Payment of Bonus Act, 1965 is the statute that mandates the payment of annual bonus to employees in establishments with 20 or more employees, prescribing a minimum bonus of 8.33% and a maximum of 20% of wages. Under Indian law, the Act applies to every factory and every establishment in which 20 or more persons are employed on any day during an accounting year, and the bonus is payable to employees whose wages do not exceed Rs 21,000 per month, though bonus is calculated on wages up to Rs 7,000 or the minimum wage, whichever is higher.
Legal definition
The Payment of Bonus Act, 1965 provides the statutory framework:
Section 10 — Minimum bonus: Subject to the other provisions of this Act, every employer shall be bound to pay to every employee in respect of the accounting year commencing on any day in the year 1979 and in respect of every subsequent accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or one hundred rupees, whichever is higher.
Section 11 — Maximum bonus: Where in respect of any accounting year, the allocable surplus exceeds the amount of minimum bonus payable to the employees... the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent of such salary or wage.
Key parameters:
| Parameter | Current Provision |
|---|---|
| Applicability | Establishments with 20+ employees |
| Eligibility | Employees earning wages ≤ Rs 21,000/month |
| Minimum bonus | 8.33% of wages |
| Maximum bonus | 20% of wages |
| Calculation ceiling | Wages up to Rs 7,000/month or minimum wage, whichever is higher |
| Qualifying service | 30 working days in the accounting year |
| Payment deadline | Within 8 months of close of accounting year |
| Set-on / Set-off | Excess allocable surplus carried forward for 4 years |
Disqualification (Section 9): An employee is disqualified from receiving bonus if dismissed for fraud, riotous or violent behaviour, or theft, misappropriation, or sabotage of any property of the establishment.
How courts have interpreted this term
Jalan Trading Co. v. Mill Mazdoor Sabha [(1966) 2 LLJ 546 (SC)]
The Supreme Court held that the Payment of Bonus Act is a self-contained code for the payment of bonus and that the formula prescribed therein is mandatory. The Court established that bonus under the Act is a statutory right — not an ex gratia payment or a matter of employer discretion — and that the employer cannot substitute a different formula for computing bonus. The Act's computation mechanism (available surplus minus prior charges = allocable surplus) must be followed strictly.
M/s. Automobile Products of India Ltd. v. Rukmaji Bala [(1955) 1 LLJ 371 (SC)]
The Supreme Court, in a pre-Act decision that influenced the statute, held that bonus is a deferred wage — a share in the prosperity of the enterprise that the worker helps to create. The Court established the Full Bench Formula (later codified in the Act) for computing available surplus: gross profits minus statutory depreciation, direct taxes, and a return on capital employed at a specified rate.
Harihar Polyfibres Ltd. v. Regional Director, ESI Corporation [(1984) 4 SCC 326]
The Supreme Court held that bonus paid under the Payment of Bonus Act is "wages" for the purpose of ESI contributions, as it is a statutory payment arising out of the employment relationship. This established that statutory bonus is not a gift or gratuity but a legally mandated component of compensation.
Why this matters
The Payment of Bonus Act affects millions of employees across India's organised and semi-organised sector. The minimum bonus of 8.33% is payable even if the establishment makes no profit — it is an unconditional statutory obligation for covered establishments. Only the allocable surplus determines whether the bonus exceeds the minimum (up to the 20% maximum) or remains at the statutory floor.
For employers, the set-on and set-off mechanism is crucial for managing bonus liability across profitable and loss-making years. If the allocable surplus in a particular year exceeds the maximum bonus (20%), the excess is "set on" and carried forward. In a subsequent loss-making year, the "set on" surplus can be used to pay bonus above the minimum. Conversely, if the allocable surplus falls short of the minimum bonus, the shortfall is "set off" against future surplus. This mechanism ensures that bonus payments smooth out over the business cycle.
Practitioners should note that the Rs 21,000 eligibility ceiling and the Rs 7,000 computation ceiling were last revised in 2015 (effective from April 1, 2014). The gap between the eligibility ceiling and computation ceiling means that an employee earning Rs 21,000 receives bonus calculated on Rs 7,000 (or the minimum wage, whichever is higher) — not on Rs 21,000. This is a frequently misunderstood aspect that leads to disputes.
Related terms
To be subsumed under:
Related benefits:
Dispute resolution:
Frequently asked questions
Is bonus mandatory even if the company makes a loss?
Yes. The minimum bonus of 8.33% is payable regardless of profits or losses. Section 10 creates an unconditional obligation to pay minimum bonus to every eligible employee. The profit-linked component only determines whether the bonus exceeds 8.33% (up to the 20% maximum). An employer cannot refuse to pay minimum bonus on the ground of losses — the set-off mechanism allows the shortfall to be adjusted against future surplus.
Who is eligible for statutory bonus?
Any employee earning wages up to Rs 21,000 per month who has worked for at least 30 working days in the accounting year is eligible. The Act applies to factories and establishments with 20 or more employees. Once an establishment is covered, it remains covered even if the employee count falls below 20. Employees dismissed for fraud, violence, theft, or sabotage are disqualified under Section 9.
What is the difference between statutory bonus and ex-gratia bonus?
Statutory bonus is mandated by the Payment of Bonus Act — its computation, payment, and eligibility are governed by the Act. Ex-gratia bonus is a voluntary payment by the employer, not governed by the Act. Employees earning above Rs 21,000 per month are not covered by the Act, but employers may pay them ex-gratia bonus. Ex-gratia payments do not follow the Act's formula and are at the employer's discretion.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.