Payment of Bonus: Eligibility, Calculation & Wage Code

Last verified: 2026-07-15

Payment of bonus in India is a statutory profit-sharing right, not an employer’s goodwill gesture. It was governed for sixty years by the Payment of Bonus Act, 1965, and from 21 November 2025 it sits inside Chapter IV of the Code on Wages, 2019. The core rule has held steady: an employee who draws wages within the notified ceiling and has worked at least 30 days in the year is entitled to a bonus of at least 8.33% of eligible wages, and up to 20% when the employer has enough allocable surplus. The bonus is calculated on a capped wage figure, not on full salary, and it must be paid within eight months of the accounting year closing.

This article sets out who is eligible for payment of bonus, how it is calculated, the timelines, disqualifications and penalties, and what changed when the Code on Wages, 2019 replaced the 1965 Act.

The idea behind it is old and simple. When a business does well, the people who ran the machines and kept the books have a legal claim to a slice of that surplus, floored at a minimum even in a bad year. That floor is what turns a bonus from a favour into a right.

Here’s why it matters right now. The law under it changed on 21 November 2025, most published guides still describe the repealed 1965 Act as if it were live, and the wage ceiling that decides who qualifies is now a moving figure rather than a fixed one. For every establishment with 20 or more employees, and for millions of workers who see “statutory bonus” on a payslip, getting this right is a live question, not a settled one.

Statutory bonus in India

Statutory bonus in India is a legally compelled share of an employer’s surplus, paid annually to lower-wage employees regardless of whether their individual performance was good, bad or ordinary. It rewards the employee for being part of a profitable establishment, not for hitting a target. That single distinction, between a bonus you earn by belonging and a bonus you earn by performing, explains most of the confusion around the word.

The right was born out of industrial conflict. Bonus disputes were a recurring cause of strikes in the 1950s, and the government set up a Bonus Commission in 1961 to design a formula that both sides could live with. The Payment of Bonus Act, 1965 was the result, and it converted an unpredictable annual fight into a calculated entitlement. The Supreme Court in Jalan Trading Co. (P) Ltd. v. Mill Mazdoor Sabha, AIR 1967 SC 691 upheld the core of the Act, Parliament’s power to fix a minimum bonus and the minimum-to-maximum scheme, as a valid exercise of legislative power (it struck down only a few ancillary provisions), and read its object as securing industrial peace by letting workers share in prosperity.

The legal framework today

For sixty years the field belonged to the Payment of Bonus Act, 1965. That changed on 21 November 2025, when the government brought all four labour codes into force. Section 69 of the Code on Wages, 2019 repeals the 1965 Act, and statutory bonus now lives in Chapter IV (Sections 26 to 41) of the Code on Wages, 2019.

Does that mean everything you knew is obsolete? Not at all. The Code carries the 1965 scheme forward almost intact: the same 8.33% floor, the same 20% ceiling, the same allocable-surplus machinery. What it changes is narrower, and we come back to it in detail in the final section. For now, the practical point is that the vocabulary of bonus (eligibility, allocable surplus, set-on, set-off) survives the transition, which is why understanding the 1965 architecture is still the fastest route into the current law. India’s shift to the four codes is the wider backdrop here, and our guide to India’s new labour codes maps how the pieces fit together.

Statutory bonus is not the only kind of bonus

Here’s the thing most payslips blur. “Bonus” on your salary structure can mean several different things, and only one of them is the statutory bonus this Act governs. A performance bonus or incentive is contractual, tied to targets, and payable on whatever terms the offer letter sets. An ex-gratia payment is voluntary, made out of goodwill, often to employees who earn above the ceiling and so fall outside the statutory scheme.

Then there’s customary bonus, the festival or Puja payment many establishments have paid for decades. The Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, (1976) 3 SCC 832 held that this kind of customary or festival bonus survives independently of the Act, so a long-standing Diwali bonus can be a separate enforceable claim built on custom rather than on profit. In practice, an employer may adjust a customary bonus against the statutory one, but cannot use the Act to wipe out an established custom altogether.

