Payment of bonus

1. Evolution

Bonus began in 1917 as a “war bonus”, an ex gratia payment by Bombay textile mills during the First World War. When employers tried to stop it, disputes followed, and industrial tribunals began to treat bonus as a claim workers could make where profits allowed. In 1950 the Labour Appellate Tribunal laid down the Full Bench Formula in the Bombay mill owners’ case: bonus is payable out of the profit left after prior charges such as depreciation, a return on capital and reserves. In Muir Mills Co. v. Suti Mills Mazdoor Union, 1954 INSC 111, AIR 1955 SC 170, the Supreme Court refused to treat bonus as deferred wages and tied the claim to profits.

The Bonus Commission (1961) recommended legislation, and Parliament enacted the Payment of Bonus Act, 1965, which made a minimum bonus payable even without profits. Its validity was upheld in substance in Jalan Trading Co. v. Mill Mazdoor Union, 1966 INSC 131, AIR 1967 SC 691. In Sanghi Jeevaraj Ghewar Chand v. Secretary, Madras Chillies, Grains Kirana Merchants Workers Union, 1968 INSC 155, AIR 1969 SC 530, the Court held the Act to be an exhaustive code on profit-based bonus, so excluded establishments cannot claim it outside the Act. But in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, 1976 INSC 49, (1976) 3 SCC 832, the Court held that the Act does not bar customary bonus or bonus based on conditions of service, which rest on a different footing.

2. Scope and applicability

• Chapter IV applies to establishments where 20 or more persons are or were employed on any day in an accounting year (section 41(2)) [s.1(3)].
• “Accounting year” is the year beginning 1 April (section 2(a)).
• Excluded (section 41(1)) [s.32]: LIC employees; seamen; registered dock workers; employees of Government departments and local authorities; the Red Cross and similar bodies, universities and educational institutions, and non-profit hospitals, chambers of commerce and social welfare institutions; RBI; notified public financial institutions; inland water transport on routes through another country; and establishments exempted for having a better profit-sharing scheme.
• Departments, undertakings and branches are treated as one establishment, unless a separate balance sheet and profit and loss account is kept for one (section 30) [s.3].

3. Key definitions

• Gross profits: calculated as prescribed by the Central Government (section 32) [s.4].
• Available surplus: gross profits minus the prior charges in section 34 (depreciation, direct taxes and other prescribed sums), plus an adjustment for the tax saved on the previous year’s bonus (section 33) [ss.2(6), 5, 6].
• Allocable surplus: 67 per cent of the available surplus, or 60 per cent for a banking company (section 31(1)) [s.2(4)]. Bonus is paid out of this.

Audited company accounts are normally not to be questioned, and the authority may call for the balance sheet but not disclose it without the employer’s consent (section 31(2), (3)). In a dispute, audited accounts of companies and corporations are presumed accurate (section 47) [s.23].

4. Eligibility and disqualification

An employee is eligible if he draws wages not exceeding the amount notified by the appropriate Government and has worked at least thirty days in the accounting year (section 26(1)) [s.8]. For calculation, wages above a notified figure are treated as that figure or the minimum wage, whichever is higher (section 26(2)) [s.12]. The Code leaves both figures to notification; under the 1965 Act as amended in 2015 they were ₹21,000 a month for eligibility and ₹7,000 for calculation.

An employee dismissed from service for any of the following is disqualified (section 29) [s.9]:

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

Where an employee has not worked all the working days, the minimum bonus is reduced in proportion (section 27) [s.13]. Days of lay-off, paid leave, temporary disablement from an employment accident and paid maternity leave count as days worked (section 28) [s.14].

5. Minimum and maximum bonus

• Minimum: 8.33 per cent of wages earned, or ₹100, whichever is higher, whether or not there is any allocable surplus (section 26(1)) [s.10].
• Maximum: where the allocable surplus exceeds the minimum, bonus in proportion to wages up to 20 per cent (section 26(3)) [s.11].
• Productivity bonus above the minimum may be fixed by agreement or settlement, but total bonus cannot exceed 20 per cent (section 26(5)) [s.31A].

