Payment of Bonus Act 1965

The Payment of Bonus Act, 1965 is an Indian labour law requiring factories and establishments with 20 or more employees to pay an annual bonus to eligible workers, based on company profits or productivity. It set a minimum bonus of 8.33% and a maximum of 20% of wages, and came into force on 25 September 1965.

Here's the simplest way to think about it: a "bonus" under this law isn't a Diwali gift your employer chooses to give you. It's a legal entitlement, tied to a formula, that the company has to pay if you qualify, whether it wants to or not. Before this law existed, bonus was purely discretionary, and that caused a lot of friction between employers and workers. This Act fixed that by giving everyone the same floor and ceiling to work from: at least 8.33% of wages, never more than 20%.

One thing worth flagging right up front: the Act itself doesn't exist as a standalone law anymore. We'll get into exactly what changed in the next section, but the short version is that its rules now live inside a bigger law called the Code on Wages, 2019.

A Quick History

• 1917: Textile mills gave workers a 10% "war bonus" during World War I, an early, informal version of profit-sharing.
• Pre-1965: Bonus was mostly a goodwill gesture, which led to frequent disputes between workers and management.
• 1950: The Labour Appellate Tribunal came up with the "Full Bench Formula" to work out how much surplus profit could fund a bonus.
• 1961: A government-appointed Tripartite Commission studied the issue and recommended a uniform, national approach.
• 1965: Parliament turned those recommendations into law, effective 25 September 1965.

As of 2026, the Payment of Bonus Act, 1965 has been repealed. Its provisions now form Chapter IV of the Code on Wages, 2019, in force since 21 November 2025, with the Code on Wages (Central) Rules, 2026 notified on 8 May 2026. The core bonus numbers 8.33% minimum, 20% maximum, Rs. 21,000 eligibility ceiling are unchanged.

This is the part most people writing or reading about the Bonus Act in 2026 tend to miss. The Act was one of four old labour laws, along with the Minimum Wages Act, the Payment of Wages Act, and the Equal Remuneration Act, that Parliament folded into a single Code on Wages back in 2019. That Code sat unimplemented for years while states worked out their own rules, but it finally came into force on 21 November 2025, and the detailed central rules followed on 8 May 2026.

In practice, HR teams still say "the Bonus Act" out of habit, and honestly, nothing about the day-to-day math has changed. But a few real operational details have.

What Changed

• Bonus must now be paid by crediting the employee's bank account; the old Act allowed cash payment.
• A conviction for sexual harassment is now a fourth ground for denying bonus, alongside fraud, violent conduct, and theft or sabotage.
• Annual compliance reporting is moving into the Code's unified return-and-register structure, rolling out state by state.

What Stayed the Same

• The 8.33% minimum and 20% maximum bonus rates.
• The Rs. 21,000/month eligibility ceiling and the Rs. 7,000/month calculation ceiling.
• The 8-month payment deadline after the close of the accounting year.
• The 30-day minimum working period to qualify.

The bonus rules apply to every factory, and to every other establishment employing 20 or more persons on any day during an accounting year. Once an establishment crosses this threshold, it must keep paying bonus even if headcount later drops below 20. Certain non-profits, LIC, hospitals, and RBI-linked bodies are exempt.

The 20-Employee Threshold

If your establishment had 20 or more people on the payroll on even a single day during the accounting year, the bonus rules apply to the whole year not just to the days you crossed the threshold. This covers manual, supervisory, managerial, technical, administrative, and clerical roles. Apprentices are excluded.

Once Covered, Always Covered

This is a rule people often miss: once your establishment becomes covered, it stays covered, even if you later shrink below 20 employees. There's no opting back out.

Exemptions

A handful of categories sit outside the bonus rules altogether: non-profit organisations, LIC and certain hospitals, the RBI and specified financial corporations, and units officially declared "sick" and exempted by the government. Brand-new establishments can also usually claim a minimum-bonus-only exemption for their first five accounting years, while they're not yet turning a profit.

