Payment of Bonus Act: A Complete Employer Guide for 2026

Payment of Bonus Act: A Complete Employer Guide for 2026

If you run payroll for an Indian business, the Payment of Bonus Act is one of those laws you cannot afford to treat as an afterthought. Unlike a discretionary Diwali gift or a performance incentive, the statutory bonus under the Payment of Bonus Act is a legal entitlement for eligible employees — which means getting it wrong exposes your company to penalties, employee disputes, and uncomfortable questions during labour inspections and due-diligence exercises.

Yet in our conversations with founders, HR managers, and payroll teams across India, the same confusions come up again and again. Who exactly is eligible? How is the bonus actually calculated? What on earth are "allocable surplus" and "set-on and set-off"? Why is the minimum bonus 8.33% and the maximum 20%? And how does all of this change once the Code on Wages fully takes effect?

This guide answers those questions in plain language. It walks through coverage, eligibility, statutory bonus calculation with worked examples, the surplus mechanics that determine the bonus percentage, payment timelines, disqualification, record-keeping, and a practical payroll workflow you can implement this year. It is written for HR managers, founders, and payroll teams — not for lawyers — so we keep the language practical while flagging the areas where you should confirm the latest official figures.

One important note before we begin: monetary thresholds under Indian labour law (eligibility wage limits, calculation ceilings, and similar figures) are revised by the government from time to time, and the transition to the Labour Codes may change them further. Throughout this guide we explain the mechanics and use illustrative numbers clearly marked as examples. Always verify the current notified limits on official government sources or with your labour law advisor before finalising payroll.

What Is the Payment of Bonus Act and Why Does It Exist?

The Payment of Bonus Act, 1965 is a central law that requires certain establishments in India to share a portion of their profits (or, at minimum, a statutory floor amount) with eligible employees every year. The bonus it mandates is commonly called the statutory bonus or annual bonus, and it is fundamentally different from any voluntary bonus your company chooses to pay.

The idea behind the law

The Act grew out of a long-running industrial-relations question in India: when a business earns profits, do workers have a claim on a share of those profits beyond their wages? After years of disputes and tribunal awards, Parliament settled the question by statute. The Act's core bargain works like this:

• Employees get certainty. Every eligible employee receives a minimum bonus each accounting year, even if the establishment makes no profit or incurs a loss (subject to limited exemptions for new establishments, discussed later).
• Employers get a ceiling. No matter how profitable the year, the statutory bonus obligation is capped at a maximum percentage of the employee's salary or wages. Profit-sharing beyond that is voluntary.
• A formula replaces negotiation. Instead of annual industrial disputes over bonus quantum, the Act prescribes a formula — built around "available surplus" and "allocable surplus" — that mechanically links the bonus percentage to the establishment's financial results, smoothed across years through the set-on and set-off mechanism.

Statutory bonus is deferred wages, not a gift

A useful mental model: the statutory bonus is best thought of as a deferred, legally mandated component of annual compensation for covered employees, not as a discretionary reward. Courts and tribunals in India have long treated the minimum bonus as an enforceable right. This is why:

• You cannot make the statutory bonus conditional on performance ratings.
• You cannot skip it in a loss-making year (outside the narrow exemptions).
• You cannot "absorb" it silently into CTC without actually paying it out in accordance with the Act.

Understanding this framing will save you from most of the common mistakes we cover later in this guide.

Which Establishments and Employees Does the Payment of Bonus Act Cover?

Coverage under the Payment of Bonus Act has two layers: whether your establishment is covered, and whether a particular employee is covered.

Establishment coverage

Broadly, the Act applies to:

• Every factory as defined under the factories legislation, regardless of headcount; and
• Every other establishment that employs a specified minimum number of persons (the commonly known threshold is twenty or more persons on any day during an accounting year, and appropriate governments have the power to extend coverage to smaller establishments in some cases — verify the position applicable to your state and sector).