So when someone asks whether their Diwali bonus and their statutory bonus are the same thing, the honest answer is: usually not, though they can overlap. One flows from Section 10 of the Payment of Bonus Act, 1965; the other flows from what the establishment has actually done, year after year.

Eligibility for payment of bonus

The eligibility for payment of bonus rests on three conditions, and all three must be met together. Miss any one and the statutory entitlement doesn’t arise, though a contractual or ex-gratia payment still might. The conditions are deliberately mechanical, because the whole point of the 1965 Act was to take the guesswork out of who gets paid.

An employee is eligible for statutory bonus when:

• the establishment employs 20 or more persons (any factory qualifies regardless of headcount, under Section 1(3) of the Payment of Bonus Act, 1965);
• the employee draws wages or salary within the eligibility ceiling, which the 1965 Act fixed at Rs. 21,000 per month (Section 2(13)); and
• the employee has worked in the establishment for at least 30 working days in the accounting year (Section 8).

That 30-day rule catches people out. It is 30 working days across the year, not 30 continuous days and not a full month of employment, so a seasonal or part-year worker who clocks the days still qualifies.

Which establishments and employees the Act covers

The Act reaches wider than most people assume. It applies to every factory, and to every other establishment in which 20 or more persons are employed on any day during the accounting year. Private companies are squarely covered (this is not a public-sector-only law), and once the Act applies to an establishment, it continues to apply even if the number of employees later falls below 20.

Government employees, and employees of most public-sector undertakings, largely sit outside the Act because their service is governed by separate rules, though a PSU that competes with private industry can be brought within it. The clearer carve-outs are in Section 32: employees of the Reserve Bank of India, LIC, the Red Cross, universities and certain non-profit institutions are excluded. So the coverage question is rarely about whether a company is private; it’s about whether it’s one of the specifically exempted bodies.

Who does not qualify, and what they get instead

What happens to an employee earning above the ceiling? They fall outside the statutory scheme entirely. An employee drawing Rs. 60,000 a month has no right to a statutory bonus, and anything they receive labelled “bonus” is contractual or ex-gratia, payable purely on the employer’s terms. This is where a lot of anger comes from at appraisal time, because a senior employee often assumes the statutory floor protects them when it simply doesn’t.

Apprentices are excluded by definition, since the Act’s definition of “employee” leaves them out. And an employee can forfeit even an earned bonus through the disqualifying misconduct in Section 9, which we deal with later.

A common question is whether someone who joined or left partway through the year still gets a bonus. They do, provided they crossed the 30-day threshold, and the amount is worked out proportionately for the period actually worked (Section 13). Days on paid leave, maternity leave, lay-off, or absence due to a workplace accident count as working days for this purpose under Section 14, which is a detail employers processing a full-and-final settlement routinely miss. Contract workers add another wrinkle: a contract employee is generally the responsibility of the contractor, but the eligibility test is applied at the level of the establishment they actually work in. Related statutory entitlements like gratuity follow their own service thresholds, so it’s worth checking each one separately rather than assuming they move together.

How bonus is calculated

Payment of bonus is calculated on the employee’s basic salary plus dearness allowance, not on gross pay, and then subjected to a wage cap that keeps the figure modest even for higher earners. This is the single most misunderstood part of the law, and it’s where employers and employees most often talk past each other. The formula itself is short. The caps around it are what do the work.

There are two different ceilings, and confusing them produces most of the errors. The eligibility ceiling (Rs. 21,000 under the 1965 Act) decides whether you get a bonus. The calculation ceiling decides how much: under Section 12, bonus is computed as if your salary were capped at Rs. 7,000 per month, or the minimum wage for the scheduled employment, whichever is higher. So an employee earning Rs. 18,000 still qualifies (below Rs. 21,000), but the bonus is worked out on Rs. 7,000, not Rs. 18,000.

The formula, the floor and the cap

The statutory bonus runs between two fixed rates. The minimum bonus is 8.33% of the eligible wage, payable under Section 10 even if the employer made no profit at all. The maximum is 20% under Section 11, payable when there’s enough allocable surplus to justify it. Everything in between is decided by the surplus, which the next section unpacks.

