Payment of Bonus
Section 26. Eligibility for bonus, etc.
(1)
Every employee is entitled to an annual minimum bonus if:
Their monthly wages do not exceed the limit notified by the appropriate Government;
They have worked at least 30 days in the accounting year.
The employer must pay a minimum bonus at:
8.33% of the wages earned, or
₹100,
whichever is higher,
even if the employer has no allocable surplus for that year.
(2)
If an employee’s monthly wages exceed the notified ceiling, then for bonus calculation:
The bonus must be computed as if the employee’s wages were equal to the notified wage ceiling,
or the minimum wage fixed by the Government,
whichever is higher.
This applies to the bonus payable under both sub-section (1) (minimum bonus) and sub-section (3) (if applicable).
26(3). Bonus When Allocable Surplus Exceeds Minimum Bonus
If, in any accounting year, the allocable surplus is more than the minimum bonus payable under sub-section (1):
The employer must pay bonus proportionate to the employee’s wages for that year.
This higher bonus replaces the minimum bonus.
The bonus cannot exceed 20% of the wages earned by the employee in that year.
26(4). Computation of Allocable Surplus
While calculating the allocable surplus:
Any amount set on or amount set off under Section 36 must be included,
And must be applied exactly as required under that section.
26(5). Bonus Based on Production or Productivity
If employees demand a bonus higher than the minimum bonus, based on:
Production, or
Productivity
for the relevant accounting year, then:
Such bonus must be decided by agreement or settlement between employer and employees.
But the total bonus, including the minimum bonus under sub-section (1), cannot exceed 20% of the employee’s wages for that year.
26(6). Bonus in the First Five Accounting Years of a New Establishment
For a newly started establishment:
The rule applies to the first five accounting years after the year in which the employer first begins selling goods or providing services.
During these first five years, the employer is required to pay bonus only for those years in which the establishment actually makes a profit.
For any such profit-making year:
The bonus must be calculated as per the normal provisions of this Code for that accounting year.
However, Section 36 (set-on and set-off) does not apply during these first five years.
Meaning in simple terms:
A new business does not have to pay bonus every year in its initial five-year period — only in the years where it earns profit. And for those profit years, bonus is calculated normally but without adjusting previous years’ surplus or deficits (no set-on / set-off).
26(7). Bonus Rules for the 6th and 7th Accounting Years of a New Establishment
After a new establishment completes its first five accounting years (during which Section 36 does not apply), the 6th and 7th years have special transitional rules.
During the 6th and 7th accounting years, the normal set-on / set-off system under Section 36 starts applying, but with specific modifications:
(i) Sixth Accounting Year
In the 6th year, set-on or set-off must be calculated:
As per the method prescribed by the Central Government, and
By taking into account the excess or deficit of allocable surplus from:
the 5th year
the 6th year
Meaning:
When calculating set-on / set-off for the 6th year, only the surplus or shortage from the 5th and 6th years is considered — not from years 1–4.
(ii) Seventh Accounting Year
In the 7th year, set-on or set-off must be calculated:
As per the method prescribed by the Central Government, and
By taking into account the excess or deficiency of allocable surplus from:
the 5th year
the 6th year
the 7th year
Meaning:
For the 7th year, the system expands — now the set-on/set-off must consider the surplus/deficit from three years: 5th, 6th, and 7th.
Section 26(8) – Meaning
From the 8th accounting year onwards (counting from the year the establishment first starts selling goods or rendering services):
The normal Section 36 set-on / set-off rules fully apply,
Exactly the same as they apply to any old or established business.
Simple meaning:
For years 1–7, special rules apply to help new businesses.
From year 8 onward, the business is treated like any other mature establishment for bonus calculations.
Explanation 1 – When is an employer considered to have “derived profit”?
For sub-section (6), an employer is considered to have earned profit in a year only if BOTH conditions are satisfied:
(a) Depreciation for that year is fully provided
The employer must first claim/record the depreciation allowed under:
Income-tax Act, or
Agricultural income-tax law (if applicable).