A few practical points employers often miss:

• Once covered, always covered. If your establishment becomes covered because headcount crossed the threshold, it generally continues to be governed by the Act even if the number of employees later falls below the threshold. You cannot drift in and out of coverage as headcount fluctuates.
• Certain categories are excluded or treated specially. The Act historically carves out certain employers and institutions — for example, some categories of non-profit institutions, certain establishments under specific public sectors, and organisations exempted by the appropriate government. If you believe an exemption applies to you, get written legal confirmation; exemptions are construed narrowly.
• Startups and SMBs are not exempt by default. There is no general "startup exemption" from the Act. A 25-person SaaS company or a 40-person D2C brand is squarely within its scope. The only relief specific to young businesses is the special treatment of new establishments in their initial years, which relates to profitability, not headcount — covered in its own section below.

Employee coverage and the bonus eligibility salary limit

Not every employee in a covered establishment is entitled to statutory bonus. The Act applies to employees whose salary or wages do not exceed a notified eligibility ceiling per month. This figure — often called the bonus eligibility salary limit — has been revised upward multiple times over the decades as wage levels in the economy have risen, and it may be revised again, including through the Code on Wages framework.

Because the ceiling changes, we deliberately do not present any figure here as guaranteed-current. What matters for your process is:

1. Identify the currently notified eligibility ceiling from official sources at the start of every accounting year and whenever an amendment is notified.
2. Compare each employee's monthly "salary or wage" as defined by the Act (see the next section — it is not the same as gross salary or CTC) against that ceiling.
3. Employees at or below the ceiling are covered; those above it are outside the Act, and anything you pay them is contractual or ex-gratia rather than statutory.

What counts as "salary or wages" under the Act?

The Act has its own definition of salary or wages, and applying the wrong pay base is one of the most common calculation errors. In general terms:

• Included: basic salary and dearness allowance (including cost-of-living components).
• Generally excluded: house rent allowance, overtime, employer contributions to provident fund or pension, travelling concessions, commission, gratuity, and the value of amenities or perquisites.

So an employee with a gross salary well above the eligibility ceiling may still be covered if their basic plus DA falls at or below it — and vice versa. Map your salary structure components to the statutory definition explicitly in your payroll system rather than eyeballing gross pay.

Bonus Eligibility Conditions: The Working Days Test

Being within the salary ceiling is necessary but not sufficient. The Payment of Bonus Act adds a service-based condition:

An employee is eligible for bonus for an accounting year only if they have worked in the establishment for not less than thirty working days in that year.

Key nuances payroll teams should build into their eligibility logic:

• Thirty days is a low bar by design. Even employees who joined late in the year, or who left mid-year, qualify if they crossed thirty working days. Eligibility is per accounting year, not conditional on being on the rolls at year-end or on payout date.
• "Worked" is interpreted generously. Days on which the employee was laid off under an agreement or standing orders, on paid leave, absent due to a work-related injury covered by law, or (for women) on maternity leave with pay are generally treated as days worked for this purpose.
• Proportionate bonus for partial years. An eligible employee who worked only part of the year receives a bonus proportionate to the salary or wages actually earned during the days worked — they do not get a full-year bonus, but they do not get zero either.
• Leavers must not be forgotten. This is a classic audit finding: employees who resigned in, say, August of the accounting year are eligible for a pro-rata bonus for that year, payable when annual bonus is disbursed. Many companies pay bonus only to active headcount and silently accumulate liability (and legal risk) for ex-employees. Some employers instead settle the pro-rata statutory bonus at the time of full-and-final settlement — a defensible practical approach; whichever you choose, apply it consistently and document it.
• Fixed-term, probationary, and part-time employees can all be eligible if they meet the salary and working-days tests. Coverage does not depend on "permanent" status. The position of apprentices engaged under apprenticeship law is different — statutory apprentices are generally outside the definition of employee for bonus purposes — but do not stretch the "apprentice" or "trainee" label to exclude people who are, in substance, employees.

How Is Statutory Bonus Calculated? The Calculation Ceiling and the Formula

This is where most of the payroll questions land, so let's take it step by step.

Step 1: Determine the bonus-qualifying wage

For each covered employee, the bonus is computed on their salary or wages as defined by the Act (basic + DA, broadly). However, the Act adds a second ceiling: where an employee's salary or wage exceeds a notified calculation ceiling per month, the bonus is calculated as if their salary or wage were that ceiling amount.

