Payment of Bonus Act, 1965

Every year around bonus season, the same question comes up in payroll teams: how much are we required to pay, and to whom? The Payment of Bonus Act, 1965, now the Code on Wages, 2019, answers both, in more detail than most people expect.
This guide walks through who the law covers, how bonus is calculated, when it has to be paid, and what happens if it isn’t. The rules apply the same way whether you’re in manufacturing, retail, or services.

What Is the Payment of Bonus Act, 1965?

The Payment of Bonus Act, 1965 turned 60 last year, and was repealed the same year: its rules now live in the Code on Wages, 2019. Enacted on May 25, 1965, it made one thing compulsory, and the Code kept it that way: if your business turns a profit, employees get a legal share of it.
Under the law, a bonus is a legal right, not a favour an employer chooses to hand out. It comes with its own rules on who qualifies, how much they get, and by when.
Definition: A bonus under this law is a share of company profits paid to eligible employees. It’s distinct from an ex-gratia or discretionary bonus, which employers pay out of goodwill, not obligation.
The law promises two things: a minimum bonus, paid even if the company runs into losses, and a bigger one when profits allow for it.

Who does it apply to?

Every factory employing 10 or more workers, and every other establishment employing 20 or more people, on any day of the accounting year. This covers permanent, temporary, casual, and contract staff, as long as they clear the eligibility bar (covered next).
A handful of organizations sit outside the law’s reach: LIC, government and local authority employees, and non-profit or charity-run institutions.

Eligibility Criteria for Bonus

Two numbers trip up almost everyone here: 21,000 and 7,000. Mix them up and your payroll math goes sideways.

Salary threshold for eligibility

₹21,000 is the eligibility ceiling. If an employee’s salary (basic pay plus dearness allowance) is at or below this, a figure carried forward unchanged from the 2015 Amendment to the old Act into Section 26 of the Code, they qualify for a bonus.
₹7,000 is a different number: the calculation ceiling. Someone earning ₹15,000 a month is eligible (since that’s under ₹21,000), but their bonus is worked out as if they earned only ₹7,000, or the minimum wage, whichever is higher, also unchanged under the Code.
Quick distinction: ₹21,000 decides who’s eligible. ₹7,000 decides how much they get. They’re not the same number, and mixing them up is the single most common bonus-calculation mistake.

Minimum working days requirement

On top of the salary math, there’s a working-days rule: an employee needs at least 30 working days in the accounting year to qualify. Permanent, temporary, casual, or on contract, the rule applies the same way to all of them, unchanged under the Code.

Employees not eligible for bonus

Clear both hurdles above and you can still lose your bonus. Under the old Act’s Section 9, now Section 29 of the Code, an employee is disqualified if they’re dismissed from service for:

• Fraud
• Riotous or violent behaviour on the employer’s premises
• Theft, misappropriation, or sabotage of company property

What’s new: The Code adds a fourth disqualifying ground that wasn’t in the old Act, dismissal following a conviction for sexual harassment. Worth flagging in any internal bonus policy that still lists only the original three grounds, and worth cross-referencing your POSH process, since a sexual harassment conviction now has a direct bonus consequence too.

Bonus Calculation Method

Once you know who’s eligible, the next question is how much.

Minimum and maximum bonus rates

Every eligible employee gets a minimum bonus of 8.33% of annual wages, or ₹100, whichever is higher, even in a year the company posts a loss. When the numbers work out, that bonus can go as high as 20% of annual wages. Both figures are unchanged under the Code on Wages.

The formula

Bonus = Salary (capped at ₹7,000/month, or minimum wage if higher) × Bonus rate (8.33% to 20%)
Only the portion of salary up to ₹7,000 a month goes into this formula, even if the employee’s actual salary is higher, up to the ₹21,000 eligibility ceiling.

A worked example

Take an employee earning ₹15,000 a month. They’re eligible, but the bonus is calculated on the capped ₹7,000, not the full ₹15,000.

• At the minimum rate: ₹7,000 × 12 × 8.33% ≈ ₹7,000 for the year
• At the maximum rate: ₹7,000 × 12 × 20% = ₹16,800 for the year

Where the money comes from: allocable surplus

Bonus payouts are funded from the allocable surplus: 60% of available surplus for banking companies, 67% for every other establishment, per Section 31 of the Code. Available surplus itself is what’s left after depreciation, taxes, and other prior charges.

Set-on and set-off

Paid more than the minimum bonus in a good year? That extra can be carried forward (set-on) to cover minimum bonus obligations in a leaner year (set-off), within a 4-year window, smoothing out payouts across good years and bad. This mechanism carries over unchanged.

A new wrinkle: the 50% wage rule

What’s new: The Code on Wages defines “wages” with a proviso: if an employee’s excluded pay components (allowances, bonus, and similar) add up to more than 50% of their total remuneration, the amount over that 50% line gets added back into “wages” for statutory purposes. This mostly matters for gratuity and PF, but it’s worth knowing it exists if your bonus policy cross-references the same wage definition elsewhere in your payroll setup.
Rule of thumb: The ₹7,000 cap applies to the calculation, not to who’s eligible. Keep the two separate and the rest of the math is straightforward.

