THE PAYMENT OF BONUS

ACT 1965
 INTRODUCTION
 The practice of paying bonus in India appears to have originated
during First World War when certain textile mills granted 10% of
wages as war bonus to their workers in 1917.
 In certain cases of industrial disputes demand for payment of
bonus was also included.
 In 1950,the Full Bench of the Labour Appellate evolved a formula
for determination of bonus.
INTRODUCTION
 This is an Act intended to provide for the payment of bonus to persons
employed in certain establishments on the basis of profits or on the basis of
production or productivity and for matters connected therewith. It came into
force from September 25, 1965.
 The Payment of Bonus Act, 1965 has undergone several amendments. This
Act extends to the whole of India
 The Act is designed to:
 (i) impose a statutory obligation on an employer of every establishment
covered by the Act to pay bonus to employees in the establishment;
 (ii) lay down principle and formula for calculation of bonus;
 (iii) provide for payment of minimum and maximum bonus and linking the
payment of bonus with the scheme of set -on and set-off ; and
 (iv) provide machinery for enforcement of liability for payment of bonus.
 APPLICABILITY OF THE ACT
Unless it is provided otherwise in this Act, it shall apply to:
 (a) every factory; and
 (b) every other establishment in which 20 or more persons are employed on
any day during an accounting year.
 (c) the appropriate Government may also apply the provisions of this Act
with effect from such accounting year as may be notified in the official
Gazette, to any establishment or class of establishments employing persons
less than 20 but not less than 10 in number
 (d) The provision of this Act shall also apply to certain public sector
establishments. An establishment in which 20 or more persons are employed
on any day during an accounting year, must continue to be governed by this
Act, in spite of the fact that the number of persons employed therein falls
below 20.
 A part-time employee is also an employee for the purpose of calculating the
number of employees i.e., 20 or more.
[Automobile Karamchari Sangh Vs. Industrial Tribunal,(1976)
EMPLOYEES NOT COVERED UNDER BONUS ACT
However employees of
 L.I.C., General Insurance Corporation of India,

 Universities and Educational institutions,

 Hospitals,

 Chamber of Commerce,

 R.B.I., Industrial Finance Corporation of India Ltd, Small Industries

Development Bank of India, Unit Trust of India.
 Social Welfare institutions

 Indian Red Cross Society or any other institution of a like nature

 National Bank for Agriculture and Rural Development;

 Industrial Development Bank of India

 National Housing Bank

are not entitled to bonus under this Act.

APPLICATION OF THE ACT TO ESTABLISHMENTS IN
PUBLIC SECTOR IN CERTAIN CASES [SECTION 20]

In following two conditions, this Act will be applied on the

public sector establishments(PSEs)-

 (i) If in any accounting year an establishment in public sector

sells any goods produced or manufactured by it or renders any
services, in competition with an establishment in private
sector, and
 (ii) The income from such sale or services or both is not less
than twenty percent of the gross income of the establishment
in public sector for that year.
 ELIGIBILITY
 Every employee of an establishment covered under the Act is
entitled to bonus from his employer in an accounting year
provided he has worked in that establishment-
 (i) for not less than thirty working days in that year,

 (ii) on a salary or wage not exceeding 10,000 per month

 The payment of Bonus Act does not make any distinction as to

whether an employee is daily wager, temporary, permanent,
weekly paid, monthly paid etc.
 The only precondition he should have worked in the
establishment for not less than 30 working days in an accounting
year.
 Himachal Pradesh State Electricity Board and Others Vs Krishan
Dutt, 2010
An employee in the following cases is entitled to bonus :
 (i) A temporary workman is entitled to bonus on the basis of total number
of days worked by him.
 (ii) An employee of a seasonal factory is entitled to proportionate bonus and
not the minimum bonus
 (iii) A part time employee as a sweeper engaged on a regular basis is
entitled to bonus.
 (iv) A retrenched employee is eligible to get bonus provided he has worked
for minimum qualifying period.
 (v) A probationer is an employee and as such is entitled to bonus.