So there are two distinct ceilings, and conflating them causes endless confusion:

Both figures are notified by the government and revised periodically — check the current numbers each year rather than relying on remembered values or old blog posts.

Step 2: Apply the bonus percentage

The bonus for the year is a percentage of the annual bonus-qualifying wage:

• Minimum bonus: 8.33% of the salary or wages earned during the accounting year (the Act also prescribes a small fixed minimum amount as a floor, with a separate figure for employees below a certain age — verify current values).
• Maximum bonus: 20% of the salary or wages earned during the year.

Where the actual percentage lands between 8.33% and 20% depends on the establishment's allocable surplus for the year, adjusted by set-on and set-off — explained in the next section. The employer does not get to pick a number arbitrarily; the Act's formula determines it.

Step 3: Pro-rate for the period worked

Multiply the monthly bonus-qualifying wage by the number of months (or pro-rate by days) the employee actually worked and earned wages during the accounting year, then apply the percentage.

Worked example 1: Wage below the calculation ceiling

Assume, purely for illustration, that the notified calculation ceiling is ₹7,000 per month (verify the actual current figure — it may be different in your year, and under the Code on Wages framework the relevant floor may be linked to notified minimum wages).

• Employee A has basic + DA of ₹6,000 per month and worked the full accounting year (12 months).
• Annual bonus-qualifying wage = ₹6,000 × 12 = ₹72,000.
• Minimum bonus at 8.33% = ₹72,000 × 8.33% ≈ ₹5,998 (in practice, one month's bonus-qualifying wage — 8.33% is essentially 1/12).
• Maximum bonus at 20% = ₹72,000 × 20% = ₹14,400.

Depending on the allocable surplus computation, Employee A's statutory bonus for the year will fall somewhere between roughly ₹6,000 and ₹14,400.

Worked example 2: Wage above the calculation ceiling

• Employee B has basic + DA of ₹18,000 per month, which is within the (illustrative) eligibility ceiling but above the (illustrative) ₹7,000 calculation ceiling. She worked the full year.
• Her bonus is computed as if her wage were ₹7,000 per month.
• Annual deemed wage = ₹7,000 × 12 = ₹84,000.
• Minimum bonus at 8.33% ≈ ₹6,997.
• Maximum bonus at 20% = ₹16,800.

Note the counterintuitive result: Employee B earns three times Employee A's wage, but her statutory bonus is only modestly higher, because the calculation ceiling flattens the base. This is by design — the Act targets income support at lower wage bands.

Worked example 3: Partial-year employee

• Employee C joined on 1 December of the accounting year (which runs April–March), with basic + DA of ₹6,500 per month, and worked through 31 March — four months, comfortably more than thirty working days.
• Bonus-qualifying wage earned = ₹6,500 × 4 = ₹26,000.
• Minimum bonus at 8.33% ≈ ₹2,166; maximum at 20% = ₹5,200.

Employee C receives a pro-rata bonus even though he was employed for only a third of the year.

Deductions the employer may make

The Act permits limited adjustments against the bonus payable:

• Adjustment of interim or customary bonus. If you paid a puja bonus or other customary/interim bonus for the same accounting year, you may deduct it from the statutory bonus payable for that year. This is also the mechanism that supports paying statutory bonus monthly (more on that practice below).
• Deduction for misconduct losses. Where an employee has caused financial loss to the employer through proven misconduct in an accounting year, the employer may deduct that loss from the bonus payable for that year only — with the balance, if any, still payable.

Available Surplus, Allocable Surplus, and Set-On/Set-Off — Explained Simply

These terms intimidate people, but the underlying logic is straightforward once you see the flow. Think of it as a four-stage funnel from your financial statements to the bonus percentage.

Stage 1: Gross profits

Start with the establishment's profits computed in the manner prescribed by the Act (there are separate computation schedules for banking companies and other establishments). This is an adjusted figure, not simply the net profit in your P&L.

Stage 2: Available surplus

From gross profits, the Act allows the employer to deduct certain prior charges before workers' share is computed, broadly including:

• depreciation as admissible under income-tax law;
• development rebate/allowance-type deductions where applicable;
• direct taxes payable on the year's income; and
• specified amounts in respect of return on capital and reserves, as set out in the Act's schedules.

