Bonus Calculation in India 2026 — Payment of Bonus Act Rules & Eligibility
The Payment of Bonus Act, 1965, mandates that employers pay annual bonus to eligible employees. Understanding the calculation method, eligibility criteria, and salary ceilings is essential for both employers budgeting for bonus payouts and employees understanding their entitlements.
Who is Eligible for Bonus?
Under the Payment of Bonus Act, bonus is payable to every employee who has worked for at least 30 days in the financial year and draws a salary up to ₹21,000/month. The Act applies to every factory and establishment employing 20 or more persons. An employee is defined as any person (other than an apprentice) employed on a salary or wage not exceeding ₹21,000/month.
Bonus Calculation Formula
The minimum bonus payable is 8.33% of salary (or ₹100, whichever is higher), regardless of whether the company made profits. The maximum bonus is 20% of salary, payable when the allocable surplus exceeds the minimum bonus obligation.
For bonus calculation, salary is capped at ₹7,000/month (or the minimum wage for the scheduled employment, whichever is higher). Even if an employee’s actual salary is ₹50,000/month, bonus is calculated on this capped amount.
Calculation Example
Employee salary: ₹35,000/month. Salary for bonus calculation: ₹7,000/month (statutory ceiling).
Minimum bonus (8.33%) = ₹7,000 × 12 × 8.33% = ₹6,997/year
Maximum bonus (20%) = ₹7,000 × 12 × 20% = ₹16,800/year
The actual bonus percentage depends on the company’s allocable surplus, calculated using the formula prescribed in the Act based on the company’s profits and available surplus.
Important Rules
Minimum Bonus Guarantee
Employers must pay minimum bonus of 8.33% even if the company suffered losses during the year. This is a statutory obligation regardless of profitability.
Due Date for Payment
Bonus must be paid within 8 months from the close of the accounting year. For companies following the April–March financial year, bonus must be paid by November 30th. Many companies pay during Diwali or other festivals.
Set On and Set Off
If allocable surplus in a year exceeds minimum bonus, the excess (up to 20% limit) is paid as bonus. If it exceeds 20%, the excess is “set on” and carried forward to be used in future years when surplus is insufficient. Conversely, if surplus is below minimum bonus, the shortfall is “set off” against future surpluses. Set on/set off can be carried forward for up to 4 years.
Tax Treatment of Bonus
Bonus received by employees is fully taxable as salary income. It is added to the employee’s gross salary and TDS is deducted accordingly. For the employer, bonus paid is a deductible business expense under Section 36(1)(ii) of the Income Tax Act.
How INDPayroll Handles Bonus
INDPayroll automates the entire bonus calculation process. The system calculates allocable surplus based on your company’s profit and loss data, determines the bonus percentage, applies the salary ceiling, and generates individual bonus amounts for each eligible employee. TDS on bonus is calculated and deducted automatically. Start your free trial to automate bonus calculations.
