THE PAYMENT OF

BONUS ACT 1965

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What is the meaning of Bonus?

Bonus means something extra than what is due.

All employees are paid wages, incentives and
allowances etc. In addition to above once in a
year they will be paid some lump sum money
linked to profit. So bonus can be called as profit
sharing or deferred wage.
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Who is an employee?

Employee means any person other than an

apprentice employed on salary or wage not
exceeding Rs.10000/- per month in any
industry to do any skilled, or unskilled
manual,
supervisory,
managerial,
administrative, technical or clerical work for
hire or reward, whether the terms of
employment be express or implied.
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Where can we follow this act?

This act will applicable to

(a) Factories
(b) Shops & Establishments
(c) Motor Transports Undertaking
(d) Plantation

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What is the meaning of Accounting year?

Accounting year means
In relation to a corporation, the year ending on the day on which the
books and accounts of the corporation are to be closed and balanced;
In relation to a company, the period in respect which any profit and
loss account of the company laid before it in annual general meeting is
made up, whether that period is year or not:
In any other case
The year commencing on the 1st day of April or
If the accounts of an establishment maintained by the employer
thereof are closed and balanced on any day other than the 31st day of
m\March, then, at the option of the employer, the year ending on the
day on which its accounts are so closed and balanced:

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What is the meaning of wage?

Wage means Basic pay and

Dearness Allowance.

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How to calculate Net Profit?

Add Back
1. Provision for
Bonus to employees
Depreciation
Direct taxes, including the provision, if any, for
previous accounting years.
Development rebate, investment allowance,
development allowance reserve
Any other reserves.
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2. Bonus paid to employees in respect

of previous account years.

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3. The amount debited in respect of gratuity paid

or payable to employees in excess of the
aggregate of
a. The amount, if any , paid or provided for
payment to, an approved gratuity fund and
b. The amount actually paid to employees on the
retirement or on termination of their employment
for any reason.

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4. Donations in excess of the amount

admissible for income tax.
5. Any annuity due, or commuted value
of any annuity paid, under the
provisions of sec.280D of the Income
Tax Act during the accounting year.
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6. Capital expenditure (other than capital

expenditure on scientific research which is
allowed as a deduction under any law for
the time being in force relating to direct
taxes ) and capital losses (other than losses
on sale of capital assets on which
depreciation has been allowed for income
tax or agriculture income tax)
7. Losses of , or expenditure relating to, any
business situated outside India.
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8. Income, profits or gains (if any)credited

directly to reserves, other than
Capital receipts and capital profits (including
profits in the sale of capital assets on which
depreciation has not been allowed for income
tax or agricultural income tax)
Profits of, and receipts relating to, any
business situated outside India
Income of foreign concern from investments
outside India.
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Deduct
1.Capital receipts and capital profits (other than profits on the
sale of assets on which depreciation has been allowed for
income tax or agricultural income tax).
2.Profits of, and receipts relating to, any business situated
outside India
3.Income of foreign concerns from investments outside.
4.Expenditure or loss (if any) debited directly to reserves,
other than
.Capital expenditure and capital losses (other than losses on
sale of capital assets on which depreciation has not been
allowed for income tax or agricultural income tax)
.Losses of any business situated outside India.

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1.In the case of foreign concerns proportionate administrative

(overhead) expenses of Head office allocable to Indian
business.
2.Refund of any direct tax paid for previous accounting years
and excess provisions, if any, or previous accounting years
relating to bonus, depreciation, taxation or development rebate
or development allowance, if written back.
3.Cash subsidy, if any, given by the Government or by any
corporate body established by any law for the time being in
forced or by any other agency through budgetary grants,
whether given directly or through any agency for specified
purposes and the proceeds of which are reserved for such
purposes of which are reserved for such purposes.
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How to calculate available surplus?

The available surplus in respect of any accounting year

shall be the gross profits for that year after deducting there
from the sums referred to in section 6:
(Provided that the available surplus in respect of the
accounting year commencing on any day in the year 1968
and in respect of every subsequent accounting year shall
be the aggregate of-

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(a) the gross profits for that accounting year after deducting there from
the sums referred to in section 6; and
(b) an amount equal to the difference between--(i) the direct tax, calculated in accordance with the provisions of
section 7, in respect of an amount equal to the gross profits of the
employer for the immediately preceding accounting year; and
(ii) the direct tax, calculated in accordance with the provisions of
section 7, in respect of an amount equal to the gross profits of the
employer for such proceeding accounting year after deducting there
from the amount of bonus which the employer has paid or is liable to
pay to his employees in accordance with the provisions of this Act for
that year)

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How to calculate Allocable Surplus?