What remains after these deductions is the available surplus — the pool notionally available for sharing.

Stage 3: Allocable surplus

The allocable surplus is the workers' slice of the available surplus, fixed as a percentage of it. The Act prescribes one percentage for certain companies (historically a lower share, around two-thirds, for companies that had particular dividend-related tax treatment) and a higher share (historically around 67%–60% bands depending on category — check the exact current text) for others. The commonly applied figures are 67% of available surplus for most companies and 60% for certain others. This allocable surplus is the fund from which bonus for the year is to be paid.

Stage 4: From allocable surplus to a bonus percentage

Now the rules connect the fund to the payout:

• If the allocable surplus covers more than the minimum bonus, employees are entitled to a higher bonus proportionate to the surplus, capped at 20% of annual bonus-qualifying wages.
• If the allocable surplus is insufficient or nil (including in a loss year), the employer must still pay the minimum 8.33% bonus — the minimum is payable irrespective of profits.

Set-on and set-off: smoothing across years

Business results fluctuate, so the Act includes a carry-forward mechanism to smooth bonus obligations across accounting years:

• Set-on: In a bumper year, if the allocable surplus exceeds what is needed to pay the maximum 20% bonus, the excess — up to a cap of 20% of the total salary or wages of employees for that year — is carried forward ("set on") for up to the next four accounting years. It sits in reserve to fund bonus in leaner years.
• Set-off: In a lean year, if there is no allocable surplus (or it falls short of even the minimum bonus) and there is no set-on balance to draw upon, the shortfall the employer had to fund to pay the minimum bonus is carried forward ("set off") against allocable surplus of up to the next four accounting years.
• Order of utilisation: Carried amounts are applied on a first-in, first-out basis — the earliest year's set-on or set-off is utilised first, and anything unutilised after four years lapses.

Set-on/set-off illustration

The table below shows how the mechanism plays out for a hypothetical establishment whose annual bonus-qualifying wage bill is ₹50 lakh, so the minimum bonus (8.33%) costs about ₹4.17 lakh and the maximum (20%) costs ₹10 lakh. All figures are illustrative.

*In Year 2, the set-on balance is treated as allocable surplus, so the bonus percentage is whatever that balance supports (between 8.33% and 20%). The point of the illustration is the mechanism, not the exact arithmetic — in practice this computation is done in the statutory registers with your finance team or auditor.

Two practical takeaways for SMB employers:

1. You cannot simply pay 8.33% every year by default. If your allocable surplus (plus set-on) supports a higher percentage, employees are legally entitled to it. Paying flat minimum bonus at a consistently profitable company is a live compliance risk, and it is a frequent demand item in employee disputes and union negotiations.
2. The computation needs finance involvement. Allocable surplus starts from adjusted gross profits, so HR cannot compute the correct bonus percentage alone. Build a joint HR–finance step into your annual close calendar.

Minimum Bonus vs Maximum Bonus: The 8.33%–20% Band

To consolidate the rules above:

• Minimum bonus — 8.33%. Payable to every eligible employee for every accounting year, profit or loss, subject only to the new-establishment exemption below. 8.33% is one-twelfth of annual wages — effectively one month's bonus-qualifying wage — which is why many companies operationalise it as "one month's basic+DA (capped at the calculation ceiling)".
• Maximum bonus — 20%. The statutory obligation never exceeds 20% of annual bonus-qualifying wages, however large the allocable surplus. Excess surplus flows into set-on instead.
• Between the two, the percentage is driven by allocable surplus adjusted for set-on/set-off — it is a computed outcome, not a management choice.

Anything you pay beyond the statutory entitlement — retention bonuses, performance bonuses, festival gifts above the statutory amount — is contractual or ex-gratia and lives outside this framework (see the ex-gratia section below).

New Establishments: Relief in the Initial Years

The Act recognises that new businesses often take years to become profitable, so it phases in the bonus obligation for a newly set-up establishment:

• First five accounting years (following the year in which the employer starts selling goods or rendering services): statutory bonus is payable only in respect of accounting years in which the establishment earns profits, and the set-on/set-off provisions do not apply during this window. In a profitable year within this period, bonus is computed under the normal rules for that year.
• Sixth and seventh accounting years: set-on and set-off begin to apply in a phased manner, taking into account surpluses of specified earlier years as provided in the Act.
• From the eighth accounting year onwards: the full provisions, including the unconditional minimum bonus, apply like any other establishment.