(b) Past losses + past unclaimed depreciation fully set off
Any:
Carry-forward business losses, or
Accumulated depreciation from previous years
must be fully absorbed from the current year’s profit before he is treated as having “derived profit”.
Simple meaning:
A company is treated as having actual profit only after clearing:
That year's depreciation, and
All old losses and depreciation.
Only then does the obligation to pay bonus under the “first five years” rule arise.
Explanation 2 – Trial Production and Prospecting Are NOT Considered Sales
For sub-sections (6), (7), and (8):
Trial production sales of a factory, and
Prospecting stage of a mine or oil-field
are NOT counted as “sale of goods” or “production.”
Why?
Because these are not commercial operations; they are testing or exploratory stages.
If a dispute arises:
The appropriate Government will decide after hearing both sides.
Simple meaning:
The “clock” for counting the 1st, 2nd, 3rd year, etc. starts only when full commercial operations begin, not when trial runs or prospecting work happens.
Section 26(9) – New Units of Existing Businesses
Sub-sections (6), (7), and (8) apply also to new departments / undertakings / branches created by an existing establishment.
Simple meaning:
If a big existing company opens a new factory, new unit, new branch, or new division, that new part is treated like a new business for bonus purposes.
It gets the same benefits and rules:
First 5 years: bonus only if the unit makes a real profit (after depreciation + past losses).
Years 6 and 7: modified set-on/set-off rules.
From year 8: full Section 36 rules apply.
Purpose:
A new division should not be burdened with high bonus obligations just because the parent company is old and profitable.
Section 27. Proportionate reduction in bonus in certain cases.
Section 27 — Proportionate Reduction of Minimum Bonus
If an employee has not worked for all working days in the accounting year:
The minimum bonus under Section 26(1)
(i.e., 8.33% of annual wages or ₹100, whichever is higher)
shall be reduced proportionately based on the number of days actually worked.
BUT only if the minimum bonus amount is higher than 8.33% of the wages for the actual days worked.
Simple Meaning
If an employee worked only part of the year, the minimum bonus should also apply only to the part of the year they actually worked.
You do not pay the full-year minimum bonus to someone who worked only some of the days.
In Even Simpler Terms
Full-year minimum bonus applies only to full-year workers.
For others, calculate bonus only for the days they worked.
If the minimum bonus (₹100 or 8.33%) is more than 8.33% of their actual working days’ wages, reduce it proportionately.
Section 28. Computation of number of working days.
For the purpose of calculating proportionate bonus under Section 27, an employee is also treated as having worked on the following days:
28(a)
Days when the employee is laid off under:
an agreement,
standing orders under the Industrial Employment (Standing Orders) Act, 1946,
the Industrial Disputes Act, 1947, or
any other applicable law.
28(b)
Days when the employee is on leave with salary or wages.
28(c)
Days when the employee is absent due to temporary disablement caused by an accident arising out of and in the course of employment.
28(d)
Days when a female employee is on maternity leave with salary or wages during the accounting year.
Section 29. Disqualification for bonus.
An employee shall not be eligible to receive bonus under this Code if he is dismissed from service on any of the following grounds:
29(a)
Dismissal due to fraud.
29(b)
Dismissal for riotous or violent behaviour while on the premises of the establishment.
29(c)
Dismissal for theft, misappropriation, or sabotage of any property of the establishment.
29(d)
Dismissal following conviction for sexual harassment.
Section 30. Establishments to include departments, undertakings and branches.
30(1)
Where an establishment has different departments, undertakings, or branches—whether located in the same place or in different places—they shall all be treated as parts of a single establishment for the purpose of computing bonus under this Code.
Proviso to 30(1)
However, for any accounting year, if a separate balance sheet and profit & loss account are prepared and maintained for any such department, undertaking, or branch, then:
That department, undertaking, or branch shall be treated as a separate establishment for bonus computation for that accounting year,
unless it was treated as part of the main establishment for bonus computation immediately before the beginning of that accounting year.
