Payment of Bonus Act, 1965 - Anil Associates
The Act is applicable to (a) any factory employing 10 or more persons where any processing is carried out with aid of power
(b) Other establishments (established for purpose of profit) employing 20 or more persons.
Minimum bonus payable is 8.33% and maximum is 20%. Bonus is payable annually within 8 months from close of accounting year.
Bonus is payable to all employees whose salary or wages do not exceed Rs 10000/- per month provided they have worked for at least 30 days in the accounting year. However, for calculation of bonus, maximum salary of Rs 3,500 is considered. ie 8.33% of 3500/- only as if .
Thus, maximum bonus payable to employee is 20% in any accounting year.
Salary or wages for calculating bonus - Where the salary or wage of an employee exceeds Rs 3,500 per month, the bonus payable to such employee under sections 10 or 11 shall be calculated as if his salary or wages were Rs 3,500 per month. [section 13]. In other words, employees drawing salary or wages above Rs 3,500 per month, are entitled to bonus on the basis of Rs 3,500 per month salary only
Once the Act is applicable, it continues to apply even if number of employees fall below 20.
Establishments to which the Act is applicable - The Act applies to— (a) every factory; and (b) every other establishment in which twenty or more persons are employed on any day during an accounting year. [section 1(3)].
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The words used are ‘number of persons employed’. Hence, all persons employed are to be considered, including those who are not eligible for bonus. Thus, all employees including those, whose salary or wages exceed Rs 10000 per month will have to be considered for purpose of deciding eligibility.
Who are eligible for bonus - Employees drawing salary or wages upto Rs 10000 per month are entitled to bonus, if he has worked for at least 30 working days in an accounting year.
Salary above Rs. 3,500 is not considered for calculation of Bonus. [section 12]. Employee drawing salary/wage exceeding Rs 10000 is not entitled to any bonus under the Act.
Thus, minimum bonus @ 8.33% will be Rs 3,500 and maximum @ 20%
Eligibility for bonus if worked for minimum 30 days - Every employee shall be entitled to be paid be his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment fornot less than thirty working days in that year. [section 8]
Higher percentage arises for the following basis of profit, allocable and available surplus set on and set off principle:
Computation of amount available for distribution as bonus - The establishment has to prepare a balance sheet and profit and loss account of the year and calculate the ‘gross profit’, ‘available surplus’ and ‘allocable surplus’ as per method and formula given in Bonus Act.
The first step is to calculate ‘Gross Profit’. As per section 4, the gross profit in respect of any accounting year is required to be calculated as per First Schedule to Act in case of banking company and as per second schedule in case of other establishments. After calculation of ‘Gross Profit’ as per section 4, next step is to calculate ‘Available Surplus’. As per section 5, ‘available surplus’ is calculated by deducting sums as specified in section 6 from ‘gross profit’ arrived at as per section 6 and adding difference equal to income tax on the bonus paid in the preceding year.
Thus, Available Surplus is equal to Gross Profit [as per section 4] less prior charges allowable as deduction u/s 6 plus amount equal to income tax on bonus portion calculated as per proviso (b) to section 5.
Allocable surplus is equal to 60% of ‘available surplus’ calculated as per provisions of section 5. [In case of company which does not deduct tax at source as per provisions of section 194 of Income Tax Act, ‘allocable surplus’ will be 67% of ‘available surplus’.
Thus, maximum bonus payable to employee is 20% in any accounting year.
Salary or wages for calculating bonus - Where the salary or wage of an employee exceeds Rs 3,500 per month, the bonus payable to such employee under sections 10 or 11 shall be calculated as if his salary or wages were Rs 3,500 per month. [section 13]. In other words, employees drawing salary or wages above Rs 3,500 per month, are entitled to bonus on the basis of Rs 3,500 per month salary only
Once the Act is applicable, it continues to apply even if number of employees fall below 20.
Establishments to which the Act is applicable - The Act applies to— (a) every factory; and (b) every other establishment in which twenty or more persons are employed on any day during an accounting year. [section 1(3)].
‘
The words used are ‘number of persons employed’. Hence, all persons employed are to be considered, including those who are not eligible for bonus. Thus, all employees including those, whose salary or wages exceed Rs 10000 per month will have to be considered for purpose of deciding eligibility.
Who are eligible for bonus - Employees drawing salary or wages upto Rs 10000 per month are entitled to bonus, if he has worked for at least 30 working days in an accounting year.
Salary above Rs. 3,500 is not considered for calculation of Bonus. [section 12]. Employee drawing salary/wage exceeding Rs 10000 is not entitled to any bonus under the Act.
Thus, minimum bonus @ 8.33% will be Rs 3,500 and maximum @ 20%
Eligibility for bonus if worked for minimum 30 days - Every employee shall be entitled to be paid be his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment fornot less than thirty working days in that year. [section 8]
Higher percentage arises for the following basis of profit, allocable and available surplus set on and set off principle:
Computation of amount available for distribution as bonus - The establishment has to prepare a balance sheet and profit and loss account of the year and calculate the ‘gross profit’, ‘available surplus’ and ‘allocable surplus’ as per method and formula given in Bonus Act.