Cautions for founders:

• "New establishment" is about the establishment, not the legal entity's paperwork date. The clock generally runs from when you begin selling goods or rendering services. Also, an establishment formed by splitting or reconstructing an existing business is typically not treated as "new" for this purpose.
• Profit in an early year triggers bonus for that year. The exemption is not a blanket five-year holiday. If your startup turns profitable in year three, eligible employees are entitled to statutory bonus for year three.
• Document your position. Record the date of commencement, the basis on which you claim the initial-years treatment, and the year-wise profit determination. This is exactly the kind of item that surfaces in funding or acquisition due diligence.

When Must Bonus Be Paid? Timelines and Mode of Payment

The Act ties payment timing to the accounting year and to dispute proceedings:

• General rule: bonus must be paid within a specified period — commonly known as eight months from the close of the accounting year. For an April–March year, that conventionally means payment by the end of November, which is why statutory bonus payouts in India cluster around the festive season. The appropriate government can extend this window in certain circumstances, subject to an overall limit.
• Where a dispute is pending: if there is a dispute regarding bonus before an authority, payment is due within a month from the date the award or settlement comes into operation.
• Mode: bonus is payable in cash (which in modern practice means a normal payroll credit) — not in kind, vouchers, or company products.

Can statutory bonus be paid monthly?

Many Indian SMBs structure a "statutory bonus" line item in the monthly salary, paying 8.33% of basic (capped) every month. Nothing in the Act expressly prescribes this practice, and it carries a subtle risk: if the year's allocable surplus supports more than 8.33%, monthly payments at the minimum rate leave a differential payable after the annual computation. Monthly payment can be operationally convenient and is widely used, but treat it as an advance against the annual statutory liability, label it clearly in the payslip, true it up after year-end computation, and never assume it fully extinguishes the obligation. Verify the acceptability of this structure for your context with your advisor, since inspector practice varies.

Disqualification: When an Employee Loses the Right to Bonus

The Act permits denial of bonus to an employee who has been dismissed from service for:

• fraud;
• riotous or violent behaviour while on the premises of the establishment; or
• theft, misappropriation, or sabotage of any property of the establishment.

Points to apply carefully:

• Dismissal is the trigger. Disqualification attaches where the employee is dismissed for one of these grounds following proper disciplinary process. You cannot invoke it against an employee you merely suspect of misconduct, or who resigned before any inquiry concluded.
• Grounds are exhaustive. Poor performance, absenteeism, insubordination, or violation of internal policies are not statutory disqualification grounds, however serious. Dismissal for other misconduct does not, by itself, extinguish bonus rights under this provision.
• Process matters. A disqualification decision unsupported by a domestic inquiry and documented findings is likely to be overturned if challenged. Keep the charge sheet, inquiry report, and dismissal order on file.
• Distinguish disqualification from the misconduct-loss deduction. Deducting a proven financial loss from the year's bonus (discussed earlier) is a different, narrower remedy than denying bonus altogether.

Registers, Returns, and Records: The Paperwork Layer

Compliance is not complete when the money hits employee accounts — the Act and its rules prescribe documentation that inspectors actually ask for:

• Register of allocable surplus computation (commonly maintained in the prescribed form, historically Form A): shows the computation of available and allocable surplus for the accounting year.
• Register of set-on and set-off (historically Form B): tracks carried-forward amounts year-wise.
• Register of bonus due and paid (historically Form C): employee-wise details of bonus payable, deductions (interim/customary bonus, misconduct-loss deductions), and net amount actually paid, with payment dates.
• Annual return (historically Form D): a return of bonus paid for the accounting year, to be filed with the inspecting authority within the prescribed time after payment. In recent years, many establishments file such returns through consolidated online portals (such as the central Shram Suvidha ecosystem, where applicable) — confirm the current filing mode and form applicable to your establishment and state.