 (vi) A dismissed employee reinstated with back wages is entitled to bonus

 (vii) A piece-rated worker is entitled to bonus.

 (viii) Employees employed through contractors on building operations shall

be entitled to bonus
SALARY OR WAGES
 Salary or Wages " means all remuneration (other than
remuneration in respect of over-time work), which would,
be payable to an employee in respect of his employment or
of work done in such employment and includes dearness
allowance,
 but does not include,-
 (i) any other allowance which the employee is for the time being
entitled to;
 (ii) the value of any house accommodation or of supply of light,
water, medical attendance or other amenity or of any service or of
any concessional supply of food grains or other articles;
 (iii) any travelling concession.

 (iv) any bonus (including incentive, production and attendance

bonus).
 (v) any contribution paid or payable by the employer to any
pension fund or provident fund or for the benefit of the employee.
 (vi) any retrenchment compensation or any gratuity or other
retirement benefit payable to the employee or any ex gratia
payment made to him.
 (vii) any commission payable to the employee
ACCOUNTING YEAR
 In relation to a corporation: the year ending on the day on which
the books and accounts of the corporation are to be closed and
balances;
 In relation to a company: the period in respect of which any
profit and loss account of the company laid before it in annual
general meeting is made up;
 In any other case:

» the year commencing on the 1st day of April; or

» if the accounts of an establishment maintained by the
employer thereof are closed and balances on any day other than
the 31st day of March, then, at the option of the employer, the
year ending on the day on which its accounts are so closed and
balanced.
  “Employee” means any person (other than an apprentice) employed
on a salary or wages not exceeding Rs.3,500 per annum in any industry
to do any skilled or unskilled, manual, supervisory, managerial,
administrative, technical or clerical work or hire or reward, whether the
terms of employment be express or implied.
  Part time permanent employees working on fixed hours are
employees.
Employer
  In relation to an establishment which is a factory, the owner or
occupier of the factory, including the agent of such owner or occupier,
the legal representative of a deceased owner or occupier, and where a
person has been named as a manager of the factory under clause (f) of
Sub-section 7(1) of the Factories Act, 1948, the person so named; and
  In relation to any other establishment, the person who, or the authority
which, has the ultimate control over the affairs of the establishment and
where the said affairs are entrusted to a manager, managing director or
managing agent, such manager, managing director or managing agent.
 ESTABLISHMENT The word ‘establishment’ is not defined
in the Act. Normally, ‘establishment’ is a permanently fixed
place for business. The term ‘establishment’ is much wider than
‘factory’. It covers any office or fixed place where business is
carried out.

 ESTABLISHMENTS TO INCLUDE DEPARTMENTS,

UNDERTAKINGS & BRANCHES
  Where an establishment consists of different departments or
undertakings or has branches, whether situated in the same
place or in different places, all such departments or
undertakings or branches shall be treated as parts of the same
establishment for the purpose of computation of bonus under
this Act
BONUS
Eligibility Disqualification

 Every employee shall  An employee shall be disqualified

entitled to be paid by his from receiving bonus under this Act
employer in an accounting :-
year, bonus, in accordance  (a) fraud; or with the provisions

with the provisions of the of

 (b) unruly or violent behavior
Act, provided he has
worked in the while on the premises of the
establishment not less than establishment
 (c) theft, misuse, damage of any
30 working days in that
year property of the establishment
COMPUTATION FOR NUMBER OF WORKING DAYS
An employee shall be deemed to have worked in an establishment
in any accounting year also on the days on which,
 he has been laid off under an agreement or as permitted by
standing orders under the Industrial Employment STANDING
ORDERS ACT, 1946 or under the INDUSTRIAL DISPUTES
ACT, 1947 or under ANY OTHER LAW applicable to the
establishment;
 he has been on leave with salary or wages;

 he has been absent due to temporary disablement caused by

accident arising out of and in the course of his employment,&
 the employee has been on maternity leave with salary or wages,
during the accounting year
CUSTOMARY BONUS & NEW ESTABLISHMENT
 Customary bonus is bonus which is being paid by way of
tradition or custom at a uniform rate over a number of years and
which has no link with profit

