The Payment of Bonus Act, 1965 is an important law in India that ensures workers in certain workplaces get a share of their company’s profits as a bonus. It’s like a reward for their hard work, helping maintain fairness and harmony between employers and employees. 

In this blog, we dive into the payment of Bonus Act, covering its definition, scope, key provisions, amendments, history, and significance. Written in clear, simple language, this guide is perfect for employees, employers, or anyone curious about the law.

What is the Payment of Bonus Act, 1965? Key Features Explained

The Payment of Bonus Act, 1965, is a law that makes it mandatory for certain employers to pay a bonus to their employees based on the company’s profits or productivity. A bonus is extra money given to workers on top of their regular salary, usually once a year, as a way to share the company’s success.

The Act was introduced to:

• Ensure employees get a fair share of profits.

• Promote peace and cooperation between workers and employers.

• Set clear rules for calculating and paying bonuses.

It applies to factories and establishments with 20 or more employees (or 10 or more in some cases, as decided by the government) across India. For example, it covers workers in factories, railways, or companies but not all workplaces, as we’ll see later.

Why Was the Payment of Bonus Act Introduced in India?

The idea of bonuses in India started during World War I when some textile mills paid workers extra money as a “war bonus” in 1917. Over time, workers began demanding bonuses as a right, leading to disputes. In 1960, the Indian government set up a Bonus Commission to study the issue and suggest fair rules. Based on the commission’s recommendations, the Payment of Bonus Act was passed in 1965 to standardize bonus payments and reduce conflicts.

The Act’s main goals, as explained by the Supreme Court in the case Jalan Trading v. Mill Mazdoor Sabha, are to:

• Share company prosperity with workers.

• Set minimum and maximum bonus rates.

• Ensure uniformity in bonus payments across industries.

Who is Eligible for Bonus Under the Payment of Bonus Act?

The Act applies to:

• Factories with 10 or more workers.

• Other establishments (like companies or shops) with 20 or more workers on any day during the year.

• Employees earning up to Rs. 21,000 per month (as updated in 2015). This includes part-time and seasonal workers if they meet eligibility criteria.

• Employees who have worked for at least 30 days in a year.

However, the Act does not apply to certain groups, such as:

• Employees of the Indian Red Cross, universities, hospitals, or social welfare institutions.

• Workers in public sector units with less than 20% government ownership.

• Employees covered by other bonus schemes, like those in coal mines.

Key Sections of the Payment of Bonus Act, 1965: Explained Simply

The Act has 40 sections and four schedules that explain how bonuses are calculated, who gets them, and how disputes are handled. Below is a simple breakdown of the most important sections

Section 1: Title and Coverage of the Act

• The law is called the Payment of Bonus Act, 1965.

• It applies to the whole of India, except for certain plantations and ports in Jammu and Kashmir before 2019 (now fully applicable).

Section 2: Important Definitions in the Act

• Defines key terms like:

  • Employee: Anyone (except apprentices) earning up to Rs. 21,000/month.

  • Employer: The owner, manager, or person in charge of the establishment.

  • Accounting Year: The financial year (usually April 1 to March 31) for calculating profits.

Section 3: Establishments Covered by the Act

• The Act applies to factories and establishments with 20 or more workers. Even if the number of workers drops below 20 later, the Act still applies.

Section 4: How to Calculate Gross Profits

• Explains how to calculate the company’s gross profits for the year, which is the starting point for determining the bonus.

Section 5: Understanding Available Surplus

• The available surplus is the money left after deducting certain expenses (like taxes and depreciation) from gross profits. This surplus is used to pay bonuses.

Section 6: Deductions Allowed from Gross Profits

• Lists expenses that can be deducted from gross profits, such as:

• Depreciation (wear and tear of assets).

• Taxes.

• Investment allowances.

Section 7: Calculating Direct Tax for Bonus

• Explains how taxes are calculated for the surplus used for bonuses.

Section 8: Who is Eligible for a Bonus?

