Every year, thousands of Indian employees ask the same question: does my company owe me a bonus by law? The answer lies in one statute. The Payment of Bonus Act 1965 is the law that turns a bonus from a goodwill gesture into a legal right. This guide breaks down the Payment of Bonus Act 1965 in plain language, so you understand your rights and your obligations without wading through dense legal text.
Legal-Veda has prepared this article for HR professionals, business owners, and employees who want clarity, not confusion. We cover applicability, eligibility, calculation methods, penalties, and recent amendments. By the end, you will know exactly how the Payment of Bonus Act 1965 applies to your situation.
What Is the Payment of Bonus Act 1965?
The Payment of Bonus Act 1965 is a central labour legislation that requires certain employers to pay an annual bonus to their employees. The law links this bonus to the profits or productivity of the establishment. In other words, the Payment of Bonus Act 1965 rewards employees for contributing to a company’s success.
This statute came into force on 25 September 1965. Parliament enacted it after a Tripartite Commission studied wage-linked bonus practices across Indian industries. The government accepted the Commission’s recommendations, and the Payment of Bonus Act 1965 became the statutory framework that governs bonus payments even today.
The Payment of Bonus Act 1965 applies uniformly across India. It does not distinguish between states, which means every eligible establishment, regardless of location, must follow the same core rules under the Payment of Bonus Act 1965.
Why Did India Need the Payment of Bonus Act 1965?
Before this law existed, bonus payments were inconsistent and often discretionary. Employers paid bonuses when they wished, and employees had no legal recourse when bonuses were withheld. Labour disputes over bonus payments were common, and courts struggled without a uniform framework.
The concept of bonus payments in India actually traces back to World War I, when textile mills offered a war bonus to compensate for rising living costs. Over the following decades, ad hoc formulas emerged through labour tribunal rulings. However, these formulas lacked statutory backing.
To fix this gap, the government appointed a Tripartite Commission that examined industry practices, worker demands, and employer capacity to pay. The Commission’s report formed the foundation of the Payment of Bonus Act 1965. Consequently, the Act converted a fragmented practice into a codified, enforceable right.
Objectives of the Payment of Bonus Act 1965
The Payment of Bonus Act 1965 serves several clear objectives. Understanding these objectives helps you interpret the law correctly when disputes arise.
- It imposes a statutory obligation on employers to share profits with employees through bonus payments.
- It fixes a minimum bonus, so employees receive some payment even when profits are low.
- It caps the maximum bonus, protecting employers from excessive financial strain.
- It prescribes a transparent formula for calculating available surplus and allocable surplus.
- It establishes a dispute resolution mechanism for bonus-related grievances.
- It promotes harmony between labour and management by linking rewards to performance.
Together, these objectives make the Payment of Bonus Act 1965 a balancing statute. It protects worker interests while respecting an employer’s financial realities.
Applicability of the Payment of Bonus Act 1965
Understanding applicability is the first step toward compliance. The Payment of Bonus Act 1965 applies to:
- Every factory as defined under the Factories Act, 1948.
- Every other establishment where twenty or more persons are employed on any day during an accounting year.
Once the Payment of Bonus Act 1965 applies to an establishment, it continues to apply even if the workforce later falls below twenty employees. This continuity clause prevents employers from escaping liability through workforce reduction.
Additionally, the appropriate government can extend the Payment of Bonus Act 1965 to establishments employing between ten and nineteen persons through a notification. Therefore, smaller establishments should still monitor government notifications carefully.
For computation purposes, different departments, undertakings, or branches of the same establishment, whether located at the same place or different places, are treated as one establishment under the Payment of Bonus Act 1965. This prevents employers from artificially splitting operations to dodge liability.
Establishments Excluded from the Payment of Bonus Act 1965
Not every organisation falls under this law. Section 32 of the Payment of Bonus Act 1965 lists specific exclusions, including:
- Employees of the Life Insurance Corporation of India.
- Seamen defined under the Merchant Shipping Act, 1958.
- Employees registered under the Dock Workers Act.
