Full Bench Formula (conceptual foundation of this chapter) is due in Part A 2026. If examining the computation chain, the examiner may fold in Full Bench Formula derivation. See LL2-2.1 for that answer.
Why This Matters
A factory worker earning Rs. 18,000 per month has worked for 25 days in the accounting year. Is she eligible for bonus? At what rate? From what pool? The answers are entirely statutory: the Code on Wages, 2019 (subsuming the Payment of Bonus Act, 1965) prescribes the computation mechanically. Where Chapter 2.1 covered the concept, history, and Full Bench Formula, this chapter covers the statutory machinery: who gets bonus, how much, computed from what, and what happens when it is not paid.
Chapter Overview
This chapter answers five questions:
- Who is covered? Application of the bonus provisions.
- How is bonus computed? Gross profit → available surplus → allocable surplus (with worked illustration).
- Who is eligible and who is disqualified? The 30 day threshold and the three disqualification categories.
- What are the minimum and maximum rates? 8.33% and 20%, and why minimum is absolute.
- How is bonus recovered? Time limits, mode, and consequences of default.
Application
Applies to: every establishment employing 20 or more persons on any day during the accounting year.
Once applicable: continues to apply even if the number of employees falls below 20 in a subsequent year.
Exemption: the appropriate Government may exempt new establishments for a period of five years from the date of establishment.
The "once covered, always covered" principle is important. If a factory employed 25 workers in 2020 but only 15 in 2021, the bonus provisions continue to apply in 2021. The threshold is a one time entry gate, not an annual qualification.
Establishments not covered: The bonus provisions do not apply to the following categories of employees: employees of the Life Insurance Corporation, employees of seamen, employees of universities and educational institutions, employees of hospitals and chambers of commerce (subject to notification), and employees of the Reserve Bank of India.
Computation of Bonus
This section traces the statutory computation from gross profits to the amount payable, with a worked illustration.
The computation follows the codified Full Bench Formula from Chapter 2.1, with standardised rates prescribed by statute.
Step 1: Gross Profits
For a company: computed in accordance with the First Schedule (following the Companies Act method of profit and loss accounting).
For non corporate establishments: computed in accordance with the Second Schedule.
Gross profits are the starting point. The Schedules prescribe what to include (all revenue income) and what to exclude (capital receipts, change in value of assets) to ensure a standardised computation methodology. This reduces litigation over what constitutes "profit" for bonus purposes.
What is included: Sales revenue, income from services, income from investments used in the business, and all other revenue receipts.
What is excluded: Capital gains from sale of assets, profits from sale of fixed assets, income of a capital nature, and amounts written back that were earlier charged to the profit and loss account.
Step 2: Available Surplus
Available Surplus = Gross Profits minus the following prior charges:
(a) Depreciation admissible under the Income Tax Act
(b) Development rebate or investment allowance or development allowance
(c) Direct taxes payable for the accounting year (calculated as if no bonus were payable, to prevent circular computation)
(d) Such further sums as the employer is entitled to deduct under the Act
The prior charges represent the minimum that the business needs to retain before any surplus is available for distribution as bonus. Depreciation accounts for wear and tear of assets. Tax is the government's prior claim. Development rebates encourage reinvestment.
Critical rule on tax computation: Direct taxes are calculated as if no bonus were payable. This prevents a circular calculation where bonus reduces taxable income, which reduces tax, which increases available surplus, which increases bonus. The statute breaks this circularity by freezing tax at the pre bonus level.
Step 3: Allocable Surplus
For banking companies: 60% of available surplus
For other companies: 67% of available surplus
For non corporate establishments: 60% of available surplus
The allocable surplus is the pool from which bonus is actually paid. The employer retains the remaining 33% (or 40%) for reinvestment, reserves, and dividends.
Step 4: Set On and Set Off
Where the allocable surplus exceeds the amount needed for maximum bonus (20%): the excess is carried forward as "set on." Where it falls short of minimum bonus (8.33%): the deficit is carried forward as "set off." Both carry forward for a maximum of four years, after which they lapse. This mechanism was covered in detail in Chapter 2.1.
Worked Illustration
| Step | Item | Amount (Rs.) |
|---|---|---|
| 1 | Gross Profits (per First Schedule) | 50,00,000 |
| 2a | Less: Depreciation | (8,00,000) |
| 2b | Less: Direct taxes (computed as if no bonus payable) | (12,00,000) |
| 2c | Less: Development rebate | (2,00,000) |
| 3 | Available Surplus | 28,00,000 |
| 4 | Allocable Surplus (67% for a company) | 18,76,000 |
| 5 | Total wages of eligible employees during the year | 1,00,00,000 |
| 6 | Minimum bonus (8.33% of total wages) | 8,33,000 |
| 7 | Maximum bonus (20% of total wages) | 20,00,000 |
| Result | Allocable surplus (18,76,000) exceeds minimum (8,33,000) but is less than maximum (20,00,000) | Pay 18,76,000 as bonus |
| Set on/off | No set on (surplus < maximum). No set off (surplus > minimum). | Nil |
If allocable surplus were only Rs. 5,00,000 (below minimum of Rs. 8,33,000): pay minimum Rs. 8,33,000 using set on from previous years. If no set on available, employer pays from own funds. Minimum is absolute.
