to the workers, and you have a component called washing allowance, then the washing allowance can also be excluded from wages to decide the contribution. Similarly, traveling allowance paid shall also be excluded for ESI contribution. Again, if the wages after deducting these two components exceed Rs. 21,000, the employee would come out of ESI coverage. For EPF, only HRA paid as a compensatory allowance shall be excluded. However, the contribution can be restricted to 12% of Rs. 15,000. You can change the basic structure of salary. If the contributions to these statutory welfare funds are not going to be affected by the change, there is no issue in bringing back DA and HRA into the salary structure.

First of all, please check whether there is any State HRA Act in place. In states like West Bengal and Maharashtra, the HRA is typically set at 5% of Basic & DA. The DA component can be disregarded in this context.

Bonuses Calculation

Bonuses are to be calculated based on factors such as Gross Profit, available surplus, and allocable surplus of the organization, especially if the organization has been in business for more than 5 years. Starting from the 6th year, regardless of profit or loss, an 8.33% bonus must be paid, which will be considered as a Set Off. Conversely, there may be a Set On scenario in case of higher profit and surplus amounts, even after the payment of a 20% bonus.

Compliance and Auditing

It is essential to maintain FORM - A, B, C, and D as per the PB Act. Additionally, the bonus account must undergo auditing annually to mitigate any potential future complications.

S K Bandyopadhyay (West Bengal, Howrah)
CEO-USD HR Solutions

Hi Madhu Sir, Thank you for replying so meticulously and enhancing my knowledge in this subject.

Let me use an example to see if I understood this: This firm is Vijayawada-based. It gives a salary of 16,500 to employees upon joining. The salary is reflected on their salary sheet, which they maintain in Excel as follows: Basic = 16,500/- DA+HRA = 0 PF = 0 (not a PF member before) ESI = 16,500 * 0.75% = 124 Net = 16,500 - 124 = 16,376, paid online.

Is this good? Now they want to change it to: Basic = 15,100/- DA+HRA = 0 (how to add that 1,400/-) PF = 0 (not a PF member before) ESI = 16,500 * 0.75% = 124 Net = 16,500 - 124 = 16,376, paid online.

Also, the firm is 10 years old but has never given a bonus but now wants to start. The employee has been working for 2.5 years. How should the bonus be shown? Should a register be maintained, or is online payment sufficient? How can the bonus be differentiated from salary if both amounts are the same? How can proof be provided that the bonus is separate from salary if the employee contests in the future? Should the firm pay the bonus on the basic or gross salary? Is ESI deducted on the bonus? Should the firm pay the bonus and salary on the same date? When should the bonus be given to this employee, i.e., in which month?

I hope I have conveyed my points clearly without confusing you, sir. I believe I will learn more about bonuses from your response. Thank you, sir.

Your first calculation is right. However, why is the second one not understood? In the second calculation, if you put the difference amount, Rs 1400, as HRA, then it is fine and the same will be the net salary. This is because the employee does not have PF, and ESI is deducted on the gross salary.

Bonus Payment

Now coming to the bonus section, it is not a monthly payment but is paid annually. You can split the bonus into two as well, to make an amount as an advance payment, which could be deducted from the final bonus when paid. As Mr. S K Bandyopadhyay has said, there are some returns and registers to be maintained as per the Payment of Bonus Act, but the payment is evidenced by a statement of bonus preparation and the payment of the same into the bank account. Even in the statutory audits and inspection by the Labour authorities, what is required is a statement of wages (wages that qualify for a bonus) and the amount of bonus, and the dates on which the payment was made. This can be maintained in an Excel format.

Statutory Bonus

An establishment that has been in existence for the last 10 years should certainly pay a statutory bonus. It is expected that you should pay a bonus after 5 years of commencement or the year in which you made profits. Therefore, it is high time that you should pay it.