• Employees who work for at least 30 days in a year are eligible for a bonus. This includes retrenched (laid-off) or seasonal workers. For example, in J.K. Ginning & Pressing Factory v. Second Labour Court, the Bombay High Court ruled that seasonal workers are eligible if they meet this requirement.

Section 9: When Can an Employee Lose Their Bonus?

• Employees can lose their bonus if they are fired for:

  • Fraud.

  • Violent behavior.

  • Theft or sabotage of company property.

Section 10: Minimum Bonus Rules

• Every eligible employee must get a minimum bonus of 8.33% of their salary or Rs. 100 (Rs. 60 for employees under 15 years), even if the company makes a loss.

Section 11: Maximum Bonus Limits

• The maximum bonus is 20% of the salary. This is paid when the company has enough profits.

Section 12: Bonus Calculation for Higher Salaries

• For employees earning more than Rs. 7,000/month (or the minimum wage, whichever is higher), the bonus is calculated as if their salary is Rs. 7,000. For example, if someone earns Rs. 15,000/month, their bonus is based on Rs. 7,000.

Section 13: Proportionate Bonus for Part-Year Work

• If an employee works only part of the year, their bonus is reduced proportionately.

Section 14: Bonus for New Businesses

• For new businesses, bonuses are calculated based on profits after a few years, as they may not have profits initially.

Section 15: Set-On and Set-Off Rules

• If there’s extra surplus after paying the maximum bonus, it’s “set on” (saved) for future years. If there’s not enough surplus, past savings are “set off” to pay the minimum bonus.

Section 16: Exemptions for New Establishments

• New businesses are exempt from paying bonuses for the first five years or until they make profits.

Section 17: Adjusting Festival or Customary Bonus

• If a company pays a festival bonus (like Diwali bonus), it can be adjusted against the bonus required by the Act.

Section 18: Deductions from Bonus for Misconduct

• Employers can deduct amounts from the bonus for financial losses caused by an employee’s misconduct.

Section 19: Deadline for Bonus Payment

• The bonus must be paid within 8 months from the end of the accounting year (usually by November 30 if the year ends on March 31).

Section 20: Bonus Rules for Public Sector Units

• The Act applies to some public sector units if they meet profit criteria.

Section 21: How to Recover Unpaid Bonus

• If an employer doesn’t pay the bonus, employees can apply to the government within one year to recover it. The government can collect it like a tax.

Sections 22–24: Handling Bonus Disputes and Accounts

• Disputes about bonuses can be referred to a Labour Court or Tribunal.

• Audited company accounts (by the Auditor General or under the Companies Act) are trusted unless proven inaccurate.

Section 25: Auditing Accounts for Non-Companies

• Employers who aren’t companies must have their accounts audited to ensure accurate profit calculations.

Section 26: Record-Keeping Requirements

• Employers must keep records like:

  • Form A: Computation of allocable surplus.

  • Form B: Set-on and set-off details.

  • Form C: Bonus payment details.

Section 27: Role of Inspectors in Enforcement

• Government-appointed inspectors can check if employers follow the Act.

Section 28: Penalties for Non-Compliance

• Employers who break the Act can face up to 6 months in jail or a Rs. 1,000 fine.

Section 29: Liability for Companies Violating the Act

• If a company violates the Act, the person in charge (like a manager) is held responsible.

Section 30: Filing Complaints for Offences

• Courts can take up cases only if the government or an authorized officer files a complaint.

Section 31: Legal Protection for Actions Under the Act

• Actions taken under the Act (like inspections) are protected from legal challenges.

Section 31A: Productivity-Linked Bonus Agreements

• Employers and employees can agree to link bonuses to productivity instead of profits, but the agreement must follow the Act.

Section 32: Exemptions from the Act

• The Act doesn’t apply to certain employees, like those in:

  • Life Insurance Corporation.

  • Universities or educational institutions.

  • Inland water transport.

Sections 33–37: Repeals and Government Exemptions

• Some old laws were repealed (canceled).

• The government can exempt certain establishments from the Act if it’s in the public interest.

Section 38: Government’s Power to Make Rules

• The government can make rules to implement the Act, like the Payment of Bonus Rules, 1975.

