Statutory bonus: who is eligible and how it is calculated

Statutory bonus is straightforward in principle and produces a surprising amount of confusion in practice — largely because the word “bonus” means something entirely different in ordinary business usage.

Statutory bonus is not a reward. It is a legal entitlement, payable to eligible employees, whether or not they performed well and whether or not the company made money.

When the Act applies

The Payment of Bonus Act, 1965 generally applies to:

• Factories, and
• Other establishments employing twenty or more persons on any day during the accounting year

Once applicable, the Act generally continues to apply even if headcount later falls, subject to the provisions on continued applicability.

Eligibility

Two conditions:

A wage ceiling. An employee is eligible if drawing wages or salary not exceeding the prescribed monthly ceiling — long standing at ₹21,000. Employees above the ceiling fall outside the statutory entitlement, though nothing prevents an employer paying them a contractual bonus.

Minimum working days. The employee must have worked for at least thirty working days in the accounting year. Days on authorised leave, lay-off, or absence due to employment injury generally count towards this.

The calculation ceiling — the part employers get wrong

There are two ceilings, and confusing them is the most common error in this area.

The eligibility ceiling decides who gets bonus — wages up to ₹21,000 per month.

The calculation ceiling decides how much — bonus is computed on wages up to a lower prescribed figure, conventionally ₹7,000 per month or the minimum wage for the scheduled employment, whichever is higher.

So an employee earning ₹18,000 a month is eligible, but their bonus is calculated on ₹7,000 or the applicable minimum wage — not on ₹18,000.

Employers who calculate on actual wages substantially overpay. Employers who apply the eligibility ceiling as the calculation base do the same. Both happen regularly, and in roughly equal numbers.

Minimum and maximum

	Rate
Minimum bonus	8.33% of wages for the accounting year
Maximum bonus	20% of wages for the accounting year

The minimum is payable regardless of profit. This is the point business owners find most counter-intuitive. A company with no allocable surplus, or an outright loss, still owes the minimum bonus to eligible employees.

Bonus above the minimum, up to the maximum, is determined by reference to the allocable surplus computed under the Act, with provisions for set-on and set-off carrying surplus and deficiency forward across accounting years.

Newly set up establishments

The Act contains a limited exemption for newly set up establishments. Broadly, in the initial accounting years, bonus may be payable only in respect of years in which the employer derives profit, subject to the conditions and period prescribed.

This is narrower than founders often assume, and it is not a blanket holiday from the obligation. Where a startup expects to rely on it, confirm the position rather than presuming it.

Disqualification

An employee may be disqualified from receiving bonus where dismissed for:

• Fraud
• Riotous or violent behaviour while on the premises
• Theft, misappropriation or sabotage of any property of the establishment

Note that this requires dismissal for that reason. An employee who resigned, or who was dismissed for ordinary poor performance, is not disqualified. Employers occasionally withhold bonus from a difficult leaver on grounds that do not apply.

Payment deadline

Bonus is payable within the period prescribed following the close of the accounting year — conventionally eight months. For a financial year ending 31 March, that means by the end of November.

Most Indian employers pay earlier, timed to the festival season. Paying early is fine. Paying late is not, and the deadline runs from the accounting year rather than from convenience.

Statutory bonus versus performance bonus

Worth being precise about, because the two are routinely conflated in offer letters.

Statutory bonus is a legal entitlement under the Act, subject to the ceilings above.

Performance bonus, incentive or variable pay is contractual. Its terms, computation and any discretion are whatever the scheme says.

Employers sometimes want to set off a contractual bonus against the statutory liability. Whether that works depends on how the scheme is framed and what it purports to be. A performance scheme drafted without this in mind generally cannot be set off — which means the employer pays the contractual scheme and the statutory minimum on top.

If you intend a scheme to absorb the statutory liability, that has to be designed in deliberately, and the position confirmed before you rely on it.

Offer letters should distinguish the two clearly. A letter promising “an annual bonus” without specifying which, or how it is computed, creates an argument at exit about what was owed.

Registers and returns

The prescribed set typically includes:

• Register showing the computation of allocable surplus
• Register showing set-on and set-off
• Register showing bonus due to each employee, deductions and amount paid
• Annual return in the prescribed form

Where employers go wrong

1. Calculating on actual wages instead of the calculation ceiling — a straightforward overpayment
2. Confusing the two ceilings, using ₹21,000 as the calculation base
3. Assuming no profit means no bonus, missing the minimum
4. Over-relying on the new establishment exemption
5. Withholding from leavers on grounds that do not disqualify
6. A contractual scheme not designed to set off, so bonus is paid twice
7. Missing the deadline after a festival payment slipped
8. Not tracking who crossed the eligibility ceiling during the year

Practical checks

• Is the Act applicable to us, and from which accounting year?
• Are we computing on the calculation ceiling, or on actual wages?
• Have we computed allocable surplus, or are we paying the minimum by default without knowing whether more is due?
• Is the set-on and set-off register maintained?
• Does our offer letter distinguish statutory from performance bonus?
• Was last year’s bonus paid within the prescribed period?

The second question can be checked against a single payslip in about a minute, and it is worth doing today.