Out of the available surplus derived as above, the

allocable surplus is calculated as follows.
If the employer, being a company (other than a
banking company) which has not made the
arrangements prescribed under the income Tax Act
for the declaration and payment of dividends within
India, payable out of its profit, in accordance with the
provision of sec.194 of the IT Act, 67% of the
Available Surplus in the Accounting year is the
Allocable surplus.
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In any other case 60% of the Available

Surplus is allocable surplus.
The allocable surplus calculated in the said
manner is to be distributed by way of bonus
to workmen.
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What is the minimum bonus payable to

an employee?
The Minimum Bonus payable is 8.33%
of the earned wages.
What is the maximum bonus payable to
an employee?
The maximum bonus payable is 20% of
the earned wages.
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What can be the wage limit for calculation of Bonus?

It is only Rs.3500/- per month.

Eg. If anybody gets wages between Rs.3500/- and
Rs.10000/- then for the purpose of calculating the
bonus we have limit it to Rs.3500/- only.

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How many days one has to work for

receiving bonus in a particular year?
It is 30 days.

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Under what circumstances the management did not pay bonus to an

employee?

If we need not pay bonus to an employee if he

dismissed from services for
(a) Fraud or
(b) Riotous or violent behaviour while on the
premises of the establishment; or
(c) theft, misappropriation or sabotage of any
property of the establishment.
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What is the meaning of Set On?

If in a given year, the allocable surplus exceeds the maximum bonus
amount, such surplus subject to a ceiling of 20% shall have to be
carried forward to the succeeding year upto and inclusive of the fourth
accounting year, to be utilized for the purpose of payment of bonus,
the methods to be followed in this behalf is set out in the Fourth
schedule to the payment of Bonus Act. In any succeeding accounting
year there is no available surplus, or allocable surplus, or the allocable
surplus falls short of the minimum bonus, the amount so carried
forward has to be utilized for paying the bonus. The statutory
obligation for setting on is confined only to four succeeding
accounting years, where after the employer is free to make such use of
the amount if any, remaining as he thinks fit.
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What is the meaning of Set-Off?

Where for any accounting year, there is no available
surplus or the allocable surplus in respect of that year falls
short of the amount of minimum bonus payable to the
employees in the establishment under section 10 and there
is no amount or sufficient amount carried forward and set
on under sub-section (1) which could be utilized for the
purpose of payment of the minimum bonus, then, such
minimum amount of the deficiency, as the case may be,
shall be carried forward for being set off in the succeeding
accounting year and so on up to and inclusive of the fourth
accounting year.
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Example for Set on and Set off

If the total amount of bonus equal to 8.33 % of
the annual salary or wage payable to all the
employees is assumed to be Rs.104167/-.
Accordingly, the maximum bonus to which all
the employees are entitled to be paid (twenty
per cent of the annual salary or wage of all the
employees) would be Rs.250000/-.

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Year

Amount equal to 60% or Amount Set on or

67% , as the case may be of payable as Set-off of
available surplus allocable as bonus
the year
bonus.
carried
forward
Rs.
Rs.
Rs.
104167
104167
nil
635000
250000
Set
on
250000
220000
250000
Nil
(inclusive
of
Rs.30000
from year
2)
375000
250000
Set
on
125000

1
2
3

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Total set
on or set
off carried
forward
Rs.
nil
250000

year
2

Set
on 2
220000

Set
on
220000
2
125000
4
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Year

Amount equal to 60% or Amount Set on or

67% , as the case may be of payable as Set-off of
available surplus allocable as bonus
the year
bonus.
carried
forward
Rs.
Rs.
Rs.
140000
250000( i Nil
nclusive
of 110000
from year
2)

310000

100000

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Total set
on or set
off carried
forward
Rs.
year
Set
on
110000
2
125000
4

250000

Set
on Set
on 2
60000
125000
4
60000
6
250000
nil
Set on
(inclusive
35000
6
of 125000
from year
4
and
25000
from year
6)

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Year

Amount equal to 60% or Amount Set on or

67% , as the case may be of payable as Set-off of
available surplus allocable as bonus
the year
bonus.
carried
forward
Rs.
Rs.
Rs.
Nil (due to loss)
104167
Set
off
(inclusive 69167
of 35000
from year
6)

10000

10

215000

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104167
104167
(after
setting off
69167
from year
8
and
41666
from year
9)

Total set
on or set
off carried
forward
Rs.
Set off
69167

Set
off Set off
94167
69167
94167
nil
Set off
52501

year
8

8
9
9

28

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