Section 39: Interaction with Other Labour Laws

• The Act doesn’t affect other laws that might apply to bonuses.

Section 40: Transition from Older Laws

• Ensures smooth transition from older laws to this Act.

Schedules: Profit Calculation Guidelines

• First Schedule: How to calculate profits for banking companies.

• Second Schedule: How to calculate profits for other companies.

• Third and Fourth Schedules: Additional rules for profit calculations.

Amendments to the Payment of Bonus Act: Key Changes Over Time

The Act has been amended several times to keep it relevant. Here are the key amendments:

1968–1989 Amendments: Minor changes, like extending the Act to Jammu and Kashmir (1970), updating banking rules, and including new institutions like the National Housing Bank.

1980 and 1985 Amendments: Adjusted calculation methods and clarified exemptions.

1995 Amendment: Updated eligibility criteria and calculation ceilings.

2015 Amendment (Effective from April 1, 2014):

• Eligibility Limit Increased: From Rs. 10,000/month to Rs. 21,000/month, making more workers eligible.

• Calculation Ceiling Raised: From Rs. 3,500/month to Rs. 7,000/month or the minimum wage (whichever is higher) for bonus calculations.

• Retrospective Effect: Applied from April 2014, meaning companies had to pay arrears (extra bonus) for 2014–15. This caused challenges as companies had already distributed bonuses for that year.

• The amendment aimed to benefit more workers but faced legal challenges, with some High Courts staying its retrospective effect.

2016 Rules Amendment:

• Updated the Payment of Bonus Rules, 1975, to align with the 2015 changes, clarifying minimum bonus amounts (Rs. 100 for adults, Rs. 60 for those under 15).

How to Calculate Bonus Under the Payment of Bonus Act

Let’s break it down with an example:

• Step 1: Calculate the company’s gross profits (total earnings minus certain expenses).

• Step 2: Deduct expenses like taxes and depreciation to find the available surplus.

• Step 3: A portion of the surplus (usually 60%) is the allocable surplus for bonuses.

• Step 4: Pay a minimum bonus of 8.33% of the salary (or Rs. 100) or up to 20% if profits allow.

• Step 5: For employees earning over Rs. 7,000/month, calculate the bonus based on Rs. 7,000.

Example:

• An employee earns Rs. 15,000/month (basic salary + dearness allowance).

• Their bonus is calculated on Rs. 7,000.

• Minimum bonus = 8.33% of (Rs. 7,000 × 12 months) = Rs. 6,996/year.

• Maximum bonus = 20% of (Rs. 7,000 × 12 months) = Rs. 16,800/year.

Challenges and Criticisms of the Payment of Bonus Act

While the Act benefits workers, it has faced issues:

• Retrospective Amendments: The 2015 amendment’s backdated effect (from 2014) forced companies to recalculate and pay extra bonuses, causing financial strain. Some High Courts paused this rule.

• Complexity: Calculating profits and surplus can be tricky, especially for small businesses.

• Exemptions: Some workers (like those in universities) feel left out as the Act doesn’t cover them.

Future of the Payment of Bonus Act: Code on Wages, 2019

The Code on Wages, 2019, is set to replace the Payment of Bonus Act, 1965, once fully implemented. This new law aims to simplify labor laws, but until it’s enforced, the 1965 Act remains in place.

Conclusion: Why the Payment of Bonus Act Matters

The Payment of Bonus Act, 1965, is a worker-friendly law that ensures employees share in their company’s success. By setting clear rules for minimum and maximum bonuses, it promotes fairness and reduces disputes. The 2015 amendment made it more inclusive by covering workers earning up to Rs. 21,000/month, but challenges like retrospective payments show the need for clearer implementation. For beginners, think of the Act as a way to reward workers for their role in a company’s growth, like a “thank you” in the form of extra cash!

If you’re an employee, check if your workplace is covered and ensure you get your rightful bonus. If you’re an employer, maintain proper records and follow the Act to avoid penalties. For more details, visit official government sites like labour.gov.in or consult a labor law expert.