Written as a formula, the annual bonus is: (capped monthly wage) x 12 x (bonus rate), adjusted proportionately for days not worked. Take the calculation ceiling of Rs. 7,000 and you get the outer edges of a statutory bonus at a glance.

Two worked examples

Consider an employee earning Rs. 6,000 a month in basic plus DA. Because that’s below the Rs. 7,000 cap, the bonus is calculated on the actual Rs. 6,000. At the minimum rate, that’s Rs. 6,000 x 12 x 8.33%, which is roughly Rs. 6,000 a year; at 20%, it’s about Rs. 14,400.

Now take an employee earning Rs. 18,000 a month. They’re eligible (under Rs. 21,000), but the calculation is capped at Rs. 7,000. Their minimum bonus is Rs. 7,000 x 12 x 8.33%, about Rs. 6,996, no matter how much their actual salary exceeds the cap. The cap is why two employees on very different salaries can receive an almost identical statutory bonus. Frankly, this gets overlooked constantly, and it’s the source of the “why is my bonus so small?” complaint every appraisal season.

One more point people ask about: is the bonus on basic-plus-DA or on gross salary? It’s basic plus DA only, mirroring the wage definition the Act uses. And can an employer pay more than 20%? Yes, as a matter of contract or goodwill, but anything above 20% is no longer statutory bonus; it’s an ex-gratia top-up, and it doesn’t carry the Act’s protections.

Allocable surplus, set-on and set-off

The allocable surplus is the pool of profit from which any bonus above the 8.33% minimum is paid. If the minimum bonus is the floor the employer owes in every year, the allocable surplus is what decides how far above that floor the bonus climbs, up to the 20% cap. No surplus, no bonus beyond the minimum. A large surplus, and the workforce moves toward the maximum.

Getting to that number is a two-step calculation. First, the employer computes the gross profit under Section 4, using the method in the First or Second Schedule to the Act, and then deducts the prior charges in Section 6 (depreciation, development rebate, direct tax, and a return on capital) to arrive at the available surplus in Section 5. The Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen, AIR 1969 SC 612 worked through what may and may not be charged before that surplus is struck, and it remains the reference point for how provisions (such as gratuity) are treated in the computation. The allocable surplus is then a fixed slice of the available surplus: 67% for most companies, and 60% for banking companies and certain others (Section 2(4)).

Set-on and set-off, explained

What happens when the surplus in a good year is more than enough to pay everyone the full 20%? It isn’t lost. Under Section 15, the excess is carried forward and “set on” to later years, up to a limit, so a bumper year can top up a lean one. And when the surplus falls short of even the 8.33% minimum, the deficiency is “set off” against surpluses carried forward, or carried forward itself to be absorbed later. Both the set-on and the set-off can be carried for up to four accounting years.

Think of it as a four-year smoothing account. The idea is that employees shouldn’t swing from 20% to nothing purely because one year’s profits spiked or dipped. A simplified picture looks like this.

The first five years of a new establishment

New businesses get a runway. Under Section 16, in the first five accounting years following the year an establishment starts selling its goods or services, bonus is payable only in respect of the years in which the employer actually derives a profit, and the set-on and set-off rules don’t apply to those years. From the sixth year, the normal machinery kicks in, and the surpluses or deficiencies of the fifth and sixth years get carried in.

So a startup that owes a founder’s-day bonus in year one only owes statutory bonus if it turned a profit that year. Worth flagging, though: this is a genuine exemption from the surplus-linked bonus, not from the minimum bonus once profit appears, and it’s frequently misread as a blanket “no bonus for five years”, which it is not.

Payment timeline, disqualification and penalties

Payment of bonus must be made within eight months of the close of the accounting year, under Section 19 of the Payment of Bonus Act, 1965. For an establishment on the April-to-March financial year, that puts the deadline at the end of November, which is why so many bonuses land around Diwali. The appropriate government can extend the window, but only up to a total of two years, and only for sufficient cause.

