A statutory bonus is a payout that is required by law. The payment of a statutory bonus under the Payment of Bonus Act 1965 is a matter of entitlement for the employee, not of choice for the employer. Bonuses are paid by employers to encourage their staff to work to their full potential.
Certain groups of employees are eligible for a statutory bonus under the Payment of Bonus Act of 1965, which is computed using the employee's pay and the employer's earnings.
Factories and enterprises with 20 or more employees are covered by the Act (or in some states, factories and establishments with 10 or more employees). Employees having at least 30 working days of employment in the applicable accounting year are eligible for a statutory bonus if they meet specific criteria. We've laid up everything you need to know about the act below:
- There is a minimum bonus of 8.33 percent and a maximum bonus of 20% of salaries.
- Statutory Bonus is due within 8 months of the end of the fiscal year.
- All employees whose monthly salaries do not exceed Rs. 21,000 are eligible for this benefit.
- If an employee's wages are equal to or greater than Rs. 7,000, or the government's minimum wage, the bonus is paid in accordance with the employee's pay.
Employee’s eligibility to revive bonus
Only employees who have worked in a business for at least thirty (30) days in a calendar year are eligible for a bonus. If an employee's services are terminated due to fraud, rioting, or violent behaviour on the premises of the establishment. Such an individual may be disqualified from obtaining a bonus from his employer in such circumstances.
Deductions from the amount of bonus payable
If an employee is found guilty of misconduct during an accounting year that results in a financial loss to the employer, the employer may deduct the amount of the loss from the amount of bonus payable to the employee.
Special provisions pertaining to new establishments
For the first five years, startups and new businesses have been exempted from paying bonuses. In the first five (05) years after the accounting year in which the new establishment/startup begins operations. Only in years when the employer makes a profit can the employer pay a Statutory Bonus.
Payment method and time limit for the payment of the bonus
All amounts due to the employee as a bonus under the Act's provisions must be paid in cash. This means that bonuses cannot be disguised as perquisites or allowances by the employer.
A statutory bonus must be paid within eight months of the year's end. For example, a bonus for the fiscal year ending March 31, 2021, must be paid by November 30, 2021.
Exemption in payment of bonus
The payment of the minimum bonus may be excused by competent authorities in special cases, taking into consideration relevant conditions of a specific factory or business that is losing money and may be given for a limited time only. The reasons for the occurrence of losses to the company, as well as the reasons and cleverness in the occurrence of losses in a row, may be crucial considerations.
Minimum and Maximum bonus
- Minimum Bonus- According to the Act, an employee should be awarded a minimum bonus of 8.33 percent of his or her income or wage received during the accounting year or Rs. 100, whichever is higher.
- Maximum Bonus- It is crucial to note that the Act sets a maximum bonus payout of 20% of the employee's income or compensation earned throughout the accounting year.
Penalty when the bonus is not paid or contravened in any manner
If a person violates the requirements of this Act in any way, he or she shall be punished by imprisonment for a period not exceeding six (06) months, a fine of Rs. 1000, or both.
How to calculate Statutory Bonus?
- Bonus is payable - If an employee's basic salary plus dearness allowance is below Rs. 21,000.
- Bonus is not payable - If an employee's basic salary plus dearness allowance exceeds Rs. 21,000 per month.
The bonus is calculated using two different formulae.
Case I- When the salary is equivalent to or less than Rs. 7000 then the bonus is calculated on the actual amount by using the following formula:
Bonus= Salary x 8.33/100
For example, If the monthly salary of A is equal Rs. 5,000
Bonus = 5,000 x 8.33/100 = 416.5 per month (Rs. 4,998 per year)
Case II- When the salary is higher than Rs. 7,000 then the bonus is computed on Rs. 7000 by using the following formula:
Bonus = 7,000 x 8.33/100
For example, If the monthly salary of B is equal Rs. 12,000
Bonus = 7,000 x 8.33/100 = 583 per month (Rs. 6997 per year)
How is Statutory Bonus different from Regular Bonus?
Employers utilise bonuses to motivate their employees to perform to the best of their abilities. The Payment of Bonus Act of 1965 sets a statutory bonus, which is commonly confused with a company's incentive bonus. Bonus is a general term for a payment tied to performance or productivity as an incentive or any traditional bonus given on festivals, whereas Statutory Bonus refers to a bonus paid under the Payment of Bonus Act, 1965.
A statutory bonus is required by law, as opposed to an incentive bonus, which is given out of pocket. The payment of a statutory bonus under the Payment of Bonus Act is based on the employee's entitlement rather than the employer's preference.
The payment of bonus act doesn’t apply to the following sections of employees
- Employees of the Life Insurance Company, as specified under Section 42 of the Merchant Shipping Act of 1958.
- Employees employed by firms who have registered or been listed under the Dock Workers Act of 1948.
- Employees in any industry under the supervision of the federal or state governments.
- Employees of the Indian Red Cross Society or non-profit educational institutes.
- Personnel of the contractor who works on the construction site Reserve Bank of India (RBI) employees
- Employees are covered by Section 3 or Section 3a of the State Financial Corporation Act (SFC) 1951.
- Employees of the IFCI, the Deposit Insurance Corporation, and the Agri-Resonance Corporation.
- Any financial institution is an establishment in the public sector which the Central Government notifies.
- The employees of Inland Water Transport
The minimal amount of statutory bonus payable to an employee should be in accordance with the payment of bonus act's rates and computations. The act makes no provision for an employer to give a bigger bonus to his or her employee voluntarily.