Employee Bonus in India: Eligibility, Calculation, Payment and Penalties

Current law and scope

The Code on Wages, 2019, generally brought into force on 21 November 2025, replaces the Payment of Bonus Act, 1965 for the operative bonus framework. Chapter IV (sections 26 to 41) regulates statutory bonus. The former Act remains relevant to historical accounting years, accrued rights and transitional questions.

Eligibility and statutory bonus - section 26

An employee within the applicable notified monthly wage ceiling who has worked at least 30 days in an accounting year qualifies, subject to statutory exclusions and disqualifications. The minimum annual bonus is 8.33% of wages earned or Rs. 100, whichever is higher, even where allocable surplus is insufficient. Where allocable surplus permits, the bonus may rise to 20% of wages. The Central Government notified a Rs. 21,000 monthly eligibility ceiling on 25 August 2026, deemed effective from 21 November 2025; check the appropriate government and applicable notifications.

Wage basis for calculation - section 26(2)

The Central Government notification S.O. 4710(E), dated 25 August 2026 and deemed effective from 21 November 2025, provides that where eligible wages exceed Rs. 7,000 per month, bonus is calculated as if wages were Rs. 7,000 or the minimum wage fixed by the Central Government, whichever is higher. The applicable wage definition and jurisdiction-specific notifications must be checked before computation.

Proportionate bonus and deemed working days - sections 27 and 28

Section 27 governs proportionate reduction where the employee has not worked all working days. Section 28 includes certain periods as days worked, including qualifying lay-off, paid leave, temporary disablement due to employment injury, and paid maternity leave. The 30-day eligibility requirement should be considered separately.

Disqualification - section 29

Statutory bonus may be forfeited where an employee is dismissed for specified misconduct, including fraud, riotous or violent behaviour on establishment premises, theft, misappropriation or sabotage of establishment property, or conviction for sexual harassment, as specified in section 29.

Gross profit, available surplus and allocable surplus - sections 31 to 36

Section 32 prescribes gross-profit computation using the applicable schedules. Section 34 specifies prior charges deductible from gross profits, including permitted depreciation, applicable direct taxes and scheduled sums; section 35 regulates direct-tax calculation. Section 33 determines available surplus. Section 31 governs bonus out of allocable surplus, and section 36 governs set-on and set-off, subject to the statutory rules and schedules. These calculations should be documented year by year.

Adjustments - sections 37 and 38

Section 37 addresses adjustment of customary or interim bonus already paid against statutory bonus. Section 38 permits deduction of the financial loss caused by specified employee misconduct from the bonus payable for that accounting year, subject to the statutory conditions.

Deadline and method of payment - section 39

Statutory bonus is ordinarily credited to the employee bank account within eight months of the close of the accounting year. The appropriate government may grant a reasoned extension, subject to the statutory outer limit. Where a bonus dispute is pending, payment is due within one month after the award becomes enforceable or settlement operates; the undisputed minimum may remain payable on the ordinary timeline.

Recovery, claims and disputes - sections 45 and 46

Section 45 provides the framework for claims and determination of amounts due, while section 46 addresses reference of disputes. Employees should preserve wage slips, attendance records, bank statements and correspondence, and approach the competent authority within the applicable limitation period.

Inspection and penalties - sections 51 and 54

Section 51 provides for Inspector-cum-Facilitators. Section 54 deals with penalties for specified contraventions, with consequences depending on the nature and repetition of the offence. The former section 28 penalty of the Payment of Bonus Act, 1965 should not be presented as the current general penalty provision.

Historical provisions of the Payment of Bonus Act, 1965

The original article addressed sections 4 (gross profits), 5 (available surplus), 6 (deductions), 7 (direct tax), 8 (eligibility), 12 (wage ceiling), 13 (proportionate reduction), 14 (working days), 19 (payment deadline), 21 (recovery) and 28 (penalty). Those provisions describe the previous statutory regime. In particular, the article's Rs. 1,600 calculation ceiling and Rs. 1,000 maximum fine were historical figures and must not be used as current compliance guidance.

Employer compliance checklist

Determine the appropriate government and applicable wage notifications; confirm establishment and employee coverage; calculate qualifying wages and working days; compute gross profit and available/allocable surplus; carry forward permitted set-on and set-off; reconcile interim payments; pay eligible employees by bank credit on time; retain registers and supporting accounts; and handle claims promptly.

Official legislation and notifications

• Code on Wages, 2019 - Ministry of Labour and Employment (official text)
• e-Gazette of India - notifications S.O. 4710(E) and S.O. 4711(E), 25 August 2026
• Ministry of Labour and Employment
• India Code - legislation and amendments

State-specific rules and notifications, where applicable, should also be checked. This article is general information and not a substitute for advice on a particular accounting year or establishment.