Section 31. Payment of bonus out of allocable surplus.
31(1)
Bonus shall be paid out of the allocable surplus, which means:
60% of the available surplus in the case of a banking company; and
67% of the available surplus in the case of any other establishment.
The available surplus shall be calculated in accordance with Section 33.
31(2)
The audited accounts of companies shall generally not be questioned.
31(3)
If there is a dispute regarding the quantum of bonus, the authority notified by the appropriate Government may:
require the employer to produce the balance sheet;
however, the authority shall not disclose any information from the balance sheet unless the employer consents.
Section 32. Computation of gross profits.
32(a)
For a banking company, gross profits for an accounting year shall be calculated in the manner prescribed by the Central Government.
32(b)
For any other establishment, gross profits for an accounting year shall also be calculated in the manner prescribed by the Central Government.
Section 33. Computation of available surplus.
33(1)
The available surplus for any accounting year is the gross profits of that year minus the deductions specified in Section 34.
33(2) — Special Rule for Accounting Years After the Commencement of the Code
For the accounting year starting after the commencement of this Code, and for every year thereafter, the available surplus shall be the sum of:
33(2)(a)
The gross profits of that accounting year minus the deductions under Section 34.
33(2)(b)
An additional amount equal to the difference between:
33(2)(b)(i)
The direct tax (calculated as per Section 35) on the gross profits of the immediately preceding accounting year; and33(2)(b)(ii)
The direct tax (calculated as per Section 35) on the gross profits of the preceding year after deducting the bonus paid or payable to employees for that year under the Code.
Section 34. Sums deductible from gross profits.
34(a)
Amounts deducted towards depreciation, as admissible under:
Section 32(1) of the Income-tax Act, or
Applicable agricultural income-tax law.
34(b)
Subject to Section 35, any direct tax the employer is liable to pay for that accounting year on income, profits, or gains.
34(c)
Any additional sums, as may be prescribed by the Central Government, in respect of the employer.
Section 35. Calculation of direct tax payable by the employer.
For the purposes of this Code, the direct tax payable by the employer for any accounting year shall be computed at the rates applicable to that employer’s income for that year, subject to the following conditions:
35(a)
While calculating such direct tax, the following shall not be taken into account:
35(a)(i)
Any loss of a previous accounting year carried forward under any law relating to direct taxes.35(a)(ii)
Any arrears of depreciation that the employer is entitled to carry forward under Section 32(2) of the Income-tax Act.
35(b)
If the employer is a religious or charitable institution to which Section 41 does not apply, and the whole or any part of its income is exempt under the Income-tax Act, then:
For the exempted income, the institution shall be treated as a company in which the public are substantially interested, for tax-calculation purposes.
35(c)
Where the employer is an individual or a Hindu Undivided Family (HUF), the direct tax payable under the Income-tax Act shall be computed as if the income from the establishment is the employer’s only income.
35(d)
If the employer’s income includes profits from export of goods or merchandise from India, and any rebate on such export income is allowed under any direct tax law, then:
No account shall be taken of such rebate while calculating the direct tax for purposes of this Code.
35(e)
While computing direct tax, no rebate shall be considered except the following:
Development rebate, or
Investment allowance, or
Development allowance, or
Any credit, relief, or deduction for development of industry (other than those mentioned earlier),
which are allowed under any direct tax law or the relevant annual Finance Act.
Section 36. Set on and set off of allocable surplus.
36(1)
Where for any accounting year, the allocable surplus exceeds the maximum bonus payable under Section 26, the excess shall, subject to a limit of 20% of the total salary or wages of employees in that year, be carried forward (set on) to the succeeding accounting year. This can continue up to and including the fourth accounting year and shall be utilised for bonus payment in the manner prescribed by the Central Government.