Payment Timeline and Compliance Requirements

Getting the calculation right is only half the job. Paying on time and keeping the paperwork straight matters just as much.

The deadline

Bonus must be paid within 8 months of the close of the accounting year, per Section 39 of the Code (unchanged from the old Act), or within 1 month of a dispute settlement or award, if there’s been one. If your accounting year ends March 31, that means the deadline is November 30.

The registers you need

This is where the recodification actually changed something. The Code on Wages (Central) Rules, 2026, notified on May 8, 2026 (G.S.R. 343(E)), repealed 17 sets of subordinate rules, the Payment of Bonus Rules, 1975 among them. The bonus-specific Forms A, B, C and D no longer exist as separate registers.
What you maintain now, for wages and bonus alike:

• Form I: Employee Register.
• Form IV: Register of Wages, Overtime, Advances, Fines and Deductions.
• Form IX: Attendance Register-cum-Muster Roll.
• Form V: the wage slip issued to each employee, physically or electronically, on or before wages are paid.

These can be kept electronically or physically, and must be preserved for 5 years after the last entry in them. The set-on and set-off mechanism survives the change: excess allocable surplus above the maximum bonus payable carries forward for up to 4 accounting years, and a shortfall against the minimum bonus carries forward as set-off the same way.
If you still need the old formats for FY 2025-26 or earlier records, here’s a free Form C template.
Employers also need to put up a notice at the workplace, in English and the local language, spelling out bonus rates, payment dates, and how they were worked out.

The annual return

There is no longer a bonus-specific annual return. The old Form D filing, due within 30 days of disbursing bonus, went with the 1975 Rules; bonus records now sit inside the consolidated registers above rather than in a separate return to the Labour Department.
Note: Missing this deadline isn’t just an oversight, it’s a compliance violation with penalties attached, covered next.

Penalties for Non-Compliance

Under the old Act, non-payment of bonus, unauthorised deductions, or obstructing a labour inspector could mean imprisonment of up to 6 months, a fine, or both. The original Act set the fine at ₹1,000; the 2007 Amendment raised it to ₹7,500 and tightened enforcement. Not keeping the required registers in order carried a separate fine, up to ₹7,500. These old-Act figures are now superseded; the current Code figures are in the callout below.
Under the old Act’s Section 29 (a different Section 29 from the Code’s disqualification provision mentioned earlier, the numbering just happens to collide), if a company falls foul of the law, every person in charge at the time, directors, managers, HR heads, is personally liable, unless they can prove they had no knowledge of or role in it. This carries forward as Section 55 of the Code, “Offences by companies,” with the same due-diligence defence.
What’s changed: Section 54 of the Code on Wages, 2019 replaces the old flat ₹7,500 fine with a graded structure. A bonus shortfall draws a fine up to ₹50,000 first time, rising to imprisonment up to 3 months or a fine up to ₹1,00,000 on repeat within 5 years. Other contraventions, like obstructing an inspector, draw up to ₹20,000; register failures draw up to ₹10,000. New this time: first-time offenders under those lighter clauses get a written notice and a chance to fix it before prosecution.
Worth remembering: Personal liability is the sting in the tail here. “The company will handle it” doesn’t hold up if you were the one in charge at the time.

Key Amendments to the Act

The recodification (2025)

The most recent and biggest change: the Act’s repeal and replacement by the Code on Wages, 2019, effective November 21, 2025. The eligibility and calculation ceilings, and the 8.33%–20% range, all carried over unchanged; what’s new is a fourth disqualification ground (sexual harassment conviction, at Section 29), a graded penalty structure in place of the old flat fine (at Section 54), and the Code-wide 50% wage rule, all covered above.

2015: the one that matters most

The 2015 Amendment nearly doubled the eligibility ceiling, from ₹10,000 to ₹21,000 a month, bringing a lot more employees, especially in retail, IT, and other services roles, under the law’s cover for the first time. It also pushed the calculation ceiling up from ₹3,500 to ₹7,000, which meant meaningfully bigger payouts for lower-paid staff. For most companies today, these are still the figures that govern their bonus cycle.

The earlier changes, briefly

Earlier changes set the groundwork. The 1976 Amendment introduced the set-on and set-off system that’s still used to carry bonus surpluses and deficits across years. The 1985 Amendment revised wage ceilings and penalty amounts to keep pace with rising salaries. The 2007 Amendment raised penalties further and cleared up some calculation grey areas that used to end up in disputes between employers and employees.
Rule of thumb: Any bonus policy that still refers to the old ₹10,000 or ₹3,500 figures, or to the Payment of Bonus Act by name as the operative law, is running on outdated references. Check the ceiling and the citation both.