- Employees of the Reserve Bank of India and certain other public financial institutions.
- Employees of universities and other educational institutions.
- Employees of hospitals, chambers of commerce, and social welfare institutions.
- Employees employed through contractors for construction work.
- Employees of the Indian Red Cross Society and similar organisations.
Non-profit organisations also fall outside the scope of the Payment of Bonus Act 1965, since the law links bonus to profit-linked productivity, and non-profits do not generate distributable profits in the same manner. This distinction matters greatly for NGOs, trusts, and charitable institutions structuring their compensation policies.
Who Is Eligible for Bonus Under the Payment of Bonus Act 1965?
Eligibility depends on two factors: salary level and duration of service. Under the Payment of Bonus Act 1965, any employee, other than an apprentice, earning wages or salary up to Rs. 21,000 per month qualifies for bonus consideration.
Furthermore, the employee must have worked for at least thirty days during the accounting year. Days on approved leave, maternity leave, or temporary disablement due to a workplace accident count toward this thirty-day requirement. This inclusive counting ensures that employees on legitimate leave do not lose bonus eligibility unfairly.
The Payment of Bonus Act 1965 covers employees performing skilled, unskilled, managerial, supervisory, administrative, or technical work. It does not restrict eligibility to a specific job category, which makes the coverage genuinely broad.
Who Is Disqualified from Receiving Bonus?
Even eligible employees can lose their entitlement. Section 9 of the Payment of Bonus Act 1965 disqualifies an employee from receiving bonus if the employer dismisses them for:
- Fraud committed against the establishment.
- Riotous or violent behaviour on the premises.
- Theft, misappropriation, or sabotage of the establishment’s property.
Importantly, disqualification under the Payment of Bonus Act 1965 applies only to dismissal for these specific misconducts. A resignation, retrenchment, or dismissal on unrelated grounds does not trigger disqualification. Employers must document misconduct properly, because courts scrutinise disqualification claims closely.
Minimum and Maximum Bonus Under the Payment of Bonus Act 1965
The heart of this legislation lies in its bonus percentages. Section 10 of the Payment of Bonus Act 1965 fixes the minimum bonus at 8.33% of the employee’s annual salary or wages. Employers must pay this minimum bonus even if the establishment records a loss during that accounting year.
On the other hand, Section 11 caps the maximum bonus at 20% of the employee’s annual salary or wages. Employers cannot exceed this ceiling, regardless of how profitable the establishment becomes, unless a separate agreement or settlement provides otherwise under applicable labour law provisions.
This dual structure protects both parties. Employees receive guaranteed income security through the minimum bonus, while employers gain predictability through the maximum bonus cap.
How Bonus Is Calculated Under the Payment of Bonus Act 1965
Calculating bonus correctly requires understanding the wage ceiling under Section 12. As per the 2015 amendment, if an employee’s salary or wage exceeds Rs. 7,000 per month, or the state’s minimum wage for that scheduled employment, whichever is higher, then the bonus is calculated as if the salary equals that ceiling amount.
Here is how the calculation typically works:
- If Basic Salary plus Dearness Allowance is Rs. 7,000 or below, the bonus is calculated on the actual amount.
- If Basic Salary plus Dearness Allowance exceeds Rs. 7,000, the bonus is calculated on Rs. 7,000, or the applicable minimum wage, whichever is higher.
For example, suppose an employee earns a Basic Salary and DA of Rs. 25,000 per month. The bonus calculation would still use Rs. 7,000 as the base, not Rs. 25,000, because the Payment of Bonus Act 1965 caps the computation ceiling separately from the eligibility ceiling.
This distinction confuses many HR professionals. Remember: Rs. 21,000 determines eligibility, while Rs. 7,000 (or the relevant minimum wage) determines the calculation base. These are two different thresholds under the Payment of Bonus Act 1965, and mixing them up leads to compliance errors.
Available Surplus and Allocable Surplus Explained
To determine bonus payments beyond the statutory minimum, employers must compute available surplus and allocable surplus. This is where the Payment of Bonus Act 1965 becomes mathematically detailed.
