Payment of Bonus Act: Statutory Bonus Eligibility and Calculation

Statutory bonus catches many first-time employers off guard because it looks optional until suddenly it isn't. Once your establishment is covered under the Payment of Bonus Act, 1965, paying a minimum bonus to eligible employees stops being a discretionary HR decision and becomes a statutory obligation with its own eligibility rules, its own calculation method, and its own payment deadline. This sits apart from any performance bonus, joining bonus, or festival ex-gratia payment you might choose to run as a matter of company policy: those remain entirely at your discretion, while statutory bonus does not. This guide walks through who qualifies, how the minimum and maximum bonus is worked out, the set-on and set-off mechanism that carries surplus and shortfall between years, when payment falls due, and what the ongoing shift toward the Code on Wages means for the Act as it stands today.

Statutory Bonus vs a Discretionary Performance Bonus

The Payment of Bonus Act exists to guarantee eligible employees a minimum share of the value they helped create, structured as a defined percentage of wages rather than left to an employer's discretion. It applies to factories and to other establishments employing a specified minimum number of persons; smaller operations are typically excluded, so confirm the current headcount threshold and any sector-specific exemption for your establishment before assuming the Act does, or doesn't, apply to you. Where it applies, statutory bonus is compulsory once an employee meets the eligibility conditions, regardless of whether you also run a separate performance-linked or discretionary bonus scheme. That second kind of bonus, tied to individual or company performance, a joining bonus, a retention bonus, or a festival ex-gratia payment, is entirely optional and governed by your own company policy or the employment contract, not by this Act. The two are not interchangeable. Paying a generous performance bonus to a senior employee does not excuse you from separately paying the statutory minimum bonus to an eligible employee lower down the pay scale, and a discretionary bonus you pay does not automatically count toward, or replace, your statutory bonus liability unless it was genuinely structured and paid in lieu of it under terms the Act allows.

Who Qualifies for Statutory Bonus

Eligibility turns on two separate conditions, and an employee generally has to satisfy both for a given accounting year. First, their salary or wage has to fall at or below a specified monthly ceiling: employees earning above that ceiling fall outside the Act's mandatory coverage, though many employers still choose to pay them an ex-gratia amount on similar terms as a matter of policy. Second, the employee has to have worked a minimum number of days during the accounting year: someone who joined partway through the year and falls short of that minimum generally will not qualify for that year, even if their wages are comfortably within the ceiling. Confirm the current figures for both the wage ceiling and the minimum days worked before you finalise your eligible-employee list. Do not assume a figure you used last year, or one you have seen quoted online, is still current: both are set by the Act and its amendments and neither should be treated as fixed indefinitely. It also helps to know that the Act typically works with two separate wage figures rather than one: the ceiling that decides whether someone is eligible at all, and a second, generally lower figure used purely to calculate the bonus amount once someone qualifies. If an eligible employee's actual wages exceed that second, calculation figure, the bonus is worked out as though they earned only up to that lower figure, not on their real salary. Treat these as two different numbers to confirm, not one.

• Wage condition: salary or wages at or below the eligibility ceiling the Act currently prescribes; confirm the figure, since it is revised periodically and not indefinitely fixed
• Service condition: worked at least the minimum number of days the Act currently prescribes during that accounting year
• Both conditions apply together: meeting the wage ceiling without meeting the minimum-days condition does not create eligibility for that year, and the reverse is equally true
• Certain categories, apprentices engaged under the Apprentices Act being a common example, are excluded from bonus eligibility altogether regardless of wages or days worked

How Much Bonus You Must Pay: Minimum, Maximum, and Allocable Surplus

The bonus amount is not a flat figure you choose. It is anchored to your establishment's profits for the accounting year through a defined calculation: gross profit is adjusted for specific items the Act lists to arrive at an 'available surplus,' and a set percentage of that, which differs by the type of entity you run, becomes the 'allocable surplus' that actually funds the bonus pool for the year. Confirm the current allocable-surplus percentage that applies to your entity type before running this calculation, since it is not the same figure for every kind of establishment. Whatever that calculation produces, the Act then places a floor and a ceiling around it: a statutory minimum percentage of wages payable to every eligible employee even in a year with a thin or negative allocable surplus, and a statutory maximum percentage of wages beyond which you are not required to pay more, however large the surplus turns out to be. Confirm both the current minimum and maximum percentages, and the wage figure the percentage applies to, before finalising a bonus run: older figures continue to circulate in outdated templates and old articles, and using one that is no longer current is an easy, entirely avoidable compliance error. If your establishment is newly set up, also check the Act's separate, more limited bonus rules for establishments in their first several accounting years, rather than assuming the standard minimum-bonus rule applies from year one.