An employee qualifies for a statutory bonus if their Basic + DA is up to Rs. 21,000/month, and they've worked at least 30 days in that accounting year. Employees dismissed for fraud, violent conduct, theft or sabotage or, since the Code on Wages, a sexual harassment conviction can be denied the bonus.

Wage Ceiling

Only Basic salary plus Dearness Allowance counts toward the Rs. 21,000 limit. Other components like HRA or overtime pay aren't included, so an employee's gross salary can be well above Rs. 21,000 and they can still qualify, as long as Basic + DA stays within the limit.

Minimum Working Days

You need at least 30 days of actual work in the accounting year. This is generous by design; part-time and seasonal staff who clear this bar are still covered.

Disqualification Grounds

An employee can lose their entitlement to bonus if they're dismissed for:

• Fraud
• Riotous or violent behaviour on the premises
• Theft, misappropriation, or sabotage of company property

A conviction for sexual harassment (this ground was added under the Code on Wages)

The minimum statutory bonus is 8.33% of wages, or Rs. 100, whichever is higher, payable even if the company makes no profit or runs a loss. The maximum is 20% of wages, paid when there's enough allocable surplus to support it.

Quick Reference Table

Nobody below the minimum floor loses out just because the year was tough; that's the whole point of setting a guaranteed minimum. And nobody gets more than 20%, no matter how profitable the year was. Everything in between depends on the company's allocable surplus, which we'll cover in Section 7.

To calculate statutory bonus: take the employee's monthly Basic + DA, cap it at Rs. 7,000 (or the notified minimum wage, whichever is higher), multiply by the applicable bonus rate (8.33%-20%), then multiply by the number of months worked in the accounting year.

It looks more complicated on paper than it actually is once you break it into three steps.

Step 1: Find your calculation wage

Take the employee's monthly Basic + DA. If it's more than Rs. 7,000, use Rs. 7,000 (or the notified minimum wage for that role, if that's higher) as your starting number instead. This cap only affects the calculation; it doesn't change whether someone is eligible in the first place.

Step 2: Apply the bonus rate

Multiply that capped wage by the bonus percentage your company is applying that year, somewhere between 8.33% and 20%, depending on the allocable surplus.

Step 3: Multiply by months worked

Take the monthly figure and multiply it by the number of months the employee actually worked (usually 12, for a full year).

Worked Examples

• Salary of Rs. 6,000/month: Rs. 6,000 × 8.33% is about Rs. 499.80/month, which works out to roughly Rs. 5,997.60 for the year.
• Salary of Rs. 15,000/month, capped at Rs. 7,000: Rs. 7,000 × 8.33% is about Rs. 583.10/month, or roughly Rs. 6,997.20 for the year.

A government clarification issued in August 2026 (applied retrospectively from 21 November 2025) confirmed something HR teams had been asking about for a while: an employee's actual wage above Rs. 7,000 doesn't, by itself, raise the number used to calculate the bonus. The cap is firm.

Available surplus is a company's gross profits for the year, minus specific deductions like depreciation, direct taxes, and statutory reserves. Allocable surplus is a fixed percentage of that available surplus the actual pool of money the minimum and maximum bonus percentages are drawn from.

Think of this as the "profit math" sitting behind the bonus number. It starts with gross profits, then subtracts a set list of prior charges, depreciation, development rebate, direct taxes, and certain reserves to arrive at the available surplus. A defined percentage of that (higher for companies that haven't arranged to pay dividends under Income Tax rules, lower otherwise) becomes the allocable surplus, which is what actually funds the bonus pool.

Set-On and Set-Off

If a year's surplus is more than enough to cover the maximum 20% bonus, the excess doesn't just disappear; it's carried forward ("set on") to help fund bonus in leaner years ahead, up to a set number of years. A shortfall works the same way in reverse ("set off"), smoothing out the good years and the bad ones.

Bonus must be paid within 8 months of the close of the accounting year. Employers also file an annual return historically called Form D covering how much bonus was declared, paid, and to how many employees, usually due by 1 February.