First, the employer calculates gross profits according to the formula prescribed in the First or Second Schedule of the Act, depending on the type of establishment. Next, the employer deducts specific items listed under Section 6, such as depreciation, development rebate, and direct taxes, to arrive at the available surplus.
From the available surplus, a percentage becomes the allocable surplus. For companies that do not distribute dividends, this percentage is typically 67%. For other establishments, it is 60%. The allocable surplus then gets distributed among eligible employees, subject to the minimum and maximum bonus limits set under the Payment of Bonus Act 1965.
This calculation demands accurate accounting records. Employers who misstate gross profits risk both civil claims from employees and regulatory scrutiny.
Set-On and Set-Off Provisions
The Payment of Bonus Act 1965 also addresses fluctuating profits through set-on and set-off mechanisms under Sections 15 to 17. These provisions smooth out bonus payments across good and bad years.
When allocable surplus exceeds the maximum bonus payable in a given year, the excess amount is “set on” and carried forward for up to four succeeding accounting years. Employers can use this carried-forward amount to pay bonuses in future years when profits are lower.
Conversely, when allocable surplus falls short of the minimum bonus requirement, employers can “set off” the deficiency against amounts previously set on. This mechanism ensures employees still receive at least the minimum bonus, even during lean years, without forcing employers into financial distress.
This dual mechanism reflects the balanced philosophy behind the Payment of Bonus Act 1965. It smooths income for workers while giving employers a financial cushion during downturns.
Time Limit for Payment of Bonus
Timely payment matters as much as correct calculation. Under Section 19 of the Payment of Bonus Act 1965, employers must pay the bonus within eight months from the close of the accounting year. If a dispute regarding bonus payment is pending before an authority, the employer must pay within one month from the date the award or settlement becomes enforceable.
The appropriate government can extend these eight months, but only up to a maximum of two years, and only for valid reasons recorded in writing. Employers who delay payment without such an extension violate the Payment of Bonus Act 1965 and expose themselves to penalties and interest claims.
Special Provisions for New Establishments
Startups and newly established businesses often ask whether the Payment of Bonus Act 1965 applies to them immediately. Section 16 answers this question.
For the first five accounting years following the year in which the establishment first sells goods or renders services, the employer must pay bonus only in years where the establishment earns a profit. During these initial years, set-on and set-off provisions do not apply. From the sixth accounting year onward, however, the establishment must comply fully with the standard provisions of the Payment of Bonus Act 1965, including set-on and set-off rules.
This concession recognises that new businesses need time to stabilise financially before taking on full bonus obligations.
Deductions Permitted from Bonus
Employers are not always required to pay the full computed bonus. Sections 17 and 18 of the Payment of Bonus Act 1965 permit certain deductions. If an employee has already received a customary or festival bonus, or a puja bonus, the employer can deduct that amount from the annual bonus payable under the Act.
Similarly, if an employee causes financial loss to the establishment through misconduct, the employer can deduct the value of that loss from the bonus due for that accounting year, provided the deduction follows due process.
Registers, Records, and Annual Returns
Compliance under the Payment of Bonus Act 1965 does not end with payment. Employers must maintain specific registers under the Payment of Bonus Rules, 1975, including:
- Form A, showing computation of allocable surplus.
- Form B, showing the set-on and set-off amounts.
- Form C, showing bonus paid to each employee.
- Form D, the annual return, which must be filed with the Inspector within thirty days of the deadline for bonus payment.
Labour authorities can inspect these registers at any time. Missing or inaccurate records create serious compliance risk, even if the employer actually paid the correct bonus amount.
Offences and Penalties Under the Payment of Bonus Act 1965
Non-compliance carries real consequences. Under Section 28, any employer who contravenes the provisions of the Payment of Bonus Act 1965, or fails to comply with directions issued under it, faces imprisonment for up to six months, a fine of up to Rs. 1,000, or both.
If the offence occurs within a company, every person responsible for the conduct of the business at the time of the offence can be held liable, unless they prove the offence occurred without their knowledge or despite due diligence. This provision extends accountability beyond the company itself to individual directors and managers, so leadership teams should treat bonus compliance seriously.
