Can We Implement Both Yearly Diwali and Monthly Bonuses in Our Engineering Firm?

We are working in the engineering sector. Our organization wants to follow a periodicity of two for the payment of the statutory bonus. One is the routine yearly method of the Diwali bonus, and the other is a monthly bonus. Can we follow both systems in one organization? Please explain.

Statutory Bonus Payment Guidelines

Statutory bonus cannot be paid in monthly installments because the bonus for a financial year should be paid within eight months of the closing of the financial year. If you pay it monthly, it will extend to 12 months, and that is non-compliance. However, you can pay it in such installments that the last installment is paid before 8 months of closing the books of accounts.

Again, employees would benefit more if they received a lump sum amount in hand. Therefore, it is not advisable to pay it even in 8 installments.

Monthly and Annual Bonus Systems

The monthly paid bonus is production-linked but not governed under any statute, act, or rules. The annual bonus is profit-based and governed by the Payment of Bonus Act. The annual bonus for the current year is payable on 1st April or by 30th November of the subsequent year at a minimum of 8.33% and a maximum of 20% for employees earning ₹21k or less per month.

Benefits of Monthly Bonus Systems

You can follow the monthly bonus systems as they are linked to production and motivate employees, helping the organization achieve higher production levels. These types of bonus schemes are introduced to optimize production when it exceeds the target. The management sanctions an agreed percentage of the bonus on the excess quantity according to set calculated norms.

Clarification on Bonus Payment Dispute

There is a major dispute on this.

We received clarification from senior lawyers who explained that the amount paid monthly is considered as salary (even if referred to as a bonus), and the bonus will still be payable at the end of the year under the Payment of Bonus Act.

Furthermore, if paid monthly, PF and ESIC contributions are due on it.

Hi VJ,

Understanding statutory and non-statutory bonuses

The statutory (annual) bonus, whether for Ganesh Chaturthi, Diwali, or Christmas, is different from what some establishments disburse monthly, bi-monthly, or otherwise. As you know, the 'statutory bonus' is a share of the profits earned by the establishment, which shall be a minimum of 8.33% of the salary or a maximum of 20%, as laid down under the Payment of Bonus Act. This is determined under sections 11, 4, 5, 6, 10, and 12 of the PoB Act. This statutory bonus is payable whether profits are earned or not and must be paid within six months after the closure of annual accounts (which in India is 31st March, making the deadline 30th September). For this purpose, your accounts department shall prepare Forms A, B, C, and D listed in the PoB Rules, 1975 (Central Rules), and submit returns to the Labour Department periodically.

Non-statutory bonuses and productivity incentives

On the other hand, some establishments disburse bonuses monthly or at intervals linked to production and productivity, wherever applicable. This is not a statutory bonus as per the PoB Act. Generally, this kind of bonus is linked to production exceeding targeted minimum threshold limits, computed under a mutually agreed formula. There are also other bonuses (incentives) such as attendance bonuses. While the statutory bonus is compulsory at a minimum of 8.33%, other production-linked bonuses are operated under a bipartite agreement on achieving certain targets only. Both types of bonuses, when applicable, can be operable in any establishment concurrently and as and when "accrued and due." It is customary in many establishments in India ahead of a festival season.

Payment flexibility of bonuses

It's legally permissible to pay the entitled bonus in more than one installment. For example, 50% can be paid during June or July (at times when employees require financial assistance during the reopening of schools/colleges to meet fees, books, etc.), and the balance 50% can be paid before a major festival such as Diwali, usually during October or November. The other bonus can be paid monthly, bi-monthly, or quarterly as per the practice in vogue.

In India, the statutory bonus is primarily governed by the Payment of Bonus Act, 1965. Here's how the periodicity works for bonuses, including the routine yearly bonus (often associated with festivals like Diwali) and monthly bonuses:

Yearly Bonus (Diwali Bonus)

- Frequency: Typically paid once a year, often during the festival season (like Diwali).
- Eligibility: Employees earning up to ₹21,000 per month are eligible for a statutory bonus if they have worked for at least 30 days in the accounting year.
- Calculation: The bonus is calculated based on the employee's salary and the profits of the company for the financial year. The minimum statutory bonus is 8.33% of the salary earned during the year, while the maximum can go up to 20%.

Monthly Bonus

- Frequency: Paid on a monthly basis, often as part of the salary or as a separate incentive.
- Nature: This is generally not a statutory requirement but can be part of company policy or incentive schemes.
- Eligibility: It may apply to all employees or specific categories based on performance, role, or company policies.
- Calculation: Usually determined based on performance metrics, attendance, or company profitability.

Key Differences

- Nature: The yearly bonus is often a statutory requirement, while monthly bonuses may be discretionary and linked to performance.
- Amount: Yearly bonuses are based on the annual salary and company profits, whereas monthly bonuses may vary based on individual or team performance.

Conclusion

For statutory bonuses, you primarily follow the yearly method with a focus on Diwali as a common payment period. Monthly bonuses, while beneficial for employee morale, are typically discretionary and not mandated by law. Always ensure compliance with applicable laws and company policies regarding bonus payments.