6. Set-on and set-off: section 36

[s.15 and the Fourth Schedule.]

• Set-on: where the allocable surplus is more than the maximum bonus, the excess, up to 20 per cent of the total wage bill, is carried forward and used in the following years, up to and including the fourth accounting year.
• Set-off: where there is no available surplus, or the allocable surplus is less than the minimum bonus, and there is not enough set-on in hand, the shortfall is carried forward to be set off against surpluses in the following years, up to the fourth year.
• The oldest carried-forward amount is used first (section 36(4)).

So a loss-making employer must still pay 8.33 per cent, but recovers it from later surpluses through set-off.

7. Special provisions for certain establishments

• New establishments (section 26(6)–(9)) [s.16]: in the first five accounting years after the employer starts selling goods or services, bonus is payable only for a year in which he makes a profit (after full depreciation and set-off of past losses), without set-on or set-off. Set-on and set-off apply in modified form in the sixth and seventh years and normally from the eighth. Trial-run production does not start the clock. These rules apply also to new departments or branches of existing establishments.
• Public sector (section 40) [s.20]: the Chapter applies to a public sector establishment only if it sells goods or services in competition with the private sector and that income is at least 20 per cent of its gross income for the year.
• Customary or interim bonus already paid in the year, such as puja bonus, may be deducted (section 37) [s.17].
• Misconduct causing financial loss: the loss may be deducted from that year’s bonus (section 38) [s.18].

8. Payment, disputes, offences and penalties

• Bonus must be credited to the employee’s bank account within eight months of the close of the accounting year; the time may be extended on application, but not beyond two years in total. If a dispute is pending, payment is due within one month of the award or settlement taking effect, but the 8.33 per cent minimum must still be paid within eight months (section 39) [s.19].
• Disputes over fixing bonus, eligibility, or application to the public sector are deemed industrial disputes (section 46) [s.22]. Claims for bonus due go to the authority under section 45, with appeal under section 49.
• Agreements to give up bonus are void (section 60), and the employer bears the burden of proving payment (section 59).
• Penalties (section 54) [s.28]: paying less than due, fine up to ₹50,000, and on a repeat within five years imprisonment up to three months or fine up to ₹1 lakh or both; other contraventions, fine up to ₹20,000; record-keeping lapses up to ₹10,000. Offences by companies make the persons in charge liable (section 55), and offences punishable with fine only may be compounded (section 56).

9. Problem

A factory with 60 workers made a loss in 2025–26. It refuses bonus to all workers. Among them, A joined on 1 March 2026 and worked 25 days; B was dismissed in January 2026 for assaulting a supervisor on the shop floor; C worked the full year. Advise.

Issue. Whether bonus is payable in a loss year, and to whom.

Law. Section 26(1) makes the minimum bonus payable whether or not there is an allocable surplus, to employees within the notified wage limit who have worked at least thirty days. Section 29 disqualifies an employee dismissed for riotous or violent behaviour on the premises. Section 36(2) lets the employer carry the deficiency forward for set-off.

Application. A worked only 25 days and is not eligible. B was dismissed for violent behaviour on the premises and is disqualified. C is eligible; the loss is no defence, since the minimum bonus does not depend on profit. The factory can set off what it pays against surpluses in the next four years.

Conclusion. C (and every other eligible worker) must be paid at least 8.33 per cent of wages earned, or ₹100 if higher, within eight months of 31 March 2026. A and B get nothing. Non-payment can be pursued as a claim under section 45 or as an industrial dispute under section 46.

How this is examined

Bonus is usually a short note or a problem (eligibility, a loss year, a new establishment, whether a bonus dispute is an industrial dispute). For an essay: evolution from war bonus to the Full Bench Formula and the 1965 Act, applicability and exclusions, available and allocable surplus, eligibility and the four disqualifications, minimum and maximum, set-on and set-off, new establishments and the public sector, time limit and penalties. Name the Code section first and the 1965 section in brackets, and note that the 1965 Act was repealed by section 69 of the Code.