Employees also retain civil remedies. If an employer fails to pay bonus, the employee can approach the appropriate government for recovery under Section 21, and the amount becomes recoverable as arrears of land revenue in many cases.
Recent Amendments to the Payment of Bonus Act 1965
The Payment of Bonus Act 1965 has evolved through several amendments since its original enactment. The most significant recent change came through the Payment of Bonus (Amendment) Act, 2015, which took effect retrospectively from 1 April 2014.
This amendment raised the eligibility ceiling from Rs. 10,000 to Rs. 21,000 per month, bringing many more employees under the protection of the Payment of Bonus Act 1965. It also raised the calculation ceiling from Rs. 3,500 to Rs. 7,000 per month, or the relevant minimum wage, whichever is higher. As a direct result, the maximum annual bonus payable rose significantly, from Rs. 8,400 to Rs. 16,800 for eligible employees at the ceiling.
Earlier amendments in 2007 refined the eligibility service period, and in 1985 addressed disqualification and calculation provisions. Each amendment reflects the government’s ongoing effort to keep the Payment of Bonus Act 1965 aligned with economic realities.
The Payment of Bonus Act 1965 and the Code on Wages, 2019
India’s labour law landscape is changing. The Code on Wages, 2019 consolidates four labour laws, including the Payment of Bonus Act 1965, the Minimum Wages Act, the Payment of Wages Act, and the Equal Remuneration Act, into a single unified code.
Once fully implemented across all states, the Code on Wages will govern bonus payments going forward, though it largely retains the core structure of the Payment of Bonus Act 1965, including the minimum and maximum bonus percentages. However, the Code redefines “wages,” requiring that basic pay constitute at least 50% of total compensation. This redefinition could alter the calculation base for many employees, since a larger portion of salary structures will now count toward the bonus computation.
Employers should track state-level notifications closely, because implementation timelines for the Code on Wages vary. Until full implementation, the Payment of Bonus Act 1965 continues to operate as the governing law in most jurisdictions.
Common Legal Issues Under the Payment of Bonus Act 1965
Several recurring disputes arise under this legislation. Employers and employees should watch for these issues:
Misclassification of employees: Some employers misclassify eligible employees as consultants or contractors to avoid bonus obligations. Courts scrutinise the actual employer-employee relationship, not just the job title, when resolving such disputes.
Incorrect calculation base: As discussed earlier, confusing the eligibility ceiling with the calculation ceiling leads to underpayment. This remains one of the most common compliance errors under the Payment of Bonus Act 1965.
Delayed payment: Employers sometimes miss the eight-month deadline without seeking a formal extension, which exposes them to penalties and interest liability.
Disputes over available surplus: Employees or unions occasionally challenge an employer’s profit calculations, arguing that the employer understated gross profits or overstated permissible deductions. These disputes often proceed to labour courts or industrial tribunals.
Multi-establishment computation: Businesses with branches across states sometimes wrongly compute bonus separately for each branch instead of treating the entire establishment as one unit, contrary to the Payment of Bonus Act 1965.
Understanding these pitfalls helps both employers and employees avoid unnecessary litigation.
Landmark Judicial Interpretations
Indian courts have shaped how the Payment of Bonus Act 1965 operates in practice. In Jalan Trading Co. v. Mill Mazdoor Sabha, the Supreme Court examined the constitutional validity of the Act’s bonus formula and upheld the legislature’s power to fix minimum and maximum bonus percentages.
In Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, the Supreme Court clarified principles around customary bonus payments predating the statute, distinguishing them from statutory bonus obligations.
In Haryana Housing Board Employees’ Union v. Haryana Housing Board, the Supreme Court addressed the scope of exemptions under Section 32, clarifying which categories of employees fall outside the Act’s protection.
These rulings demonstrate that courts interpret the Payment of Bonus Act 1965 purposively, balancing worker protection against legitimate business considerations.
