Is minimum bonus payable when there is no allocable surplus?

Yes. Subject to the special rules for newly established businesses, an eligible employee is entitled to minimum bonus even when the employer has no allocable surplus. The deficiency may be carried forward as set-off under Section 36.

Who is eligible for bonus under the Code on Wages?

An employee must fall within the wage ceiling notified by the appropriate Government, work for at least 30 days during the accounting year, and not be disqualified under Section 29.

What is the difference between the bonus eligibility ceiling and calculation ceiling?

The eligibility ceiling decides whether an employee is covered. The calculation ceiling determines the wage base after the employee is found eligible. Section 26(2) does not create eligibility.

What is the minimum and maximum statutory bonus rate?

Minimum bonus is 8⅓% of wages earned during the accounting year or ₹100, whichever is higher. Maximum bonus is 20% of wages earned during the accounting year.

Which minimum wage applies when employees work in different states?

Apply the minimum wage legally applicable to each employee according to the relevant state, scheduled employment, category, zone and effective period. Do not use one common rate unless it lawfully applies to all employees.

Can minimum wage change during the accounting year for bonus calculation?

Yes. Minimum-wage rates may be revised during the accounting year. Apply the rate legally in force for each relevant period while determining the calculation wage under Section 26(2).

Can an employee be denied bonus merely because a charge-sheet was issued?

No. Section 29 requires dismissal for a specified ground, including fraud, riotous or violent behaviour, theft, misappropriation, sabotage, or conviction for sexual harassment.

Who pays statutory bonus to contractual employees?

The contractor remains primarily responsible. Where the contractor fails and Rule 21 applies, the specified principal entity must pay minimum bonus after written information and confirmation of the default.

How long can set-on or set-off be carried forward?

Set-on or set-off may be carried forward up to and including the fourth succeeding accounting year. The balance originating from the earliest accounting year must be considered first.

Payment of Bonus Under Code on Wages: Complete Guide

Q: What is the time limit for payment of statutory bonus?

Bonus must ordinarily be credited to the employee’s bank account within eight months from the close of the accounting year, subject to a lawful extension granted by the competent authority.

Payment of statutory bonus under the Code on Wages, 2019 is not a flat 8.33% payroll exercise. Employers must first verify establishment coverage, employee eligibility, the correct calculation wage, allocable surplus, set-on or set-off, individual adjustments, and the statutory payment deadline.

Chapter IV of the Code on Wages, 2019 covers Sections 26 to 41. Chapter V of the corresponding Central Rules covers Rules 21 to 28. Together, these provisions regulate eligibility, minimum and maximum bonus, contractual employees, gross profit, available surplus, allocable surplus, newly established businesses, adjustments, deductions and payment.

This guide explains the law in the same sequence in which an employer, HR team, payroll function or compliance professional should apply it.

Statutory Bonus at a Glance

Compliance point	Legal position
Establishment threshold	Generally applies where 20 or more persons are or were employed on any day during the accounting year
Minimum service	Employee must work for at least 30 days during the accounting year
Eligibility ceiling	Monthly wage ceiling notified by the appropriate Government
Minimum bonus	8⅓% of wages earned or ₹100, whichever is higher
Maximum bonus	20% of wages earned during the accounting year
Calculation wage	Notified calculation amount or applicable minimum wage, whichever is higher, subject to actual wages earned
Allocable surplus	60% for a banking company and 67% for other establishments
Set-on or set-off	May be carried forward up to and including the fourth succeeding accounting year
Normal payment period	Within eight months from the close of the accounting year
Mode of payment	Credit to the employee’s bank account

The monetary ceilings used for eligibility and calculation are determined through notifications issued by the appropriate Government. Employers must verify the notification applicable to their establishment instead of assuming that an earlier amount continues automatically.

When Does the Bonus Chapter Apply?

Subject to the statutory exclusions, Chapter IV applies to an establishment in which 20 or more persons are employed, or were employed on any day during an accounting year.

The threshold is not tested only on the last day of the accounting year. If the establishment employed 20 or more persons on any day during that year, the coverage requirement may be attracted.

Section 41 of the Code on Wages excludes specified employees and establishments, including employees of the Life Insurance Corporation of India, Reserve Bank of India, government departments, local authorities, universities, educational institutions and certain non-profit or public institutions.

An exclusion must be established from the specific provision or applicable notification. The fact that an establishment performs a public, educational, charitable or welfare function is not by itself conclusive.

