Created by Prof.

Pradnya Page 1 11/8/2011

PAYMENT OF BONUS ACT

Important Definition:
 Available Surplus
 Allocable Surplus
 Employee
 Accounting year
 Salary/ Wage

What is the Object of the Payment of Bonus Act, 1965?

The object of the Act is to maintain peace and harmony between
labour and capital by allowing the employees to share the prosperity of
the establishment reflected by the profits earned by the contributions
made by capital, management and labour.

To which establishments is the Act applicable?

The Act is applicable to:
a. (a) every factory
b. (b) every other establishment employing 20 or more persons.
The Government can, however, apply the Act to any establishment
employing less that 20 but not less than 10 persons. An establishment
to which the Act applies shall continue to be governed by the Act
irrespective of any fall in the number of person employed therein.
{Section 1}

Are the establishments in public sector covered by the Act?

According to sub-section (2) of Section 20, save as otherwise provided
in sub-section (1), nothing in the Act shall apply to the employees
employed by any establishment in public sector. By the said sub-
section (1) the provisions of the Act are made applicable in relation to
an establishment in public sector which sells any goods produced or
manufactured by it or renders any services in competition with an
establishment in private sector and earns income from such sale or
services or both an quantified in the said sub-section.

How to Calculate Amount that is payable as Bonus.

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 First Step: Calculate “Gross profit” ------ which is calculated as per

Schedule I (in cases of banking company) or Schedule II (in any
other cases) of the Act. (Sec 4)
 Second Step: then from this “Gross profit” sums are deductable-----
that amount is known as “Deductions from Gross profits” ----- which
is given under Section 6 of the Act.
 Then we calculate an amount as per Sec 7 called “Available
Surplus”
 Of this 67% of allocable surplus in case of Company other than
Banking Company
 And 60% of allocable surplus in any other case.

LETS SEE IN DETAIL THE CALCULATION OF THE AMOUNT

THAT IS PAYBALE AS BONUS:
I. Explanation of Sec 6 is as follows:
1. Is depreciation admissible in accordance with section 32 of
Income tax Act/ Agriculture Income Tax.
&
Not depreciation allowed by the income tax officer in
making assessment on the employer

2. Any amount by way of -----

 Development rebate }}} which the employer
is
 Investment allowances }}}} entitled to deduct
 Or Development allowances }}}} from his income under
Income Tax Act

II. Available Surplus: (Sec 5)

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(i) The gross profit for that Accounting year after deduction
u/s 6.

And

(ii) Amount = amount equal minus amount equal

to gross
to the gross profit profit of the
employer
of the employer for preceding
accounting yr
for the immediately after
deducting there from the
preceding year. amount of
bonus which
(as per sec 7i.e; Direct Tax) employer
has paid or is liable
to pay to his employee in
provision of this Act for
that yr.
(as per sec 7i.e; Direct
Tax)

III. Section 7: Calculation of Direct Tax payable by

the employer.

(Direct tax: The Direct tax is the tax which is charged on the
income or profits of the person who pays it rather than on
goods or service)

Any Direct Tax ------- Employer has to pay for the

accounting year
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 What If employer is HUF (Hindu Undivided Family) the

direct tax payable by such employer shall be calculated on the basis

that income derived by him from the establishment is his only
income.
 If employer is religious / charitable trust in this case where

the section 32 of the Income Tax Act does not apply

or
whole or any part of the income is exempt from tax under the
Income Tax
Act  then the calculation of direct tax is done as if the religious trust
or charitable trust with respect to the exempted income is a company
and in which public is substantially interested.

But while calculating the Direct tax certain things are not
considered which are as follows:
 Any loss which respect to any previous accounting year -- which
has been carried forward -- in relation to the Direct tax.
 Any exemption u/s 84 of the Income Tax Act or
 Any deduction u/s 101 (1) of The Finance Act, 1965.
 Any arrears of depreciation -------- employer is entitled to add to
the amount of allowance for depreciation for the following
accounting year u/s 32 of the Income Tax Act.

IV. What is Allocable Surplus?

Sec 2 (4) defines:

i. In case of Company (other than Banking Company)---
the employer which has not made arrangements as
prescribed under the Income Tax Act for the
declaration and payment within India of the Dividends
payable out of its profit as per section 194 of the Act.
 It has to be 67% of such available surplus.
ii. In any other cases it has to be 60 % of the available
surplus.

What is ‘Set off’ and ‘Set on’ of Allocable Surplus?

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1) Where the Allocable Surplus exceeds the amount of

Maximum Bonus that has to be payable --- the excess
amount shall be subject to 20% of total salary or wage in
that accounting year. ------ which is carried forward to
the succeeding accounting year including the 4th
accounting year --- is called ‘SETON’ of Allocable
Surplus or ‘’carried forward for being SETON in the
succeeding accounting year’’.

2) Where there is no Allocable Surplus or allocable surplus

falls short of Minimum Bonus that has to be payable
------ thus there is no amount that can be carried
forward to the succeeding accounting year ------- thus it
is called as ‘SETOFF’ of Allocable Surplus or ‘‘carried
forward SETOFF in the succeeding year including the 4th
accounting year’’.