Mode of payment matters too. Statutory bonus is paid in cash or, in practice, by bank transfer, and it’s a distinct line item, not something that can be quietly folded into monthly wages and called “advance bonus” to escape the annual obligation. The much-discussed “advance statutory bonus” that some large employers show as a fixed monthly figure is really a contractual arrangement layered on top of the statutory duty, not a substitute for the year-end reconciliation.

When bonus can be withheld or forfeited

Can an employer simply refuse to pay? Only on narrow grounds. Section 9 disqualifies an employee from bonus for that year if they’re dismissed from service for fraud, for riotous or violent behaviour while on the premises, or for theft, misappropriation or sabotage of any property of the establishment. The disqualification is tied to dismissal for those specific acts, so an ordinary performance issue or a routine resignation doesn’t strip the entitlement.

There’s a separate power to adjust. Where an employer has paid a customary or interim bonus, or a Puja bonus, before the statutory bonus is worked out, Section 17 lets that payment be adjusted against the statutory amount due. What an employer cannot do is deduct at large: the only permitted deductions are those the Act specifically allows.

And in a loss-making year? The minimum 8.33% is still payable. That’s the whole point of a floor. Section 10 fixes the minimum bonus whether or not the employer has any allocable surplus, so a loss year cannot extinguish it. Any customary festival bonus the establishment has long paid sits alongside that statutory minimum rather than replacing it.

If your employer does not pay

Suppose the eight-month deadline passes and nothing arrives. The employee (or a trade union on their behalf) can move the authority under the Act to recover the bonus due, and an application for recovery must generally be made within one year of the money falling due, under Section 21. The amount is then recoverable as an arrear, and the government can direct payment.

The Act also has teeth. Under Section 28, an employer who contravenes the Act, or fails to comply with a direction or requisition under it, can face imprisonment of up to six months, or a fine of up to Rs. 1,000, or both. The sums look small by modern standards (a legacy of 1965 drafting), but the reputational and compliance exposure is not, especially now that record-keeping and inspection reach further under the codes. For HR and compliance professionals, staying current on exactly this kind of obligation is what makes the difference between a clean audit and a penalty, and it’s a skill set the market increasingly pays for in HR compliance roles. A practical starting point for employers is our new labour-code compliance checklist, which folds the bonus obligation into the wider annual calendar.

Payment of bonus under the Code on Wages, 2019

Payment of bonus under the Code on Wages, 2019 carries forward the 1965 scheme with a few real changes, and understanding them is now essential rather than academic. The codes came into force on 21 November 2025, so this is the operative law, not a proposal. Chapter IV of the Code, Sections 26 to 41, is the statutory bonus chapter, and anyone reading only the 1965 Act today is reading a repealed statute.

The bones are familiar. Section 26 keeps the 8.33% minimum (or Rs. 100, whichever is higher) and the 20% maximum, the 30-working-days qualification survives, and the allocable-surplus machinery is carried over (payment out of allocable surplus in Section 31, and set-on and set-off in Section 36). Section 29 keeps the disqualification for fraud, violent conduct and theft or sabotage, and adds conviction for sexual harassment as a fresh ground. So far, continuity.

What actually changed

Three shifts are worth pinning down. First, the eligibility wage ceiling is no longer hard-coded. The 1965 Act fixed it at Rs. 21,000; the Code leaves the figure to be notified by the appropriate government, so the number that decides who qualifies is now a policy lever rather than a line in the statute, and it’s one to watch as central and state rules settle. Second, the Code applies its wage-and-bonus discipline across establishments more broadly, part of the codes’ general push toward universal coverage. Third, and most consequential for salary structures, is the new definition of “wages”.

The 50% wages rule, and why it moves money

Here’s where it gets interesting. The Code on Wages defines “wages” in Section 2(y) so that the excluded allowances (HRA, conveyance, and the rest) cannot exceed 50% of total remuneration. If they do, the excess is added back into “wages”. For salary structures deliberately built with a small basic and a large allowance basket, that inclusion rule quietly re-inflates the base on which bonus, provident fund and gratuity are all computed. Our detailed walk-through of the new wage code and the 50% rule shows how this reshapes take-home pay.