Compliance Checklist for Employers
Employers seeking to comply confidently with the Payment of Bonus Act 1965 should follow these steps:
- Confirm whether your establishment meets the twenty-employee threshold.
- Identify eligible employees based on the Rs. 21,000 monthly wage ceiling.
- Verify each employee completed at least thirty working days in the accounting year.
- Check for any disqualification under Section 9 before processing payment.
- Compute gross profits accurately using the correct Schedule.
- Apply permissible deductions to determine available and allocable surplus.
- Calculate bonus using the Rs. 7,000 ceiling, or the applicable minimum wage, whichever is higher.
- Apply set-on or set-off provisions where relevant.
- Pay the bonus within eight months of the accounting year’s close.
- Maintain Forms A, B, C, and D, and file the annual return on time.
Following this checklist significantly reduces the risk of disputes and penalties under the Payment of Bonus Act 1965.
Statutory Bonus Versus Ex-Gratia Payment
Many employees confuse statutory bonus with ex-gratia payment, yet the two differ significantly under the Payment of Bonus Act 1965. Statutory bonus is a legal entitlement. Once an employee satisfies the eligibility conditions under the Payment of Bonus Act 1965, the employer cannot withhold it at discretion.
Ex-gratia payment, by contrast, is voluntary. Employers often pay ex-gratia amounts to employees who earn above the Rs. 21,000 ceiling, since these employees fall outside the mandatory scope of the Payment of Bonus Act 1965. Because ex-gratia payments are discretionary, employers can reduce, modify, or discontinue them without violating the Act.
This distinction matters during salary negotiations and appraisal cycles. HR teams should clearly label each payment type on salary slips and appointment letters. This prevents employees from mistakenly assuming that a discretionary ex-gratis payment carries the same legal protection as a statutory bonus under the Payment of Bonus Act 1965.
Payment of Bonus Act 1965 and Gender-Neutral Application
The Payment of Bonus Act 1965 applies equally to male and female employees, without any distinction based on gender. Maternity leave counts toward the thirty-day eligibility threshold, ensuring that women returning from maternity leave do not lose their bonus entitlement. This gender-neutral design aligns the Payment of Bonus Act 1965 with India’s broader commitment to workplace equality, as reflected in the Maternity Benefit Act and the Equal Remuneration Act.
Employers must therefore include women on approved maternity leave in bonus calculations, just as they would any other eligible employee. Overlooking this requirement constitutes a violation of the Payment of Bonus Act 1965 and can invite legal action.
Practical Guidance for Employees
Employees should also understand their rights under this law. If your monthly salary falls within the eligibility ceiling and you have completed the required working days, your employer owes you at least the minimum bonus, regardless of company profitability. Review your salary slips to confirm whether Basic Salary and Dearness Allowance are correctly reflected, since these two components form the calculation base under the Payment of Bonus Act 1965.
If your employer delays or denies payment without valid justification, you can raise a written complaint with the company first. If the issue remains unresolved, you can approach the labour commissioner’s office or the appropriate government authority for recovery proceedings.
Conclusion
The Payment of Bonus Act 1965 remains one of India’s most important labour welfare statutes. It transforms bonus payments from a discretionary gesture into an enforceable legal right, while still protecting employers from unsustainable financial obligations. By understanding applicability, eligibility, calculation methods, and compliance requirements, both employers and employees can navigate this law confidently.
As India transitions toward the Code on Wages, 2019, the core principles of the Payment of Bonus Act 1965 will likely continue to guide bonus policy for years to come. Staying informed about amendments, judicial interpretations, and compliance deadlines protects your interests, whether you run a business or work for one.
For further legal guidance on labour law compliance, consult a qualified labour law practitioner who can address the specific facts of your situation.
