Bonus

When an employer says bonus, it usually means a performance payment decided each year. When the law says bonus, it means something else entirely: a statutory share of the employer's results, payable to employees below a wage threshold, at a minimum rate whether or not the employer made a profit.

The provisions sit in Chapter IV of the Code on Wages, 2019, in force since 21 November 2025, which repealed the Payment of Bonus Act, 1965 and carried its scheme forward with changes. The shape of the obligation is unchanged: a class of eligible employees, a minimum percentage that must be paid regardless of profit, a maximum beyond which the employer need not go, and a computation run on a capped wage figure rather than on actual pay. Three details did change, and each is set out below: the calculation ceiling is now floored at the minimum wage, a fourth disqualification ground was added, and bonus must be paid by bank credit.

The reason this matters practically is that the two payments are frequently conflated. An employer that pays a generous performance bonus in June and nothing else has not necessarily met its statutory obligation, and the shortfall accrues without anyone raising it, because employees receiving a payment rarely ask whether it was the right one.

Start with a question that comes before eligibility, because it decides whether any of this applies at all.

The bonus chapter applies only to an establishment in which twenty or more persons are employed, or were employed on any day during the accounting year. A smaller establishment is outside it entirely. The Code also excludes a list of employers outright, whatever their size: the Life Insurance Corporation, seamen, registered dock workers, employees of Government departments and local authorities, the Indian Red Cross and similar institutions, universities and other educational institutions, non-profit hospitals, chambers of commerce and social welfare institutions, the Reserve Bank, specified public sector financial institutions, and certain inland water transport establishments.

For an establishment that is in, the position is this.

Two of these rows cause most of the confusion. The eligibility threshold and the computation ceiling are different figures doing different jobs: the first decides whether an employee is in at all, the second caps the number the percentage is applied to. An employee can be eligible and still have their bonus computed on less than they actually earn.

Note what the Code does and does not fix. The percentages, the thirty days, the eight months and the twenty-employee threshold are in the Code itself. Neither rupee figure is: both the eligibility threshold and the calculation ceiling are left to notification by the appropriate government, so the familiar twenty-one thousand and seven thousand from the Payment of Bonus Act, 1965 should not be quoted as though the Code contained them. What the Code does add is the whichever-is-higher rule on the calculation ceiling, which floors the computation at the applicable minimum wage. Where the minimum wage exceeds the notified ceiling, it is the minimum wage that governs the calculation.

The entitlement is not unconditional. An employee is disqualified from receiving bonus if dismissed from service for any of four grounds: fraud; riotous or violent behaviour while on the premises of the establishment; theft, misappropriation or sabotage of any property of the establishment; or conviction for sexual harassment.

The fourth ground is new. The Payment of Bonus Act, 1965 had only the first three, and the Code added conviction for sexual harassment when it consolidated the chapter. Guidance written before November 2025, including a good deal that is still circulating, lists three grounds and is now incomplete. Note also how the fourth is framed: it requires a conviction, not a finding by an internal committee under the sexual harassment legislation, and like the others it operates only where the employee has been dismissed.

Two further things are worth stating plainly.

• The disqualification follows dismissal for those specified reasons. It is not a general power to withhold bonus from someone the employer is unhappy with, and it does not extend to poor performance.
• Where the ground is made out, the disqualification is total rather than proportionate.

Separately, the employer may deduct from the bonus payable for an accounting year any puja or other customary bonus paid in that year, and any part of the bonus paid before it fell due. Where an employee is found guilty of misconduct causing financial loss to the employer, the amount of that loss may be deducted from the bonus payable for that accounting year only, and not carried into another year. And where an employee has not worked all the working days in the year, the minimum bonus is proportionately reduced. These are specific permissions with their own conditions, not a general right of set-off.

The practical point is that withholding statutory bonus is a decision with a legal basis or it is a shortfall. There is no middle position where it is simply management discretion.

Everything above concerns the statutory entitlement. A performance bonus, retention bonus, joining bonus or festival ex gratia is a contractual or discretionary payment, and it is governed by what the employer said it would do.

Three points determine whether such a payment causes problems.

• Whether the terms were stated before the period. A target set out in advance, with the measure, the scale, the decision-maker and the exit treatment written down, is defensible. A payment decided afterwards against unstated criteria is where disputes come from.
• Whether it has become customary. A payment made in full every year for several years is relied upon, and withdrawing it will be experienced as a pay cut whatever the policy says. In some contexts a long-standing customary payment can be treated as more than discretionary.
• Whether it is being used to discharge the statutory obligation. If it is, say so explicitly and adjust it against what is due, which the Code permits, rather than assuming one absorbs the other.

Bonus of either kind is taxable when paid, and it is paid in one month against a year of work. That produces the same effect as any large one-off payment: the projected annual income jumps, and the tax collected in that month rises sharply. Where the payment crosses a surcharge threshold, marginal relief has to be applied in the same computation.

Whether bonus forms part of the base for provident fund and other contributions depends on the statutory definition of wages rather than on the policy document. Most structures treat it as outside, and that is usually right, but it is worth confirming for the specific payment rather than assuming.

On presentation, two habits avoid most queries. Show statutory bonus as its own component rather than merged into a performance payment, so an employee can see which is which. And announce the gross with an indication of the deduction, because employees compare what was announced with what arrived and read the difference as a reduction of the award.