Payment of Bonus Act 1965

Payment of Bonus Act, 1965, is a significant piece of legislation in India designed to provide employees with a share of the profits generated by their employers. This act seeks to bridge the gap between the employer and employees, fostering a better relationship and ensuring fair distribution of profits.

Introduction and Objectives

The Payment of Bonus Act, 1965, was enacted to ensure that employees receive a bonus based on the profits earned by the company. The primary objectives of the Act are:

• To provide for the payment of bonuses to persons employed in certain establishments.
• To lay down the principles for calculating and distributing bonuses.
• To bridge the economic gap between employees and employers by distributing a portion of the company’s profits to its employees.

Applicability

The Act applies to the following establishments:

1. Factories: As defined under the Factories Act, 1948.
2. Other Establishments: Any establishment employing 20 or more persons on any day during an accounting year.

However, the government has the power to extend the applicability of the Act to establishments employing less than 20 but not less than 10 persons, subject to certain conditions.

Eligibility:

1. Employees Covered: The Act applies to employees drawing a salary or wage up to ₹21,000 per month.
2. Continuous Service: Employees must have worked in the establishment for at least 30 working days in that year to be eligible for a bonus.

Disqualification:

An employee can be disqualified from receiving a bonus if they are dismissed from service for:

• Fraud
• Riotous or violent behavior.
• Theft, misappropriation, or sabotage of any property of the establishment.

Computation of Bonus

• Gross Profit Calculation:

The Act provides detailed schedules (Schedule I and II) for calculating gross profits for companies and other establishments. Gross profit forms the base for further calculations.

• Available Surplus:

After calculating the gross profit, the next step is to determine the available surplus, which is calculated as: Available Surplus = Gross Profit – Prior Charges (such as depreciation, development rebate, investment allowance, direct taxes, etc.)

• Allocable Surplus:

Allocable Surplus is defined as:

• 60% of the available surplus in case of a company other than a banking company.
• 67% of the available surplus in case of a banking company.

Minimum and Maximum Bonus

• Minimum Bonus:

Every eligible employee is entitled to receive a minimum bonus of 8.33% of the salary or wage earned during the accounting year, or ₹100, whichever is higher. This minimum bonus is payable whether or not the employer has any allocable surplus in the accounting year.

• Maximum Bonus:

The maximum bonus payable to an employee is 20% of the salary or wage earned during the accounting year. If the allocable surplus exceeds the amount required for payment of the maximum bonus, the excess shall be carried forward for the next four accounting years.

Calculation of Bonus

The bonus is calculated based on the salary or wage earned by the employee during the accounting year. Here’s a simplified example:

Assume an employee’s monthly salary is ₹18,000, and they worked for the entire accounting year.

Minimum Bonus:

• Annual salary: ₹18,000 x 12 = ₹2,16,000
• Minimum bonus: 8.33% of ₹2,16,000 = ₹17,998.8

Maximum Bonus:

• Maximum bonus: 20% of ₹2,16,000 = ₹43,200

Therefore, the employee is entitled to a bonus between ₹17,998.8 and ₹43,200, depending on the available surplus.

Set-Off and Set-On

• Set-Off:

If there is no allocable surplus in a particular accounting year, the employer can set off the amount of the minimum bonus paid against the allocable surplus of the subsequent accounting years up to four years.

• Set-On:

If the allocable surplus exceeds the amount required for the maximum bonus, the excess amount is carried forward to the next accounting years, up to four years, to be used for paying bonuses in those years.

Payment of Bonus

The bonus must be paid within eight months from the close of the accounting year. However, the time limit can be extended by the appropriate authority upon application by the employer.

Grievance Redressal

Employees have the right to approach the appropriate labor authority if they believe they have not been paid the bonus they are entitled to. The labor authorities, such as the Labor Commissioner or the Labor Court, have the power to resolve disputes regarding the payment of bonuses.

Penal Provisions

Employers who contravene the provisions of the Act, such as failing to pay the due bonus, can face penal consequences. The penalties can include:

• Fine: Up to ₹1,000.
• Imprisonment: Up to six months, or both.

Additionally, the employer may be required to pay the due bonus along with interest.

Recent Amendments

The Payment of Bonus Act has undergone several amendments to keep pace with economic changes and inflation. Notable amendments include the enhancement of the salary eligibility limit and the calculation base for bonuses.

• 2015 Amendment:

The salary eligibility limit was raised from ₹10,000 to ₹21,000 per month. The calculation ceiling for the bonus was also amended to include employees earning up to ₹21,000 per month.