Public-sector establishments

Chapter IV does not ordinarily apply to employees of public-sector establishments. However, it applies where the establishment sells goods or renders services in competition with a private-sector establishment and earns at least 20% of its gross income for the accounting year from that competitive activity.

Read Section 40: Application to public-sector establishments

Departments, undertakings and branches

Different departments, undertakings and branches situated at the same or different places are generally treated as parts of one establishment. A unit may be treated separately for a particular accounting year where a separate balance sheet and profit and loss account are prepared and maintained for it, subject to Section 30.

A separate payroll, registration number or physical location does not by itself settle whether a branch is a separate establishment for bonus purposes.

Read Section 30: Departments, undertakings and branches

Who Is Eligible for Statutory Bonus?

An employee becomes eligible for statutory bonus when:

the employee’s wages do not exceed the monthly ceiling notified by the appropriate Government;
the employee has worked for at least 30 days during the accounting year; and
the employee is not disqualified under Section 29.

The eligibility ceiling is not permanently fixed in Section 26. Employers must identify the appropriate Government and verify the applicable notification, effective date, any revision during the year and the statutory wages of the employee.

Read Section 26: Eligibility for bonus

Eligibility Ceiling and Calculation Ceiling Are Different

The eligibility ceiling decides whether an employee falls within the statutory bonus framework. If the employee’s wages exceed the ceiling notified under Section 26(1), the employee is not eligible for statutory bonus under Chapter IV.

The calculation ceiling decides the wage amount on which bonus is calculated after the employee has already been found eligible.

Where the wages of an eligible employee exceed the amount notified under Section 26(2), bonus is calculated as though the employee’s wage were:

the notified calculation amount; or
the applicable minimum wage,

whichever is higher.

NOTE

Section 26(2) does not create eligibility. It determines the calculation wage only after the employee has qualified under Section 26(1).

For an eligible employee, the monthly calculation base can broadly be understood as:

Lower of:
1. Employee’s actual wages; or
2. Higher of:
   a. the notified calculation ceiling; and
   b. the applicable minimum wage.

The final computation must reflect wages actually earned during the accounting year.

Minimum Wage Can Change During the Accounting Year

The applicable minimum wage is not necessarily one fixed annual figure. It may differ according to:

State or Union Territory;
scheduled employment;
skill category;
zone or geographical area;
nature of work;
class of establishment; and
effective period of the notification.

Minimum wages may be revised during the accounting year. A multi-state employer may need to apply different rates to different employees. If an employee moves between states, categories or zones, the applicable rate may also change during the year.

The comparison under Section 26(2) must therefore use the minimum wage legally applicable to the employee for each relevant period. One common organisational rate should not be used unless it lawfully applies to every concerned employee.

Minimum and Maximum Bonus

Minimum bonus

Every eligible employee who has worked for at least 30 days during the accounting year is entitled to:

8⅓% of wages earned during the accounting year; or
₹100,

whichever is higher.

Subject to the special provisions for newly established businesses, minimum bonus is payable even when the employer has no allocable surplus.

The statutory rate is 8⅓%, mathematically equal to one-twelfth. Payroll software and spreadsheets should not reduce it to 8.33% where rounding causes an underpayment.

Maximum bonus

Where allocable surplus exceeds the amount required for minimum bonus, every eligible employee is entitled to bonus in proportion to wages earned, subject to a maximum of 20%.

An agreement or settlement may provide for bonus linked with production or productivity. However, total bonus, including statutory minimum bonus, cannot exceed 20% of wages earned during the accounting year.

Proportionate Reduction and Working Days

An employee need not work throughout the accounting year to qualify. Completion of at least 30 days is the initial eligibility condition.

Where an employee has not worked for all working days, minimum bonus may be reduced proportionately under Section 27. Employers should not simply multiply monthly wages by 12 for every employee. Joining, separation, unpaid absence, wage revision and partial-year employment must be reflected in wages earned and working-day records.

Read Section 27: Proportionate reduction in bonus

Days treated as days worked

For bonus purposes, certain periods are treated as days worked. These include days on which the employee:

was laid off under an agreement, standing orders or applicable law;
was on leave with salary or wages;
was absent due to temporary disablement caused by an employment accident; or
was on maternity leave with salary or wages.

Read Section 28: Computation of working days

When Can an Employee Be Disqualified?

