The Payment of Bonus Act,

1965
Contents
Meaning of Bonus
Object of the Act
Application of the Act
Definitions
Eligibility for Bonus
Disqualification for Bonus
Determination of Bonus
Computation of Gross Profit
Determination of Available Surplus
Allocable surplus
Inspectors
Penalties
Miscellaneous
Meaning of Bonus
It is an extra payment to workers beyond their wages

The desire of the employer to share with his workers the
surplus generated by the enterprise.

Something as an act of grace (ex gratia) made by an
employer to provide stimulus for extra effort.

Now, by the enactment of this act, it has become
compulsory for the employer to pay bonus to the workers
Object of the Act
To maintain peace & harmony between labour & capital by
allowing the employees, in recognition of their right, to share in
the prosperity of the establishment.

To fill the gap between living wages & the actual wages paid.

It is 4 dimensional
1. To impose statutory liability upon an employer of every
establishment covered under the Act to pay bonus to employees.
2. To define the principle of payment of bonus according to the
prescribed formula.
3. To provide for payment of minimum & maximum bonus & linking
the payment of bonus with the schemes of set-on & set-off.
4. To provide machinery for enforcement of the liability for payment
of bonus.

Application of the Act
The act applies to
a) Every factory
b) Every other establishment in which 20 or more
persons are employed on any day during any
accounting year
c) Employees employed through contractors
(amendment-2007)

The act does not apply to
a) LIC, Govt. organizations, NGOs etc.
b) Universities & other educational Institutions,
hospitals, etc.
c) RBI, NABARD,SIDBI, any financial corporation,
etc.

Power of Exemption
Definitions
Employee- It means any person employed on
salary/wage not exceeding Rs. 10,000 (amendment in
2007) per month in any industry to do any skilled or
unskilled, manual, supervisory, managerial,
administrative, technical or clerical work.
Where the salary or wage of an employee exceeds Rs. 3500 per
month, the bonus payable to such employee shall be calculated
as if his salary/wage were Rs. 3500
Eligibility & Disqualification For Bonus
Eligibility for bonus- Every employee shall be entitiled to be paid
by his employer in an accounting year, bonus, in according to the
provisions of the Act, provided he has worked in the
establishment for not less than 30 working days in that year.
Where an employee has not worked for all working days in any
accounting year, the bonus payable to him shall be proportionately
reduced.

Disqualification for bonus- Notwithstanding anything contained in
the Act, an employee shall be disqualified from receiving bonus
under the Act, if he is dismissed from service for-
a) Fraud, or
b) Riotous or violent behaviour while on the premises of the
establishment, or
c) Theft, misappropriation or sabotage of any property of the
establishment.
Determination of Bonus
Computation of Gross Profits- The starting point is the
net profit as shown in the Profit & Loss Account.
Items to be added back to net profit
1. Provision for bonus to employees
2. Provision for depreciation
3. Provision for reserves
4. Donations in excess of the amount admissible for income-
tax
5. Losses of, or expenditure relating to any business situated
outside India
Items to be deducted
1. Profits of, receipts relating to any, business situated
outside India
2. Cash subsidy, if any given by the Government

Computation of Available Surplus
Determination of available surplus- The available
surplus in respect of any accounting year shall be the
gross profits for that year after deducting there from
the sums-
1. Any direct tax which the employer is liable to pay
2. The dividends payable on its preference share capital
3. 8.5% of its paid-up equity share capital at the commencement
of the accounting year (7.5% in case of banking co.)
4. 6% of its reserves shown in the balance sheet at the
commencement of the accounting year (5% in case of banking
co.)
5. 25% of gross profits in case of a firm


Computation of the allocable surplus
Allocable surplus- After determining the available
surplus, the employees share known as allocable
surplus is to be determined

Company which has not made the arrangements
prescribed under the Income Tax for the declaration &
payment of tax within India, the allocable surplus would
be 67% of the available surplus

Co.s which declare & pay tax in India, the allocable
surplus would be 60% of available surplus
Minimum & Maximum Bonus
Every employer shall be bound to pay every
employee in respect of the accounting year, a
minimum bonus which shall be 8.33% of the
salary/wage earned by the employee, or Rs. 100
(Rs. 60 in case employee is below 15 years of
age), whichever is higher.

Bonus at the rate higher than minimum bonus
is payable only when the allocable surplus in a
particular accounting year exceeds the amount
of minimum bonus.

Such a bonus is paid proportionate to the
salary/wage earned by that employee, subject
to the maximum limit of 20% of salary/wage.
Scheme of Set-on & Set-off
Set-on- where the allocable surplus for any accounting year exceeds
the amount of maximum bonus payable to the employees, then the
excess of allocable surplus, shall be carried forward for being set-on
to the succeeding accounting year & so-on up to & inclusive of the
4
th
accounting year

Set-off- where for any accounting year, there is no allocable surplus,
or the allocable surplus in respect of that year falls short of the
amount of minimum bonus payable to the employees, and there is
no amount carried forward (set-on) that could be utilized, then the
deficiency, shall be carried forward for being set-off in the
succeeding year & so-on up to & inclusive of the 4
th
accounting year

Miscellaneous
Computation of the no. of working days-
These shall be considered as working days in case of
computation of no. of working days.
Laid-off
Leave with pay
Temporary disablement
Maternity leave
Adjustment of customary/Interim bonus

Deduction of certain amount from bonus
In case of misconduct by the worker
In case the worker causes financial loss to the company.

Contd
Time limit for payment of the bonus
8 months of the end of the accounting year
If any, court case is pending, 2 years

Recovery of bonus
By the collector

In case of new establishments
Following the accounting year in which the establishment sells/
renders services
Shall be free not to pay bonus in the first 5 accounting years, if no
profit is made.
For the succeeding years, provision of set-on & set-off starts.

An establishment shall not be considered as new establishment
merely on the basis of
Change of location
Change of ownership
Penalties
Imprisonment that may extend to 6 months
Or/ and with a fine that may extend to Rs. 1000