The first step is to calculate ‘Gross Profit’. As per section 4, the gross profit in respect of any accounting year is required to be calculated as per First Schedule to Act in case of banking company and as per second schedule in case of other establishments. After calculation of ‘Gross Profit’ as per section 4, next step is to calculate ‘Available Surplus’. As per section 5, ‘available surplus’ is calculated by deducting sums as specified in section 6 from ‘gross profit’ arrived at as per section 6 and adding difference equal to income tax on the bonus paid in the preceding year.
Thus, Available Surplus is equal to Gross Profit [as per section 4] less prior charges allowable as deduction u/s 6 plus amount equal to income tax on bonus portion calculated as per proviso (b) to section 5.
Allocable surplus is equal to 60% of ‘available surplus’ calculated as per provisions of section 5. [In case of company which does not deduct tax at source as per provisions of section 194 of Income Tax Act, ‘allocable surplus’ will be 67% of ‘available surplus’.
Frankly, I am not able to visualise a situation where a company can legally ignore provisions of section 194 of Income Tax Act]. - -
This ‘allocable surplus’ has to be distributed as bonus among employees in proportion to the salary or wages actually earned by each employee during the year. However, this is subject to minimum 8.33% and maximum 20% as explained below.
Set off and set on provisions - It may happen that in some years, the allocable surplus is more than the amount paid to employees as bonus calculating it @ 20%. Such excess ‘allocable surplus’ is carried forward to next year for calculation purposes. This is called ‘carry forward for being set on in succeeding years’. The ceiling on set on that is required to be carried forward is 20% of total salary and wages of employees employed in the establishment. In other words, even if actual excess is more than 20% of salary/wages, only 20% is required to be carried forward. The amount set on is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not utilised in that period, it lapses [section 15(1)].
Similarly, in a particular year, there may be lower ‘allocable surplus’ or no ‘allocable surplus’ even for payment of 8.33% bonus. Such shortfall is also carried to next year. This is called ‘carry forward for being set off in succeeding years’. Thus, in every year, ‘allocable surplus’ is calculated. To this amount, set on from previous years is added. Similarly, set off, if any, from previous years is deducted. This gives amount which is available for distribution as bonus. The amount set off is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not set off in that period, it lapses. [section 15(2)]
Minimum bonus - Every employer shall be bound to pay to every employee in respect of any accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year.
While computing number of working days, an employee shall be deemed to have worked in an establishment even on the days on which (a) He was laid off (b) He was on leave with salary/wages(c) He was absent due to temporary disablement caused by accident arising out of and in course of employment and (d) Employee was on maternity leave with salary/wages. [section 14].
Payment of maximum bonus - Where in respect of any accounting year, the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent of such salary or wage. [section 11(1)]. - - In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section. [section 11(2)].
High Court Judgment:
Set off and set on provisions - It may happen that in some years, the allocable surplus is more than the amount paid to employees as bonus calculating it @ 20%. Such excess ‘allocable surplus’ is carried forward to next year for calculation purposes. This is called ‘carry forward for being set on in succeeding years’. The ceiling on set on that is required to be carried forward is 20% of total salary and wages of employees employed in the establishment. In other words, even if actual excess is more than 20% of salary/wages, only 20% is required to be carried forward. The amount set on is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not utilised in that period, it lapses [section 15(1)].
Similarly, in a particular year, there may be lower ‘allocable surplus’ or no ‘allocable surplus’ even for payment of 8.33% bonus. Such shortfall is also carried to next year. This is called ‘carry forward for being set off in succeeding years’. Thus, in every year, ‘allocable surplus’ is calculated. To this amount, set on from previous years is added. Similarly, set off, if any, from previous years is deducted. This gives amount which is available for distribution as bonus. The amount set off is carried forward only upto and inclusive of the fourth accounting year. If the amount carried forward is not set off in that period, it lapses. [section 15(2)]
Minimum bonus - Every employer shall be bound to pay to every employee in respect of any accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year.
While computing number of working days, an employee shall be deemed to have worked in an establishment even on the days on which (a) He was laid off (b) He was on leave with salary/wages(c) He was absent due to temporary disablement caused by accident arising out of and in course of employment and (d) Employee was on maternity leave with salary/wages. [section 14].
Payment of maximum bonus - Where in respect of any accounting year, the allocable surplus exceeds the amount of minimum bonus payable to the employees, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to a maximum of twenty per cent of such salary or wage. [section 11(1)]. - - In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section. [section 11(2)].
High Court Judgment:
Employer cannot bifurcate salary into allowances to calculate lesser Bonus as decided by the Delhi High court
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