Human Resources and Management Consultants

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7, SUGANDH CHS, Rajwade Path, 801 Bhandarkar Institute Road, Shivajinagar, Pune 411004
TeleFax: 25674407, E-mail: kishorb@vsnl.com

Basic provisions of the Payment of Bonus Act 1965.

1. The act applies to all factories and establishments covered under
Shops & Commercial Establishments Act employing more than 20
persons.
2. The act covers all employees (irrespective of status, grade, designation
etc.) who draw wages not exceeding Rs. 3500/- p.m.
3. The "wage" for the purpose of this act is the Basic Salary+Dearness
Allowance, as per the generally accepted meaning of the definition of
the term.
4. The act requires the employer to compute "Gross Profit" as stipulated
in the act. [Sec. 4(b)-Second Schedule]
5. From the Gross Profit, the act requires determination of "Available
Surplus" (Sec. 5, 6 and 7)
6. Sixty Seven per cent of the available surplus is treated as the
[Allocable Surplus). The relation between the "bonusable salary/wage"
and the "allocable surplus" provides the percentage of the bonus
payable.
7. By "bonusable salary/wage" it stipulated as under:
For employees with salary/wage upto Rs. 2500/- p.m. the actual
figure will be basis on which the bonus will be payable.
For employees with salary/wage greater than Rs. 2500/- p.m.
and less than Rs. 3500/- p.m. the salary/wage will be deemed to
be Rs. 2500/- p.m. only.
For employees with salary/wage greater than Rs. 3500/- p.m. no
bonus is payable by force of law as these employees are NOT
covered by the act.
8. No employee who has put in service less than 30 days during the
year is eligible to receive bonus under the act.
9. The law stipulates that Minimum bonus payable will be 8.33% and
this is payable even when the company has made a loss or the
allocable surplus is not adequate to support payment of even 8.33%
bonus. The Maximum Bonus payable is fixed at 20% of the
bonusable salary/wage.
10. With a view to ensure that there will be stability in payment of
bonus, the law also provides a mechanism of "set on" and "set off"
(Sec. 15). So, when the particular year's allocable surplus is not
adequate to support payment of 20% bonus, the employer is
entitled to draw from the set on of previous years, if available.
11.The law also requires the employer to maintain specified registers
and file sprcified returns to the authorities.

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Having provided the highlights of the act I like to point out further as
under:
If "bonus" is paid to the employees NOT covered by the act, OR if
the bonus is paid disregarding the coverage limits, then such
payments can not be allowed to disturb the calculations stipulated
under the act. Such expenses are to be treated as "revenue
expenditure" only.
2. Many companies follow the practice of paying an equivalent amount
to the employees NOT covered by the act or to those who for
reasons of periodic salary revision go out side the coverage limits
stipulated under the act, by way of an "ex-gratia" payment.
Whatever the name, the expense remains "revenue" in nature.
3. Payment of bonus/ex-gratia to ineligible employees or on
salary/wages beyond the permissible limits, is a matter of the
choice of the employer, but shall not be permitted to disturb the
bonus act mechanism in any way.
1.

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