The second-order effect is the interesting part, and it’s one most guides skip. The old game of keeping basic artificially low to shrink statutory liabilities stops working, because the 50% floor drags the computation base back up. Payroll teams across the country are now restructuring salaries to stay compliant, and the practical result is that statutory bonus, for employees still under the ceiling, is likely to be calculated on a higher base than before. For a fuller picture of the Code’s wage and bonus provisions, iPleaders has a useful section-by-section explainer of what the Code on Wages, 2019 covers.

Tax, CTC and the transition

Two quick practical questions round this out. Is statutory bonus taxable? Yes, fully: it’s part of “salary” for income-tax purposes, so it’s taxable in the year of receipt and TDS applies. Can it sit inside your CTC? It can, and often does, but showing it in CTC doesn’t dilute the statutory obligation to actually pay it within the deadline; a bonus “included in CTC” but never disbursed is still a contravention.

As for the transition itself, bonus for accounting years that closed under the 1965 Act is worked out under that Act, while years closing after the Code’s commencement fall under Chapter IV. Early signals suggest the notified wage ceiling and the state-level rules will be the settling points to watch through 2026, and practitioners expect the Rs. 21,000 reference figure to inform, though not necessarily fix, whatever ceiling is finally notified.

Frequently asked questions

1. Who is eligible for statutory bonus? An employee who works in an establishment covered by the Act (a factory, or any establishment with 20 or more employees), draws wages within the eligibility ceiling (Rs. 21,000 per month under the 1965 Act framework), and has worked at least 30 working days in the accounting year. All three conditions must be met together.

2. What is the minimum bonus an employer must pay? The minimum bonus is 8.33% of the employee’s eligible wages, under Section 10. It is payable even in a year when the employer made no profit or a loss, which is what makes it a statutory floor rather than a discretionary reward.

3. What is the salary limit for bonus eligibility? Under the Payment of Bonus Act, 1965 the eligibility ceiling was Rs. 21,000 per month of basic plus dearness allowance. Under the Code on Wages, 2019, that ceiling is now a figure notified by the appropriate government rather than a fixed statutory number.

4. By when must bonus be paid each year? Within eight months of the close of the accounting year, under Section 19. For an April-to-March year that means by the end of November, which is why bonuses often coincide with Diwali. The window can be extended up to two years by the appropriate government for sufficient cause.

5. Is payment of bonus compulsory in India? Yes, for establishments and employees the Act covers. Once an establishment employs 20 or more people (or is a factory), payment of the minimum statutory bonus to eligible employees is a legal obligation, not a choice, and it continues even if headcount later drops below 20.

6. Is bonus payable if the company made a loss? Yes. The minimum bonus of 8.33% is payable regardless of profit or loss. Bonus above the minimum, up to 20%, depends on the allocable surplus, so a loss year typically means the minimum is paid and any shortfall is set off against future surpluses.

7. Can an employer withhold or refuse my bonus? Only on the narrow grounds in Section 9: dismissal for fraud, riotous or violent conduct on the premises, or theft, misappropriation or sabotage of the establishment’s property. A routine resignation, a performance issue, or a personal dispute does not disqualify you from bonus already earned.

8. My employer did not pay my bonus. How do I claim it? You (or your trade union) can apply to the authority under the Act to recover the bonus due, generally within one year of it falling due, under Section 21. The amount is recoverable as an arrear, and an employer who contravenes the Act faces penalties under Section 28.

9. When can an employee be disqualified from bonus? Under Section 9 of the 1965 Act (and Section 29 of the Code on Wages), where the employee is dismissed for fraud, violent or riotous behaviour on the premises, or theft, misappropriation or sabotage. The Code adds conviction for sexual harassment as a further disqualifying ground.

10. What is the penalty if an employer fails to pay bonus? Under Section 28, imprisonment of up to six months, or a fine of up to Rs. 1,000, or both. The monetary figure is dated, but the contravention also carries recovery of the unpaid amount and wider compliance and reputational exposure under the labour codes’ inspection regime.