Gross Profits → minus prior charges (depreciation, tax, rebates) → Available Surplus → 67% or 60% → Allocable Surplus → compare with min (8.33%) and max (20%) → Pay
67% for companies. 60% for banking companies and non corporate establishments.
Tax computed as if no bonus payable (breaks circularity).
Eligibility and Disqualification
Eligibility
Every employee who has worked in the establishment for not less than 30 working days in the accounting year shall be eligible for bonus.
The threshold is 30 working days. Not calendar days. Not days on the payroll. Actual working days. A worker who joined on 1 December and worked 30 days before 31 March (end of accounting year) is eligible. A worker who was on the rolls for 90 days but only worked 25 days (rest on leave) is not eligible.
Who is an "employee" for bonus purposes?
Any person (other than an apprentice) employed on a salary or wage not exceeding Rs. 21,000 per month (or such amount as notified). This ceiling determines who is covered. Employees earning above the ceiling are excluded from the bonus scheme entirely.
Wage ceiling for computation: Even for covered employees, bonus is calculated on salary or wage up to Rs. 7,000 per month (or minimum wage for the scheduled employment, whichever is higher). If a worker earns Rs. 15,000 per month, bonus is calculated as if the wage were Rs. 7,000 (or the applicable minimum wage if higher). This ceiling caps the employer's bonus liability while ensuring low wage workers receive a meaningful percentage.
- 30 working days = eligible
- Rs. 21,000/month = ceiling for coverage (above this, not covered)
- Rs. 7,000/month = ceiling for computation (bonus calculated on this even if actual wage is higher)
Disqualification
An employee shall be disqualified from receiving bonus if dismissed for:
(a) Fraud
(b) Riotous or violent behaviour on the premises
(c) Theft, misappropriation, or sabotage of establishment property
| Eligible (bonus payable) | Disqualified (no bonus) |
|---|---|
| Worked 30+ working days | Dismissed for fraud |
| Temporary, casual, piece rate workers meeting 30 day threshold | Dismissed for riotous/violent behaviour on premises |
| Probationers meeting 30 day threshold | Dismissed for theft/misappropriation/sabotage |
| Dismissed for habitual absence: still eligible | Only these three categories disqualify |
| Dismissed for insubordination: still eligible | Ordinary misconduct does NOT disqualify |
| Dismissed for poor performance: still eligible |
Wrong. Only three categories: fraud, violence, theft/misappropriation/sabotage. An employee dismissed for habitual absence, insubordination, poor performance, or any other reason not in these three categories retains the right to bonus for the period worked.
Minimum and Maximum Bonus
Minimum bonus: 8.33% of the salary or wage earned during the accounting year, or Rs. 100, whichever is higher.
Maximum bonus: 20% of the salary or wage earned during the accounting year.
| Dimension | Minimum (8.33%) | Maximum (20%) |
|---|---|---|
| Payable when | Every year, regardless of profit or loss | Only when allocable surplus permits |
| Funded by | Set on from past years if current surplus insufficient; employer's own funds if no set on | Current year allocable surplus + available set on |
| Floor amount | Rs. 100 (if 8.33% is less than Rs. 100) | No ceiling amount, but rate capped at 20% |
| Obligation | Absolute: employer must pay even in loss year | Conditional: depends on available surplus |
| Origin | Bonus Commission (1964) recommendation | Full Bench Formula precedent, codified |
Why 8.33%? This equals one month's wage divided by 12 months. It was intended to guarantee at least one month's wage as bonus to every eligible worker, regardless of the establishment's profitability. The Bonus Commission recommended this as the absolute floor to prevent exploitation.
The minimum is non negotiable. Even if the establishment has made a loss, minimum bonus is payable. This is funded through the set on mechanism (past surplus years subsidise current loss years). If set on is exhausted, the employer must pay from own funds. There is no escape from minimum bonus for a covered establishment.
📋 Facts: Employers challenged the Payment of Bonus Act, 1965, arguing that compelling payment of minimum bonus even in a loss year was arbitrary and violated Articles 14 and 19.
⚖️ Issue: Whether the statutory minimum bonus payable irrespective of profits is constitutionally valid.