References
- India Code – The Payment of Bonus Act, 1965 (Official Text)
https://www.indiacode.nic.in/handle/123456789/1548 - Ministry of Labour and Employment, Government of India
https://labour.gov.in/ - The Payment of Bonus Act, 1965 – West Bengal Government
https://wb.gov.in/acts/act_labour_bonus_act.pdf - The Payment of Bonus (Amendment) Act, 2015 – PRS Legislative Research
https://prsindia.org/billtrack/the-payment-of-bonus-amendment-bill-2015 - India Code – The Code on Wages, 2019 (Official Text)
https://www.indiacode.nic.in/handle/123456789/2004 - Ministry of Labour and Employment – Labour Codes
https://labour.gov.in/labour-codes - India Code – Central Acts and Legislation
https://www.indiacode.nic.in/ - Ministry of Labour and Employment – Acts and Rules
https://labour.gov.in/acts - Supreme Court of India – Official Website
https://www.sci.gov.in/ - Supreme Court of India – Judgments and Orders
https://www.sci.gov.in/judgements/ - Legislative Department, Ministry of Law and Justice – Government of India
https://legislative.gov.in/ - e-Gazette of India – Government of India
https://egazette.nic.in/ - Ministry of Labour and Employment – Code on Wages, 2019
https://labour.gov.in/sites/default/files/the_code_on_wages_2019_no._29_of_2019.pdf - Ministry of Labour and Employment – Payment of Bonus Rules, 1975
https://labour.gov.in/sites/default/files/thepaymentof_bonus_rules1975.pdf - PRS Legislative Research – Labour Legislation
https://prsindia.org/billtrack - National Portal of India – Labour and Employment
https://www.india.gov.in/ - Central Government Industrial Tribunal – Labour Ministry
https://cgit.labour.gov.in/ - Ministry of Labour and Employment – Notifications and Circulars
https://labour.gov.in/notifications - India Code – Labour and Employment Legislation
https://www.indiacode.nic.in/ - Department of Legal Affairs – Ministry of Law and Justice
https://legalaffairs.gov.in/
FAQs about the Payment of Bonus Act 1965
- 1. What is the Payment of Bonus Act 1965?
The Payment of Bonus Act 1965 was a central labour law that regulated statutory bonus payments to eligible employees in covered establishments. The law prescribed rules for eligibility, minimum and maximum bonus, calculation, set-on and set-off, disqualification, payment deadlines, and employer records. Historically, it generally applied to factories and establishments employing 20 or more persons, subject to statutory provisions and exemptions.
However, the Payment of Bonus Act 1965 is no longer the standalone law governing current bonus payments. The Code on Wages, 2019 repealed the Act under Section 69. Therefore, readers researching bonus law in 2026 should distinguish historical claims under the old Act from current claims under the Code on Wages.
- 2. Is the Payment of Bonus Act 1965 still applicable in 2026?
No. The Payment of Bonus Act 1965 was repealed when the Code on Wages, 2019 came into force. The Government brought all provisions of the Code into force from 21 November 2025.
However, this does not automatically erase earlier actions, claims, or liabilities. Section 69 contains savings provisions for actions taken under the repealed legislation. Therefore, a lawyer handling an older bonus dispute must identify the relevant accounting year and applicable legal provisions.
- 3. What was the minimum bonus under the Payment of Bonus Act 1965?
Under the former Payment of Bonus Act 1965, the statutory minimum bonus was generally 8.33% of the relevant salary or wages, subject to the Act’s calculation rules. The employee also generally needed to have worked for at least 30 days during the accounting year.
The current Code on Wages retains an annual minimum bonus of 8.33%, subject to its eligibility and calculation provisions.
- 4. What was the maximum bonus under the Payment of Bonus Act 1965?
The Payment of Bonus Act 1965 generally provided a maximum statutory bonus of 20% of the relevant salary or wages. The calculation depended on statutory concepts such as allocable surplus and the applicable wage base.
The current Code on Wages also retains the 20% maximum framework for statutory bonus, subject to its provisions.
- 5. When must bonus be paid under current law?
Under the current Code on Wages, bonus is generally required to be paid within eight months from the close of the accounting year, subject to permitted extensions. Where a bonus dispute is pending, special payment provisions may apply.
Therefore, although the Payment of Bonus Act 1965 remains an important historical labour-law reference, employers and employees should use the Code on Wages, 2019 when assessing current bonus compliance.