Examples are given in the Schedule IV of the Act

What is the meaning of "available surplus" and "allocable

surplus" and what is the connection between allocable surplus
and bonus?
Bonus payable under the Act is linked with profits. The employer has
to calculate "gross profits" of his establishment in the manner specified
in section 4. Then from "gross profits" so
calculated he has to deduct the sums referred to in section 6 as prior
charges. The balance is called "available surplus". A percentage of the
available surplus calculated in accordance
with the provisions of sub-section (4) of section 2 is called "allocable
surplus". Where, in respect of any year the allocable surplus exceeds
the amount of minimum bonus payable to the
employees, the employer must pay to every employee in respect of
that year bonus in proportion to the salary or wage earned by the
employee during the year subject to a maximum
of twenty percent of such salary or wage. {Subsection 2(4), 4, 5, 6 &
11}

Are the newly set up establishments exempted from paying

bonus to their employees?
The newly set up establishment is exempted from paying bonus to its
employees in the first five years following the year in which the
employer sells the goods produced or manufactured by him. If,
however, the employer derives profit in any of the first five year, he
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has to pay bonus for that year. The provisions of set on and set off are
not applicable in such cases. {Section 16}

Payment of Bonus:

1) Eligibility for bonus: (sec 8)

 Every employee is entitled to be paid bonus.
 But employee should have worked in the establishment
for not less than 30 working days of that year

Is an employee entitled to get bonus on the basis of his entire

salary or wage?
If an employee is drawing a salary or wage not exceeding Rs.
3500.00 per month, he is entitled to get bonus on his entire
salary or wage. If an employee is getting a salary or wage
exceeding Rs. 3500.00 per month, but not exceeding 10000.00
per month, the bonus payable to him is to be calculated as if
his salary or wage were Rs. 3500.00 per month. An employee
getting a salary or wage exceeding Rs. 10000.00 per month is
not entitled to get bonus. {Section 12}

Are there any categories of employees who are excluded from

the application of the Act?
The employees of Life Insurance Corporation of India, Reserve Bank of
India, Unit Trust of India, Central Government and State Government
industrial establishments and
Universities and other educational institutions are some of the
excluded categories. {Section 32}

2) Disqualification for bonus: (Sec 9)

Employee disqualified to be paid bonus if commits:
 Fraud
 Riots or violent behavior in the premises of establishment
 Theft, misappropriation or sabotage of any ppty of the
establishment.

Minimum Bonus: (Sec 10)

 8.33 % of the salary or wage earned by the employee during
accounting year.
or
 Adult---Rs.100/- and in case of below 15 yrs ---- Rs. 60/-
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Which ever is higher is paid.

 Even though the employer has suffered loss the employer is

entitled to pay the minimum bonus to the employees.

Maximum Bonus: (Sec 11)

 When allocable surplus exceeds the amount of minimum
bonus ------ then employer shall pay the bonus (maximum)
------ 20% of the salary or wage earned by the employee
during that accounting year.

 While calculating allocable surplus (as referred to page

no.4.) the Set off and Set on are taken into account.

What is the principle behind fixing a minimum and maximum

limit for payment of bonus?
The principle behind fixing a minimum and maximum limit for payment
of bonus is that the rate of bonus should not fluctuate widely from year
to year.

Deduction of Amount from the Bonus:

 If the employee is found of any misconduct or has caused
any financial loss to the employer ---------- employer can
deduct the amount from the Bonus amount.
 If employer has paid any puja bonus or customary bonus
Or
Has paid half payment of the bonus
then --------- the employer can deduct the amount so
paid, and employee entitled to receive only balance.

In case of dispute due to the non payment of the

bonus ----- pending before the Court then --------
within 1 month from the date of award employer
should pay.

In any other disputes and matter pending before the

court------- the payment of bonus , then the time
period is of 8 months which may be extended but not
more than 2 years by the Appropriate Govt.

What is the meaning of customary bonus?

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Customary bonus is bonus which is being paid by way of tradition or

custom at a uniform rate over a number of years and which has no link
with profit.

Is it open to employees and employers to agree for grant of

bonus under a formula different from that under the Act?
Employees can enter into an agreement or a settlement with their
employer for granting them bonus under a formula different from that
under the Act, i.e. bonus linked with
production or productivity; but subject to the provisions of the Act in
respect of payment of minimum and maximum bonus. {Subsection
31A & 34}

Non payment of bonus by the employer under

the settlement or award
Then:
 the employee himself
 or any other person authorized by the employee in writing
 his assignee or his heirs in case of death

make application to the Appropriate govt within 1 mnth from

the date of payment is due.

then Appropriate Government shall issue a certificate to the

Collector to recover the money as land arrears.

How to raise a dispute about bonus payable under the Act?

A dispute about bonus payable under the Act will have to be raised by
the employees concerned in accordance with the provisions of the
Industrial Disputes Act, 1947, or any corresponding
State law, as is applicable to them, as such a dispute is deemed to be
an industrial dispute within the meaning of such laws. {Subsection 22
& 39}

What are the offences under the Act and what is the
punishment for them?
If any person contravenes any provision of the Act or any rule made
thereunder; or fails to comply with any direction given to him; he
would be punished with imprisonment
upto 6 months, or with fine upto Rs. 1000.00 or with both. {Section
28}
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Important Questions:
1. What is allocable surplus? How does it differ from the
Available surplus?
2. Discuss the scope and object of Payment of Bonus Act?
3. Discuss the eligibility for getting payment of bonus.
4. Discuss the disqualification for payment of bonus.

This is reference notes.

In exam write full answers.

I hope this notes would be helpful to all

my readers.
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