Set-On and Set-Off: Smoothing Bonus Across Good and Bad Years

Profits do not arrive in a straight line, and the Act does not expect them to. In a year where your allocable surplus is more than enough to fund the maximum bonus, you don't simply retain the rest or pay it all out regardless: the excess above what was needed for the maximum bonus is carried forward, a mechanism the Act calls 'set on,' to be drawn on in a future year when the surplus falls short. Conversely, in a year where the allocable surplus is not enough to fund even the minimum bonus, the shortfall is carried forward as a 'set off' against surplus in a future year rather than simply excusing you from paying the statutory minimum for that year; you still owe the minimum bonus, funded in part by this carried-forward mechanism. Both set on and set off carry forward for a limited number of subsequent accounting years that the Act specifies, after which unused amounts drop out of the calculation, so confirm the current carry-forward period rather than assuming it runs indefinitely. The practical effect is that statutory bonus liability is smoothed across a run of good and bad years rather than reset entirely by a single year's results: a single loss-making year does not necessarily leave employees with no bonus at all, provided set-on balances exist from earlier years, and a single exceptional year does not commit you to paying out the entire surplus as bonus in one go. An accurate, year-on-year set-on and set-off ledger is not optional bookkeeping. It is the calculation your actual bonus liability depends on.

Payment Deadlines and the Shift Toward the Code on Wages

The Act prescribes a payment deadline measured in months from the close of the accounting year, rather than leaving timing to each employer's discretion. Confirm the exact number of months currently prescribed, and whether any extension provision could apply to your situation, before you set an internal payroll deadline for the bonus run. Treat that deadline the way you treat a wage payment date: a delay is not a minor administrative slip, since unpaid statutory bonus is recoverable from the employer much like unpaid wages, with its own enforcement machinery behind it.

The Payment of Bonus Act, 1965 is one of the older central labour laws being folded into the Code on Wages, 2019, alongside laws such as the Minimum Wages Act, as covered in our guide to the new labour codes' payroll impact. As that guide explains, the four labour codes have been in force nationally since November 2025 with central rules notified, but several practical provisions only take effect for a given establishment once its own state has notified matching state rules, and that process has not moved at the same pace everywhere. Until your state has done so for the provisions affecting bonus, the Payment of Bonus Act, 1965, with its existing eligibility, calculation, and payment framework, remains the operative law: treat the Code on Wages as something to track rather than something already governing your current bonus run. One point is already settled either way: the Code on Wages' definition of 'wages' used for PF and similar calculations generally keeps statutory bonus outside that definition, subject to the overall cap on excluded allowances discussed in that guide, so a correctly paid statutory bonus should not, by itself, inflate the wage base you use for PF. Because so many of the figures behind statutory bonus change by notification, and the calculation itself spans several years through set-on and set-off, the records you keep matter as much as the payment:

• Confirm the current eligibility wage ceiling, calculation wage ceiling, minimum days worked, minimum and maximum bonus percentages, and payment deadline before each year's bonus run, rather than reusing last year's figures from memory
• Maintain a year-wise computation sheet showing gross profit, the adjustments made to arrive at available surplus, and how allocable surplus was derived for your entity type
• Keep a running set-on and set-off ledger across accounting years, showing the opening balance, the current year's surplus or shortfall, and the closing balance carried forward
• Maintain wage and attendance records that can show, employee by employee, who met the wage ceiling and the minimum-days condition for each accounting year
• Retain proof of payment, bank transfer records or signed acknowledgements, for statutory bonus paid to each eligible employee, dated against the prescribed payment deadline
• File any annual return the Payment of Bonus Rules require with the appropriate authority, and confirm the current form and filing mode rather than assuming an older process still applies
• Keep discretionary performance or ex-gratia bonus payments documented separately from statutory bonus in your HR policy and payroll records, so the two are never conflated during an audit or an employee dispute
• Revisit your bonus computation whenever your state notifies rules under the Code on Wages that affect the Payment of Bonus Act, rather than waiting for the next accounting year to catch up