A warning, charge-sheet, suspension or pending disciplinary proceeding does not by itself disqualify an employee from bonus.

Section 29 applies where the employee is dismissed from service for:

fraud;
riotous or violent behaviour on the establishment’s premises;
theft, misappropriation or sabotage of establishment property; or
conviction for sexual harassment.

The dismissal and statutory ground should be clearly established from the disciplinary record and final order.

Read Section 29: Disqualification for bonus

Bonus for Contractual Employees

Employment through a contractor does not automatically take an otherwise eligible employee outside the bonus provisions.

The contractor, as immediate employer, remains primarily responsible. Rule 21 creates a protective mechanism where the contractor fails. Where employees or their registered trade union provide written information, and the failure is confirmed, the specified company, firm, association or other person must pay the minimum bonus to affected employees.

Read Rule 21: Payment of bonus to contractual employees

The principal establishment should maintain oversight over deployment records, wages, attendance, the 30-day condition, contractor calculations, bank-payment evidence and complaints regarding non-payment.

Rule 21 should not be read as automatically transferring every component of the contractor’s bonus liability. It specifically deals with minimum bonus after written information and confirmation of default.

Gross Profit, Available Surplus and Allocable Surplus

Payment above the statutory minimum depends upon allocable surplus. The broad sequence is:

Statutory Gross Profit
      ↓
Less: Permissible Prior Charges
      ↓
Available Surplus
      ↓
Applicable Allocable Percentage
      ↓
Allocable Surplus
      ↓
Set-on / Set-off Adjustment
      ↓
Bonus Rate, subject to 8⅓% minimum and 20% maximum

Statutory gross profit

Gross profit must be computed:

for a banking company, according to Appendix B; and
for another establishment, according to Appendix C.

Statutory gross profit should not automatically be treated as the ordinary gross profit or net profit appearing in financial statements.

Available surplus

Available surplus is determined from gross profit after deductions permitted under Section 34 and the additional computation under Section 33. It should not be calculated merely by deducting current-year expenses from accounting profit.

Read Section 33: Computation of available surplus

Permissible prior charges

The deductions under Section 34 include:

admissible depreciation;
direct tax calculated according to Section 35; and
further sums prescribed for the relevant category of employer in Appendix D.
Section 34: Sums deductible from gross profits
Section 35: Calculation of direct tax
Rule 26: Further deductible sums

The financial inputs used for surplus computation should be verified by the employer’s finance team, auditor or another competent financial professional.

Allocable surplus

Allocable surplus is:

60% of available surplus for a banking company; and
67% of available surplus for another establishment.

Read Section 31: Bonus out of allocable surplus

Set-On and Set-Off

The set-on and set-off mechanism balances bonus liability across profitable and less profitable accounting years.

Set-on

Where allocable surplus exceeds the amount required to pay maximum bonus, the permissible excess may be carried forward as set-on. The amount is subject to a limit of 20% of the total salary or wages of employees employed in the establishment during that accounting year.

Set-off

Where there is no available surplus, or allocable surplus is insufficient to meet minimum bonus and sufficient set-on is unavailable, the minimum bonus amount or remaining deficiency may be carried forward as set-off.

Set-on and set-off may be carried forward up to and including the fourth succeeding accounting year. Where more than one balance exists, the earliest balance must be considered first.

Employers should maintain a continuous year-wise working showing the year, total employee wages, allocable surplus, minimum and maximum liabilities, opening balance, amount utilised, current-year balance, year of origin and expiry.

Rules for Newly Established Businesses

During the first five accounting years following the accounting year in which an establishment first sells goods or renders services, bonus is payable only for an accounting year in which the establishment derives profit. The ordinary set-on and set-off mechanism does not apply during this initial period.

Profit is not treated as derived unless admissible depreciation has been provided and arrears of depreciation and previous losses have been fully set off against profits.

For the sixth accounting year, the calculation considers excess or deficiency relating to the fifth and sixth years. For the seventh accounting year, it considers the fifth, sixth and seventh years. From the eighth accounting year onwards, Section 36 applies in the ordinary manner.

Adjustment of Customary or Interim Bonus

Where an employer has already paid puja bonus, another customary bonus or part of statutory bonus as interim bonus, that amount may be adjusted against statutory bonus payable for the same accounting year. The employee is entitled to the balance, if any.

Every ex gratia payment, incentive or festival payment does not automatically qualify for adjustment. Examine the nature, terms and relevant accounting year of the payment.