11. Can statutory bonus be included inside my CTC? It can, and employers commonly show it within CTC. But including it in CTC does not reduce the obligation to actually pay it within the statutory deadline. A bonus shown in CTC but never disbursed is still a contravention of the Act.

12. Is statutory bonus taxable? Yes, fully. Statutory bonus is part of “salary” for income-tax purposes, taxable in the year it’s received, and TDS applies. There is no special exemption for statutory bonus the way there is for gratuity up to a ceiling.

13. Do I get bonus if I resign mid-year? Yes, provided you worked at least 30 working days in that accounting year. The bonus is calculated proportionately for the period you actually worked, under Section 13, and paid in your full-and-final settlement. Days on paid leave, maternity leave or lay-off count as working days.

14. Statutory bonus vs performance bonus vs ex-gratia: what is the difference? Statutory bonus is a legal entitlement under the Act, tied to eligibility and allocable surplus. A performance bonus is contractual, tied to targets set in your offer letter or policy. An ex-gratia payment is voluntary employer goodwill, often paid to employees above the ceiling who fall outside the statutory scheme.

15. Payment of Bonus Act, 1965 vs Code on Wages, 2019: what changed? The Code (in force from 21 November 2025) repeals the 1965 Act and re-enacts bonus in Chapter IV, keeping the 8.33% floor and 20% ceiling. The main changes are a notified (rather than fixed Rs. 21,000) eligibility ceiling, a new disqualification for sexual-harassment conviction, and the 50% “wages” definition that raises the computation base for allowance-heavy salaries.

16. Does the Payment of Bonus Act apply to private companies? Yes. The Act applies to every factory and to every establishment employing 20 or more persons, which squarely includes private companies. The main exclusions are specific bodies listed in Section 32 (such as the RBI, LIC and certain non-profits), not private employers generally.

References

Case Law

1. Jalan Trading Co. (P) Ltd. v. Mill Mazdoor Sabha, AIR 1967 SC 691 (also (1967) 1 SCR 15): upheld the core of the Payment of Bonus Act, 1965 (the power to fix a minimum bonus and the minimum-to-maximum scheme) as a valid exercise of legislative power, striking down only a few ancillary provisions, and read its object as securing industrial peace.
2. Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, (1976) 3 SCC 832: held that customary or festival (Puja/Diwali) bonus survives independently of the Payment of Bonus Act, so an established customary bonus is a separate, enforceable claim.
3. Metal Box Co. of India Ltd. v. Their Workmen, AIR 1969 SC 612 (also (1969) 1 SCR 750): worked through the computation of available surplus and the permissible prior charges and provisions (including gratuity) before bonus is calculated.

Statutes

1. Payment of Bonus Act, 1965. Sections cited: 1(3) (application), 2(4) (allocable surplus), 2(13) (employee/eligibility ceiling), 4 (computation of gross profit), 5 (available surplus), 6 (prior charges), 8 (30-day eligibility), 9 (disqualification), 10 (minimum bonus), 11 (maximum bonus), 12 (calculation ceiling), 13 (proportionate reduction), 14 (working days), 15 (set-on and set-off), 16 (new establishments), 17 (adjustment of customary bonus), 19 (time limit for payment), 21 (recovery), 28 (penalty), 32 (exclusions).
2. Code on Wages, 2019. Chapter IV, Sections 26 to 41 (payment of bonus), in force from 21 November 2025; sections cited: 26 (eligibility, minimum and maximum bonus), 29 (disqualification), 31 (payment out of allocable surplus), 36 (set on and set off); read with Section 2(y) (definition of wages, 50% rule) and Section 69 (repeal of the Payment of Bonus Act, 1965).

Secondary sources

1. Ministry of Labour and Employment, Government of India: notification bringing the four labour codes into force with effect from 21 November 2025.

This article is for informational purposes only and does not constitute legal advice. For specific legal guidance, consult a qualified legal professional.