Difference Between Bonus and Wages

Bonus is different from wages. The latter is a monthly payment, whereas the former is paid once a year. Therefore, you should not mix up salary with a bonus. There should be a bonus calculation sheet as referred to above. It takes into account the salary earned by each employee (who is entitled to get a bonus) month-wise and the aggregate of those wages for the year. The same is multiplied by the rate of bonus decided. It shall depend upon the profit of the company and ranges from 8.33% to 20%. While putting the wages earned, what you have to note is to put only the bonus qualifying wages earned by each employee for each month. Bonus qualifying wages mean Rs 7000 or such amount as the government has declared as minimum wages for the category of employment. Obviously, LOP will be deducted from the bonus qualifying wages.

Tax and Deductions on Bonus

No ESI or other contributions are payable on bonus payment. Obviously, if the employee comes under the tax brackets (due to heavy overtime wages that one shall earn), TDS shall be deducted from the bonus payments.

Bonus Identification and Dispute Resolution

Since the bonus is paid only once a year, that itself identifies it as a bonus apart from salary. Normally, the date of payment of the bonus will be announced separately, and as such, the amount credited shall be taken as their bonus by the employees. Therefore, there will not be any dispute raised about non-payment of the bonus. The only dispute that may arise is the computation part. In order to make the employees understand how their bonuses are calculated, you can prepare a bonus slip in Excel and distribute it to the employees. It can be prepared from the Excel sheet for calculating the bonus of all the employees.

@ Madhu Sir,

1) The firm says it wants to change to the second salary structure to reduce its gratuity liability since it's based on basic pay.

2) Is there a problem for the firm if they have not given a bonus until now? Also, in which month should they pay the bonus now since it is their first time?

3) An employee left the firm last month in the first week of April; she worked for 1.5 years. Should the firm call her and give a bonus, or is there no issue since that account is closed?

4) So, if my understanding is correct, the bonus calculation should be done as follows: take the average of 12 months of NET salary paid to the employee (after leave deductions) for a fiscal year and then pay it in a certain month (when the firm is paying the minimum bonus). Example: Payment after their leave deductions for month 1 = 12500, month 2 = 16500, month 3 = 15000... so the bonus would be (12.5 + 16.5 + 15 / 3) (3 months just for example's sake).

5) Also, when should the bonus be paid to a new employee joining now?

Thank you again for taking your time and responding to my queries.

Changes in Basic Wages and Legal Obligations

1. When you reduce the basic wages from, say, Rs. 16,500 to Rs. 15,100, the employees may oppose it. Therefore, you can introduce such changes only after taking the workers into confidence. Moreover, we have a legal obligation to give notice of changes in service conditions as per Section 9A of the Industrial Disputes Act. If the employees agree, you can change the salary structure. Otherwise, you have to fix the present gross salary as the basic salary (or a salary comprising of basic pay and dearness allowance) and any future amounts given as increments may be put under some allowances not forming part of gratuity computation.

Non-Compliance in Paying Bonuses

2. Not paying a bonus for such a long period is certainly non-compliance. It is surprising that the workers did not demand a bonus, and no law enforcement officer has asked why you did not file the annual return. Anyway, if you start paying it now, you may do the calculation based on the earnings of 2023-24 and pay it before the first regional and/or religious festival.

Bonus Eligibility and Payment

3. An employee under the salary bracket of Rs. 21,000 is to be paid a bonus if he has worked at least 30 days in the financial year. Hence, even if he has already left, he should be paid a bonus. However, unlike gratuity, which is payable even if the employee has not demanded it, a bonus to the left employees may be paid on request from the respective employee.

Bonus Calculation Method

4. Bonus is not calculated on the net salary, but it is paid assuming that the wage is Rs. 7,000 or minimum wages. Therefore, for each month, there should be a separate calculation sheet putting the gross (bonus qualifying) salary as 7,000 or the minimum wages. If the minimum wages of a particular category of employees are, say Rs. 12,500, put that amount against the employee. This 12,500 is for 30 days working, and if there is no loss of pay, put the same amount as salary earned. If there are two days of LOP, then put 11,667 (12,500 minus 2 days' wages, i.e., 12,500/30*2 or 833) as earned wages. For each month, calculate the earned salary, and then total these earned wages to get the total earned wages for the year. Multiply this by 8.33% or such other higher percentage that the employer decides. You will get the bonus amount payable. Pay it.