Read Section 37: Adjustment of customary or interim bonus

Deduction for Financial Loss Caused by Misconduct

Where an employee is found guilty of misconduct that caused financial loss, the employer may deduct the amount of that loss from bonus payable for the same accounting year.

The deduction requires:

a finding of misconduct;
a financial loss caused by that misconduct;
deduction limited to the amount of loss; and
payment of any remaining bonus balance.

This differs from Section 29. Section 38 permits deduction of quantified loss, while Section 29 deals with complete disqualification following dismissal for specified misconduct.

Read Section 38: Deduction from bonus

Time Limit and Mode of Payment

Statutory bonus must ordinarily be paid by crediting the amount to the employee’s bank account within eight months from the close of the accounting year. For an April-to-March accounting year, the normal period ordinarily ends on 30 November.

WARNING

Missing the payment deadline, using the wrong wage ceiling, or applying one minimum-wage rate across employees covered by different states, categories or effective periods can result in an incorrect statutory liability.

The appropriate Government or authorised authority may extend the period on the employer’s application where sufficient reasons are shown. The total extended period cannot exceed two years.

Where a bonus dispute is pending, the amount determined under an enforceable award or operative settlement must be paid within one month. If the dispute concerns a higher rate, minimum bonus at 8⅓% must still be paid within the normal period.

Read Section 39: Time limit for payment

Employer Compliance Process

1. Confirm establishment coverage

Check the 20-person threshold, exclusions under Section 41, public-sector conditions under Section 40 and treatment of departments or branches.

2. Identify the appropriate Government

This determines the applicable eligibility ceiling, calculation ceiling, minimum-wage notification, rules and administrative authority.

3. Identify eligible employees

Verify statutory wages, the notified ceiling, at least 30 working days, deemed working days and any Section 29 disqualification.

4. Determine calculation wages

For each eligible employee, verify actual wages earned, the notified calculation ceiling and the minimum wage applicable for each relevant period.

5. Determine minimum and maximum liability

Calculate minimum bonus at 8⅓% or ₹100, whichever is higher, and maximum bonus at 20%.

6. Obtain verified financial inputs

Determine statutory gross profit, admissible depreciation, direct tax, further prescribed deductions, available surplus and allocable surplus.

7. Apply set-on and set-off

Verify brought-forward balances, year of origin, expiry, oldest balance first and the current-year amount to be carried forward.

8. Finalise the bonus rate

Determine the rate payable within the statutory range of 8⅓% to 20%.

9. Apply adjustments and deductions

Account for customary or interim bonus under Section 37 and permissible financial-loss deductions under Section 38.

10. Pay and preserve evidence

Credit the final amount to employees’ bank accounts within the permitted period. Preserve eligibility workings, wage notifications, attendance, employee-wise calculations, financial workings, set-on or set-off statements, adjustment records and payment evidence.

Common Bonus Compliance Errors

Employers should avoid:

treating the eligibility ceiling and calculation ceiling as the same amount;
assuming an employee above the eligibility ceiling remains eligible on capped wages;
applying one common minimum wage across different states or categories;
ignoring minimum-wage revisions during the accounting year;
calculating every employee’s annual wage as monthly wage multiplied by 12;
excluding statutory deemed working days;
treating a charge-sheet or suspension as automatic disqualification;
using ordinary accounting profit as statutory gross profit;
ignoring brought-forward set-on and set-off balances;
using net bonus after employee-specific deductions for set-on or set-off computation;
adjusting an unrelated ex gratia payment without examining its nature;
paying statutory bonus in cash;
treating contractor compliance as entirely outside principal-establishment oversight;
missing the eight-month payment deadline; and
failing to preserve supporting calculations and records.

Conclusion

Payment of bonus under the Code on Wages is an integrated legal process covering establishment applicability, employee eligibility, calculation wages, minimum and maximum bonus, allocable surplus, set-on and set-off, contractual employees and the payment deadline.

Correct compliance requires coordination between HR, payroll, finance, contractors and the labour-law compliance team. Employers must distinguish the two wage ceilings, apply the correct period-wise minimum wage, use wages actually earned, obtain verified financial inputs, preserve year-wise set-on and set-off records, document adjustments and complete payment through bank credit within the prescribed period.

A mechanically applied percentage is not enough. Statutory bonus must be supported by an accurate eligibility assessment, legally correct wage base, verified financial computation and complete payment record.