36(2)
Where in any accounting year:
there is no available surplus, or
the allocable surplus is less than the minimum bonus payable, and
there is no sufficient set-on amount from earlier years,
then the deficiency or minimum amount shall be carried forward (set off) to the succeeding accounting year, up to the fourth accounting year, in the manner prescribed by the Central Government.
36(3)
The principle of set on and set off as prescribed by the Central Government applies to all other cases not covered under sub-section (1) or (2) for the purpose of bonus payment.
36(4)
When calculating bonus for a succeeding accounting year, any amount carried forward as set on or set off shall be applied starting with the earliest accounting year from which it was carried forward.
Section 37. Adjustment of customary or interim bonus against bonus payable under this Code.
37(1)
Where in any accounting year:
(a) the employer has paid any puja bonus or other customary bonus to an employee; or
(b) the employer has paid a part of the bonus payable under this Code to an employee before the date it becomes payable,
then the employer is entitled to deduct the amount so paid from the bonus payable under this Code for that year.
37(2)
The employee shall be entitled to receive only the balance of the bonus after such deduction.
Section 38. Deduction of certain amounts from bonus payable.
38(1)
Where in any accounting year, an employee is found guilty of misconduct causing financial loss to the employer,
it shall be lawful for the employer to deduct the amount of such loss from the bonus payable under this Code for that year.
38(2)
The employee shall be entitled to receive only the balance, if any, after such deduction.
Section 39. Time limit for payment of bonus.
39(1)
All amounts payable to an employee by way of bonus under this Code shall be credited to the bank account of the employee by the employer within eight months from the close of the accounting year.
Provided:
The appropriate Government, or an authority specified by it, may, upon application by the employer and for sufficient reasons, extend the eight-month period to such further period as it thinks fit;
However: The total extension shall not exceed two years.
39(2)
Where there is a dispute regarding payment of bonus pending before any authority:
Such bonus shall be paid within one month from the date on which the award becomes enforceable or the settlement comes into effect.
Provided:
If the dispute concerns payment at a higher rate, the employer shall pay 8⅓% of the wages earned as per the Code within eight months from the close of the accounting year.
Section 40. Application of this Chapter to establishments in public sector in certain cases.
40(1)
If in any accounting year, a public sector establishment:
sells any goods produced or manufactured by it, or
renders any services,
in competition with a private sector establishment, and the income from such sale or services is not less than 20% of the gross income of the public sector establishment for that year,
then the provisions of this Chapter shall apply to the public sector establishment in the same manner as they apply to a similar private sector establishment.
40(2)
Except as provided in sub-section (1), nothing in this Chapter applies to employees employed by any public sector establishment.
Section 41. Non-applicability of this Chapter.
41(1)
Nothing in this Chapter shall apply to the following employees:
(a) Employees employed by the Life Insurance Corporation of India.
(b) Seamen, as defined in clause (42) of section 3 of the Merchant Shipping Act, 1958.
(c) Employees registered or listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948, and employed by registered or listed employers.
(d) Employees employed by an establishment under the authority of any department of the Central Government, State Government, or a local authority.
(e) Employees employed by:
(i) the Indian Red Cross Society or any other similar institution, including its branches;
(ii) universities and other educational institutions;
(iii) institutions including hospitals, chambers of commerce, and social welfare institutions established not for profit.
(f) Employees employed by the Reserve Bank of India.
(g) Employees employed by public sector financial institutions other than banking companies, which the Central Government may, by notification, specify, having regard to:(i) its capital structure;
(ii) its objectives and nature of activities;
(iii) the nature and extent of financial assistance or concessions given by the Government;
(iv) any other relevant factor.
(h) Employees employed by inland water transport establishments operating on routes passing through any other country.
(i) Employees of any other establishment which the appropriate Government may exempt by notification, having regard to the overall benefits under any other scheme of profit sharing available in such establishments.
41(2)
Subject to sub-section (1), the provisions of this Chapter shall apply to any establishment in which 20 or more persons are employed or were employed on any day during an accounting year.