Bonus Payment for New Employees

5. An employee joining now, i.e., in May, will be paid a bonus next year only.

Aspects of Bonus Calculation

There are two aspects involved in bonus calculation. Firstly, the percentage of the bonus is determined based on gross profit, available surplus, allocable surplus, Set On, and Set Off. It is essential to note that the organization may not always pay a minimum bonus of 8.33% without considering the factors mentioned above. The organization has already been at fault for not paying bonuses for a few years.

Individual Bonus Calculation

The second aspect is individual bonus calculation. As explained by Mr. Madhu TK, a minimum presence of 30 days is required for eligibility. There are no provisions for leave adjustment. If it is a paid leave, the employee is eligible for a bonus for that month along with the leave pay. If the bonus salary is calculated based on 7000/- or the minimum wages applicable, there is no need to calculate the individual month's salary if it is not less than 7000/- or the minimum wages applicable for deduction.

Regards, S K Bandyopadhyay (WB, Howrah) CEO - USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons]

Proportionate Deduction for Bonus-Qualifying Salary

True, but if there are loss of pay days, a proportionate deduction should be made from the bonus-qualifying salary. Suppose we have two employees, A and B. A has reported to work on all the days, but B has availed his leaves and, in addition, has taken 10 days of loss of pay leave. If we pay a bonus based on Rs 7000 per month to both A and B, it will not be fair. At the same time, the bonus-qualifying wages of B should be reduced proportionately to the number of days' loss of pay.

As such, if the bonus-qualifying salary of A is Rs 84,000 (7000 X 12) for 2023-24, it should be Rs 81,670 (7000 X 12 - (7000/30 X 10)) for B, and the amount of the bonus should be Rs 7000 and Rs 6800 (roughly) at an 8.33% rate.

Hello Sirs, thank you for all your responses, but I was unable to understand the bonus concept, maybe due to my improper English and lack of knowledge on the bonus subject. I did not understand how a 7,000 minimum wage applies to a person with a 16,500 salary. For example, if a person with a 16,500 salary is Mr. A and he takes 1 or 2 leaves every month in a year, how do you calculate his bonus, given his pay structure is as follows:

Basic + DA = 15,100
HRA = 1,400
PF = 0 (not a PF member before)
ESI = 16,500 * 0.75% = 124
Net = 16,500 - 124 = 16,376 paid online (if present for a full month).
Gross = 16,376 + company ESI contribution.

Employee Rejoining and Gratuity Calculation

Also, sirs, if an employee who worked for 3.5 years left the firm due to family issues and returns after 1.5 months demanding higher pay than before (previously 15k, now demanding 20k), the firm is ready to hire her now. The firm wants to know if she will be considered a new employee or an old one in terms of whether her gratuity will be calculated from today or from the old joining date 3.7 years ago.

Gratuity and Bonus as Advances

Also, can gratuity and bonus be given in advance if staff ever asks? Does the firm have to charge interest if they give advances to employees?

I hope you learned professionals can clear my doubts, and I hope I have not been a burden by asking too many things.

For bonus calculation, you have to prepare a separate calculation sheet with Rs 7000 as the base salary. It can be prepared month-wise or annually. The same is explained in the previous post itself.

Rejoining After Leaving Service

If an employee has left the service, and you have settled the dues until that date, his/her rejoining should be treated as a fresh appointment. If the break in service of 1.5 months is not artificial but genuine, supported by his/her resignation and request to rejoin, then you should forget about the past service of 3.5 years entirely. You should issue a new appointment order and ask them to follow the procedures for joining. You can continue to use the same UAN or ESI number, but the date of registration would be the new date. This is because you should have exited them when they left the company 1.5 months ago. When you calculate the bonus, you should treat these 45 days as unpaid days. It is advisable to calculate the bonus until the date of leaving and for the period after rejoining separately.

Advance Payment Considerations

It is up to you to decide whether an advance shall be given or not. But in no case should you give any advance of gratuity because they will not become eligible to receive gratuity before completing 5 years from now.