Practical hygiene:

• Reconcile Form C-type registers with actual bank payout records; mismatches are a classic inspection finding.
• Preserve records for the retention period prescribed (and, prudently, longer — bonus claims can surface years later in full-and-final disputes).
• If you operate in multiple states, remember that inspection and filing practice is administered by the appropriate government for each establishment; a process that satisfies one state's inspectorate may need adjustments elsewhere.

The Code on Wages: Where Bonus Law Is Heading

India has consolidated its wage-related laws — including the Payment of Bonus Act — into the Code on Wages, 2019. The Code has been enacted by Parliament, and implementation has been rolling out over time; the practical position on the ground depends on central and state notifications bringing provisions and rules into force. Directionally, employers should understand:

• The bonus chapter of the Code carries forward the core architecture of the 1965 Act: eligibility linked to a wage ceiling, minimum bonus of 8.33%, maximum of 20%, allocable surplus, set-on/set-off, new-establishment relief, disqualification, and timelines are all recognisable.
• Thresholds become more dynamic. Under the Code's scheme, eligibility and calculation-wage parameters are to be set by notification by the appropriate government, rather than frozen in the statute — which means the numbers can change more readily, and multi-state employers may need to track state-specific notifications.
• A uniform statutory definition of "wages" across the Codes changes the pay base conversations. The Code's wage definition — with its inclusion/exclusion lists and a rule that pulls excluded components back into "wages" if they exceed a specified proportion of total remuneration — can alter which employees fall under bonus ceilings and on what base the bonus is computed, depending on your salary structuring.
• Compliance mechanics get consolidated: common registers, returns, and an inspector-cum-facilitator regime are part of the Code's design.

What should you do in 2026? Do not wait for a "final" switchover date to clean up your bonus process. Build your payroll logic around the mechanics described in this guide, parameterise the ceilings and percentages so they can be updated by notification, and have your advisor confirm, each year, whether the 1965 Act or the Code's bonus chapter (and which state rules) currently governs each of your establishments.

Statutory Bonus vs Ex-Gratia: Know the Difference

Because both often land in the same festive payout, employers frequently blur the two. They are legally distinct:

Common practice in Indian companies: employees within the eligibility ceiling receive statutory bonus under the Act, while employees above the ceiling receive an equivalent ex-gratia amount so that festive payouts feel uniform. That is perfectly lawful — just label the two correctly in payroll, because only the statutory portion belongs in your bonus registers and returns, and only genuinely discretionary ex-gratia can be withdrawn in future years without dispute. Also be careful with repeated, unqualified ex-gratia payments: a long, unbroken custom of payment can be argued to have ripened into a condition of service, so include clear "discretionary, non-precedential" language in your communications.

Payroll Processing Workflow: Statutory Bonus, Step by Step

Here is a practical annual workflow an SMB payroll team can adopt. Assume an April–March accounting year.

Phase 1 — Setup (start of the accounting year)

1. Confirm coverage of each establishment (factory or 20+ threshold; check state extensions and any exemptions).
2. Update statutory parameters in your payroll system: current eligibility ceiling, calculation ceiling, minimum bonus floor amounts, and the accounting-year dates. Verify against current official notifications.
3. Map salary components to the Act's definition of salary or wages (basic + DA in; HRA, OT, PF contributions, commissions out).
4. Flag covered employees automatically based on monthly basic+DA versus the eligibility ceiling, and start accumulating their bonus-qualifying wages and working days.

Phase 2 — Through the year

1. Track working days and eligible leave so the 30-working-days test and pro-rata math are automatic.
2. Record interim/customary bonus payments (e.g., festival advances) against each employee so they can be adjusted at final computation.
3. Handle leavers: compute pro-rata bonus accrual for employees exiting mid-year and either settle it in full-and-final (documenting the practice) or park it as a payable for the annual payout run.

Phase 3 — After year close

1. Compute available and allocable surplus with finance/auditors from the closed financials, applying the Act's schedules, and update the set-on/set-off register.
2. Derive the bonus percentage for the year (8.33% floor, 20% cap, surplus-driven in between).
3. Run the bonus payroll: for each eligible employee, annual bonus-qualifying wage (actual or ceiling-capped) × percentage, minus permissible adjustments; apply TDS — statutory bonus is taxable as salary in the employee's hands.
4. Pay within the statutory window (conventionally eight months from year close) via normal bank payroll, with a clear payslip line item.
5. Complete registers and file the annual return in the prescribed form/portal; archive computation workpapers.
6. Communicate: a short note to employees explaining the year's bonus percentage and the calculation basis dramatically reduces disputes and grievance tickets.