Payment Deadline

Eight months sounds like a long runway, but it comes around faster than most payroll teams expect. For a typical April-March accounting year, that deadline lands around 30 November, worth putting straight into next year's compliance calendar rather than tracking loosely.

Form D Annual Return

Form D captures the establishment's details, total employees, how many actually received a bonus, the percentage declared, amounts paid, and reasons for any non-payment. It's filed electronically through the labour ministry's portal. Under the Code on Wages (Central) Rules, 2026, this is folding into a unified return format; details are still rolling out state by state, so it's worth confirming the current form with your compliance provider before a filing deadline.

The Payment of Bonus Act was significantly amended in 2015, raising the eligibility ceiling to Rs. 21,000 and the calculation ceiling to Rs. 7,000. A 2019 rules update digitised annual filing. In 2025-26, it was absorbed entirely into the Code on Wages, 2019.

2015 Amendment

Effective retrospectively from 1 April 2014, this amendment raised the eligibility wage ceiling from Rs. 10,000 to Rs. 21,000/month, and the calculation ceiling from Rs. 3,500 to Rs. 7,000/month. The 8.33%-20% rates stayed the same. A few High Courts stayed the retrospective effective date, which created a genuinely confusing period for employer liability calculations at the time.

2019 Rules

This update introduced electronic filing of Form D through the Ministry of Labour's web portal, with a filing deadline of 1 February each year, while keeping the inspector's authority to call for physical records during an audit.

2025-2026: Code on Wages

As covered in Section 2, this is the big one: the Act itself was repealed, and its provisions were absorbed into Chapter IV of the Code on Wages, 2019, in force since 21 November 2025, with implementing rules notified on 8 May 2026.

The Payment of Bonus Act (now Chapter IV of the Code on Wages) covers annual profit-sharing bonus. It's distinct from the Minimum Wages Act (a wage floor for all work), the Payment of Wages Act (timely, correct wage payment), and the Payment of Gratuity Act (a lump sum on long-service exit) all now absorbed into related codes of their own.

Comparison Table

The easiest way to remember the difference: minimum wages and timely payment are about what you're owed for the work you did. Bonus is about sharing in the company's profit on top of that. Gratuity is a separate, long-service reward paid when you leave.

Statutory bonus sits alongside other Indian payroll compliance obligations PF, ESI, Professional Tax, and TDS all of which are now governed by the four consolidated Labour Codes. Getting the bonus calculation right usually means getting the same underlying wage data (Basic + DA) right across all of these.

If you're already tracking Provident Fund (PF, split between employer and employee contributions to EPFO), Employee State Insurance (ESI, employer-funded medical cover for lower-wage employees), Professional Tax (state-specific slabs that vary by location), and TDS on salary, you'll notice a pattern: all of these lean on the same core wage definitions the bonus calculation uses. Getting your Basic + DA split consistent across PF, ESI, and bonus isn't optional busywork; it's what keeps all four calculations from quietly drifting apart over a few payroll cycles.

QkrHR automates statutory bonus calculation directly from attendance and payroll data applying the Rs. 21,000 eligibility check and the Rs. 7,000 calculation cap automatically, tracking the 8-month payment deadline, and keeping a clean audit trail for every payout, without a manual spreadsheet in the loop.

Running this calculation by hand across a large or mixed team some permanent staff, some on contract is exactly where most bonus disputes start. A missed eligibility check, an outdated wage base, or a forgotten deadline can turn into a labour complaint fast. Here's what QkrHR specifically does with this:

1. Automatic eligibility checks

Flags every employee whose Basic + DA falls within the Rs. 21,000 threshold, pulled straight from existing payroll records.

2. Built-in calculation cap

Applies the Rs. 7,000 (or notified minimum wage) ceiling automatically, so nobody's bonus gets calculated on the wrong base.

3. Deadline tracking

Keeps the 8-month payment window on the compliance calendar, with alerts before it's due.

4. Bank-credit payouts

Supports paying bonus directly into employee bank accounts, in line with the Code on Wages requirement.

5. Audit-ready records

Keeps a record of every bonus calculation and payment against the employee's wage history, ready if a labour inspector asks.