Payment of Bonus Act

What it is

The Payment of Bonus Act, 1965 requires certain employers to pay employees an annual bonus, distinct from any discretionary or performance bonus a company might choose to pay on top. It's meant to let employees share in the profits — or, in a loss-making year, a minimum guaranteed amount — generated by the business.

Who it applies to

The Act applies to establishments employing 20 or more people, and — within a covered establishment — to employees whose wages fall at or below a wage eligibility ceiling set by the government. That ceiling has been revised over the years by amendment, most recently in 2015, so it should be confirmed against the current statutory figure rather than assumed fixed.

How the amount is calculated

The Act sets a band rather than a single rate: the statutory minimum bonus is 8.33% of the employee's salary or wages for the accounting year — payable even in a loss-making year, subject to conditions — and the maximum required bonus is 20% of salary or wages, with the actual figure within that band depending on the employer's "allocable surplus" as defined under the Act. These 8.33%–20% bounds have stayed stable for a long time and can be treated as reliable; the wage ceiling that determines who's eligible in the first place is the part most likely to move with a future amendment.

Why it matters for payroll

Bonus computations under the Act require a specific set-aside and allocable-surplus calculation, separate from routine payroll processing. It's typically an annual, not monthly, exercise, and needs its own audit trail since it directly affects statutory compliance filings.