A modern HRMS like CozyHR automates most of phases 1, 2, and 3's mechanical steps — component mapping, eligibility flagging, pro-rata math, adjustment tracking, and register-ready reports — leaving your team to handle the judgment calls (surplus computation and percentage sign-off) with finance.

Common Mistakes Employers Make (and How to Avoid Them)

1. Using gross salary or CTC instead of basic + DA for both the eligibility test and the calculation base. Fix: hard-code the component mapping in payroll.
2. Paying flat 8.33% every year regardless of profits. If allocable surplus supports more, the differential is a legal liability quietly compounding. Fix: run the surplus computation annually, even if the answer is usually "minimum".
3. Skipping leavers. Ex-employees with 30+ working days in the year are entitled to pro-rata bonus. Fix: build bonus accrual into full-and-final settlements or maintain a leavers' payable list for the annual run.
4. Treating statutory bonus as a discretionary or performance-linked payout. Withholding it for low ratings or pending PIPs is non-compliant. Fix: keep performance incentives in a separate, clearly discretionary plan.
5. Confusing the two ceilings — applying the calculation ceiling as if it were the eligibility ceiling (excluding people who should be covered) or vice versa. Fix: maintain both as separate parameters and revisit them every year.
6. Assuming the "startup exemption" is a blanket holiday. Profitable early years trigger bonus, and the clock runs from commencement of business activity. Fix: document year-wise profit determinations from year one.
7. Baking bonus into CTC but never actually paying it. Showing "statutory bonus" as a CTC line while the payslip never reflects a corresponding payment is a dispute magnet. Fix: if it is in CTC, it must be visibly paid — monthly as an advance or annually.
8. No registers, no return. Paying correctly but failing the paperwork still fails inspection. Fix: generate Form A/B/C-equivalents and file the annual return as part of the payout runbook.
9. Missing the payment deadline. Delaying the payout beyond the statutory window (commonly eight months from year close) is itself an offence, independent of eventual payment. Fix: put the deadline in the compliance calendar with a two-month buffer.
10. Wrong disqualifications. Denying bonus to employees dismissed for grounds outside fraud/violence/theft-sabotage, or without inquiry. Fix: route every proposed disqualification through HR-legal review.
11. Ignoring the Code on Wages transition. Structures optimised under old definitions may shift employees in or out of coverage. Fix: parameterise, monitor notifications, and re-test coverage annually.

Payment of Bonus Act Compliance Checklist for 2026

Use this as a quick annual audit for each establishment:

• [ ] Establishment coverage confirmed (factory / headcount threshold / state extensions); "once covered, always covered" applied
• [ ] Current eligibility ceiling and calculation ceiling verified from official sources this year
• [ ] Salary components mapped to the statutory definition of salary/wages
• [ ] Covered-employee list generated and reviewed (including fixed-term, part-time, probationers)
• [ ] 30-working-days eligibility test automated, with paid leave/maternity/lay-off days counted correctly
• [ ] Pro-rata bonus computed for joiners and leavers; leaver payouts settled or scheduled
• [ ] Available surplus and allocable surplus computed with finance; set-on/set-off register updated (FIFO, four-year lapse)
• [ ] Bonus percentage for the year determined within the 8.33%–20% band and signed off
• [ ] Interim/customary bonus and permissible misconduct-loss deductions adjusted correctly
• [ ] Payment released within the statutory timeline, through payroll, with clear payslip labelling and TDS applied
• [ ] Registers (allocable surplus, set-on/set-off, bonus paid) completed and reconciled with bank records
• [ ] Annual return filed in the prescribed form/portal within time
• [ ] New-establishment relief position (if claimed) documented year-wise
• [ ] Ex-gratia payments to non-covered employees documented as discretionary
• [ ] Code on Wages notifications reviewed for changes to ceilings, definitions, or forms

Frequently Asked Questions

1. Who is eligible for statutory bonus under the Payment of Bonus Act?

An employee of a covered establishment whose monthly salary or wages (basic + DA, per the Act's definition) do not exceed the notified eligibility ceiling, and who has worked at least thirty working days in the accounting year. Contract labour engaged through a contractor is generally the contractor's responsibility for bonus purposes, but principal employers should verify contractor compliance, since claims have a way of travelling upward.