 The NEWLY SET UP ESTABLISHMENT is exempted from

paying bonus to its employees in the first five years following
the year in which the employer sells the goods produced or
manufactured by him.
 If, however, the employer derives profit in any of the first five
year, he has to pay bonus for that year. The provisions of set on
and set off are not applicable in such cases.
TIME LIMIT FOR PAYMENT
 The bonus should be paid in cash within 8 months from
the close of the accounting year or within one month
from the date of enforcement of the award or coming
into operation of a settlement following an industrial
dispute regarding payment of bonus.
 However if there is sufficient cause extension may be
applied for.
DEDUCTION OF CERTAIN AMOUNTS
FROM BONUS PAYABLE UNDER THE
ACT
 Where in any accounting year, an employee is found guilty of
misconduct causing financial loss to the employer, then, it
shall be lawful for the employer to deduct the amount of loss
from the amount of bonus payable by him to the employee
under this Act in respect of that accounting year only and the
employee shall be entitled to receive the balance, if any.
CALCULATION OF BONUS
 1.) Calculate the Statutory bonus

 2.) Calculate the Available Surplus.

MEANING OF STATUTORY BONUS
 Statutory Bonus means bonus payable as per bill, i.e., the Payment of
Bonus Act.
 As per the Act, an amount equal to 8.33% of the

Basic + Dearness allowance

paid to an employee who is eligible for bonus is to be paid irrespective of
availability of surplus or profit.
 Therefore, 8.33% is the statutory minimum bonus payable.

 However, depending upon availability of profit, the employer shall pay

bonus 20 subject to a maximum of 20%.
 The Payment of Bonus Act, 1965, gives to the employees a statutory
right to a share in the profits of his employer. Prior of the Act some
employees used to get bonus but that was so if their employers were
pleased to pay the same.
 All the confirmed employees whose basis is less than or equal to 10000/-
per month is eligible for statutory bonus @ rate of 8.33% of Basic pay.
 MINIMUM AND MAXIMUM BONUS
 The minimum bonus which an employer is required to pay even
if he suffers losses during the accounting year or there is no
allocable surplus is 8.33 % of the salary during the accounting
year.
 If in an accounting year, the allocable surplus, calculated after
taking into account the amount ‘set on’ or the amount ‘set of’
exceeds the minimum bonus, the employer should pay bonus in
proportion to the salary or wages earned by the employee in
that accounting year subject to a maximum of 20% of such
salary or wages.
HOW STATUTORY BONUS IS
CALCULATED?

 The Act enables the employees to get a minimum bonus

equivalent to one months salary or wages (8.33% of annual
earnings) whether the employer makes any profit or not.
 But the Act also puts a ceiling on the bonus and the maximum
bonus payable under the Act is equivalent to about 2 1/2
months salary or wage (20% of annual earnings).
AVAILABLE SURPLUS
 Available Surplus = Gross Profit – the following :

• Depreciation admissible u/s 32 of the Income tax Act

• Development allowance
 1. Calculate the gross profit in the manner specified in
 First Schedule, in case of a banking company, or

 Second Schedule, in any other case. 

 2. Calculate the Available Surplus

 Available Surplus = Gross Profit –
 - Depreciation admissible u/s 32 of the Income tax Act