🏛️ Held: The minimum bonus obligation was upheld. Bonus under the Act is no longer tied purely to profit: the statute creates a right to share in prosperity averaged across years, and the minimum is a statutory liability of the establishment.
🎯 Principle: Minimum bonus is an absolute statutory debt. The employer must pay 8.33% even in a loss year.
Time and Mode of Payment
Bonus must be paid within 8 months of the close of the accounting year.
Where there is a dispute pending before any authority or tribunal, bonus must be paid within one month of the date of settlement, award, or order.
Mode: Bonus is payable in cash. The employer must maintain a register showing the computation of allocable surplus, the set on/set off carried forward, and the bonus paid to each employee.
Recovery of Bonus
Where bonus is not paid within the prescribed time, the employee or trade union may apply to the appropriate Government. The amount is recoverable as arrears of land revenue: the Government can issue a certificate to the Collector, who can then attach and sell the employer's property to recover the unpaid bonus.
This recovery mechanism places unpaid bonus on the same footing as unpaid land revenue, one of the strongest recovery mechanisms in Indian law. The employer cannot delay or avoid payment once the amount is determined.
Common Confusions
Wrong. The threshold is 30 working days. Not calendar days, not days on payroll. 25 working days means not eligible, regardless of how long the employee has been associated with the establishment.
Wrong. Minimum bonus (8.33%) is payable every year, including loss years. The set on/set off mechanism funds this. Only bonus above the minimum depends on actual surplus.
Wrong for high earners. Bonus is calculated on salary up to Rs. 7,000/month (or minimum wage if higher), not actual salary. An employee earning Rs. 20,000/month receives bonus calculated on Rs. 7,000 (or applicable minimum wage).
Key Takeaways
Application:
- 20+ employees on any day in accounting year
- Once covered, always covered
- Coverage ceiling: Rs. 21,000/month
Computation:
- Gross Profits → minus prior charges → Available Surplus → 67%/60% → Allocable Surplus
- Tax computed as if no bonus payable (circularity breaker)
- Set on/set off: 4 year carry forward
Eligibility and Disqualification:
- 30 working days = eligible
- Computation ceiling: Rs. 7,000/month or minimum wage
- Only fraud, violence, theft/sabotage disqualify
- Ordinary misconduct does not disqualify
Rates:
- Minimum: 8.33% (absolute, even in loss years, or Rs. 100)
- Maximum: 20% (conditional on surplus)
Payment and Recovery:
- Within 8 months of close of accounting year
- Recoverable as arrears of land revenue
Eligibility for Bonus
Under the Code on Wages, 2019, every employee who has worked for not less than 30 working days in an establishment during the accounting year is eligible for bonus. The establishment must employ 20 or more persons on any day during the accounting year (once covered, always covered).
Coverage ceiling: employees earning up to Rs. 21,000/month. Computation ceiling: bonus calculated on salary up to Rs. 7,000/month or minimum wage, whichever is higher. Minimum bonus: 8.33% of wages or Rs. 100, whichever is higher (payable every year including loss years). Maximum: 20%.
Disqualification: only for fraud, riotous/violent behaviour, or theft/misappropriation/sabotage. Dismissal for ordinary misconduct (absence, insubordination, poor performance) does not disqualify.
Part A (6 marks)
Computation of Gross Profits and Allocable Surplus
Gross profits are computed per First Schedule (companies) or Second Schedule (others). From gross profits, deduct prior charges: depreciation, development rebate, and direct taxes (calculated as if no bonus payable, to break circularity). The result is available surplus.
Allocable surplus is 67% of available surplus for companies, 60% for banking companies and non corporate establishments. Bonus is paid from allocable surplus, subject to minimum 8.33% and maximum 20%.
Where surplus exceeds maximum, the excess is set on (carried forward up to 4 years). Where it falls short of minimum, the deficit is set off (carried forward up to 4 years). The set on/set off mechanism ensures minimum bonus even in lean years.
Part B (15 marks)
Define Bonus. Explain computation of Gross Profit, Allocable Surplus. What is Minimum and Maximum Bonus? Discuss eligibility and disqualification under the Payment of Bonus Act / Code on Wages, 2019
- Application: 20+ employees on any day in accounting year; "once covered always covered"
- Coverage ceiling: Rs. 21,000/month; computation ceiling: Rs. 7,000/month or minimum wage
- Eligibility: 30 working days in accounting year (not calendar days)
- Computation chain: Gross Profits to Available Surplus to Allocable Surplus
- Tax computed as if no bonus payable (breaks circularity)
- Minimum 8.33% (absolute, even in loss years) or Rs. 100; Maximum 20%
- Disqualification: only fraud, riotous behaviour, theft/misappropriation/sabotage
- Payment within 8 months; recovery as arrears of land revenue