2. Is statutory bonus payable if the company makes a loss?

Yes, in general. The minimum bonus of 8.33% is payable irrespective of profit or loss. The main exception is a newly set-up establishment within its initial years, where bonus is payable only for years in which the establishment earns profits.

3. How is the minimum bonus of 8.33% actually computed?

Take the employee's bonus-qualifying wage for the year — actual basic + DA earned, or the notified calculation ceiling per month if their wage exceeds it — and multiply by 8.33%. Because 8.33% is one-twelfth, the minimum bonus works out to roughly one month's bonus-qualifying wage for a full year worked, pro-rated for partial years.

4. Can we pay statutory bonus monthly along with salary?

It is a widespread practice to pay 8.33% monthly as a payslip component. Treat it as an advance against the annual statutory liability: label it clearly, and true it up after the year-end allocable surplus computation, because if the surplus supports more than 8.33%, the balance is still payable. Confirm the acceptability of your structure with your labour advisor.

5. What is the difference between allocable surplus and available surplus?

Available surplus is the establishment's adjusted gross profit after prescribed prior charges (depreciation, direct taxes, specified returns on capital and reserves). Allocable surplus is the fixed statutory percentage of available surplus (commonly 67% or 60% depending on the category of employer) that constitutes the fund from which bonus is paid, adjusted by set-on and set-off balances.

6. What happens to an employee who resigns in the middle of the year?

If they worked at least thirty working days in the accounting year, they are entitled to pro-rata bonus on the wages earned during the period worked. Pay it at the annual payout or, as many employers do, in the full-and-final settlement — but do not skip it.

7. When can an employer refuse to pay bonus to an employee?

Only where the employee has been dismissed for fraud, riotous or violent behaviour on the premises, or theft, misappropriation, or sabotage of the establishment's property — following due disciplinary process. These grounds are exhaustive; performance issues or other misconduct do not qualify for disqualification.

8. Does the Payment of Bonus Act still apply after the Code on Wages?

The Code on Wages, 2019 subsumes the Payment of Bonus Act and carries its architecture forward with modifications (notably notification-driven thresholds and a uniform wage definition). Which regime operationally governs you depends on the notifications in force for your establishment and state at the relevant time — verify the current position each year with official sources or your advisor rather than assuming either way.

Conclusion: Make Statutory Bonus a Non-Event

The Payment of Bonus Act rewards employers who systematise. The rules — coverage, the two ceilings, the 30-day test, the 8.33%–20% band, allocable surplus, set-on/set-off, timelines, registers — are intricate but entirely mechanical once encoded into your payroll process. The employers who get into trouble are almost never the ones who misunderstood a fine legal point; they are the ones who ran bonus off spreadsheets, forgot leavers, paid flat minimums without computing surplus, or missed a filing.

Encode the rules once, verify the notified numbers every year, and the annual bonus cycle becomes a non-event: eligibility lists generate themselves, pro-rata math is automatic, registers are a report away, and your team's attention goes to the one genuine judgment call — the surplus computation with finance.

That is exactly the philosophy behind CozyHR. Our payroll engine handles statutory bonus eligibility flagging, ceiling-based calculations, pro-rata payouts for joiners and leavers, payslip labelling, and register-ready compliance reports — alongside PF, ESI, professional tax, and the rest of India's statutory stack — so your HR and payroll team ships every cycle accurately and on time. If bonus season currently means a week of spreadsheet archaeology, try CozyHR and see how an India-first HRMS turns statutory compliance into a background process.

Disclaimer: This article is for general informational purposes and does not constitute legal advice. Monetary thresholds, forms, and procedures under the Payment of Bonus Act and the Code on Wages are revised by government notification from time to time. Always verify the current notified figures and requirements from official government sources or a qualified professional before acting.