 - Development allowance

 - Direct taxes payable for the accounting year

 + Direct Taxes in respect of gross profits for the

immediately preceding accounting year

 3. Calculate Allocable Surplus
 Allocable Surplus = 60% of Available Surplus, 67% in case of foreign
companies.
 Make adjustment for ‘Set-on’ and ‘Set-off’. For calculating the
amount of bonus in respect of an accounting year, allocable surplus is
computed after considering the amount of set on and set off from the
previous years.
 The allocable surplus so computed is distributed amongst the
employees in proportion to salary or wages received by them during
the relevant accounting year.
 4. In case of an employee receiving salary or wages above Rs.
21,000 the bonus payable is to be calculated as if the salary or
wages were Rs. 21,000 p.m. only.
SET ON
 Where for any accounting year, the allocable surplus exceeds
the amount of maximum bonus payable to the employees,
then, the excess shall, subject to a limit of 20% of the total
salary or wages of the employees employed in the
establishment in that accounting year, be carried forward for
being set on in the succeeding accounting year and so on up to
and inclusive of the fourth accounting year to be utilized for
the purpose of payment of bonus.
SET OFF
 Where for any accounting year, there is no available 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 or sufficient amount carried forward
and set on which could be utilized for the purpose of
payment of the minimum bonus, then such minimum
amount or the deficiency, as the case may be, shall be
carried forward for being set off in the succeeding
accounting year and so on up to and inclusive of the fourth
accounting year
SET ON & SET OFF
 In calculating bonus for the succeeding accounting year, the
amount of set on or set off carried forward from the earliest
accounting year shall first be taken into account.
 The allocable surplus so computed is distributed amongst the
employees in proportion to salary or wages received by them
during the relevant accounting year.
DUTIES OF EMPLOYER
 To calculate and pay the annual bonus as required under the
Act.
 To submit an annul return of bonus paid to employees during
the year, in Form D, to the Inspector, within 30 days of the
expiry of the time limit specified for payment of bonus.
 To co-operate with the Inspector, produce before him the
registers/records maintained, and such other information as
may be required by them
RIGHTS OF EMPLOYER
 Right to forfeit bonus of an employee, who has been
dismissed from service for fraud, lawless or violent behavior,
or theft, misappropriation or damage of any property of the
establishment.
 Right to make permissible deductions from the bonus
payable to an employee, such as, festival/interim bonus paid
and financial loss caused by misconduct of the employee.
 Right to refer any disputes relating to application or
interpretation of any provision of the Act, to the Labour
Court or Labour Tribunal.
RIGHTS OF EMPLOYEES
 Right to claim bonus payable under the Act and to make an
application to the Government, for the recovery of bonus due
and unpaid, within one year of its becoming due.
 Right to refer any dispute to the Labour Court/Tribunal.

 Employees, to whom the Payment of Bonus Act does not

apply, cannot raise a dispute regarding bonus under the
Industrial Disputes Act.
 Right to seek clarification and obtain information, on any
item in the accounts of the establishment.
OFFENCES AND PENALTIES
 For contravention of the provisions of the Act or rules the
penalty is imprisonment upto 6 months, or fine up to Rs.1000,
or both.
 For failure to comply with the directions or requisitions made
the penalty is imprisonment upto 6 months, or fine up to
Rs.1000, or both.
 In case of offences by companies, firms, body corporate or
association of individuals, its director, partner or a principal
officer responsible for the conduct of its business, shall be
deemed to be guilty of that offence, unless the person
concerned proves that the offence was committed without his
knowledge or that he exercised all due diligence
MAINTENANCE OF REGISTER, RECORDS
& INSPECTORS
 Every employer shall prepare and maintain such registers,
records and other documents in such form and in such manner
as may prescribed.
 The appropriate Government may, by notification on the
Official Gazette, appoint such person as it think fit to be
Inspectors for the purposes of this Act and may define the
limits within which they shall exercise jurisdiction
INSPECTORS DUTIES
 An Inspector appointed under sub-section (1) may, for the
purpose of ascertaining whether any of the provisions of this
Act has been complied with
 Require an employer to furnish such information as he may
consider necessary;
 At any reasonable time and with such assistance, if any, as he
thinks fit enter any establishment or any premises connected
therewith and require any one found in charge thereof to
produce before him for examination any accounts, books,
registers and other documents relating to the employment of
persons or the payment of salary or wage or bonus in the
establishment.