FY 25-26 closed profitably. The founders allocated a ₹40 lakh bonus pool. Anushka's job: distribute it. Three sets of expectations are in the room:
- 4 office assistants + 6 customer-support reps (salaries ₹14-20k/month): expect a statutory Diwali bonus. They've been told their friends at similar-size companies receive a 1-month-salary statutory bonus.
- 32 engineers + 8 product folks + 6 sales (salaries ₹70k-3L/month): expect performance bonus per their offer letters. Some have 15%-of-salary annual performance bonus terms.
- Everyone: expects a Diwali "appreciation" payout — small, symbolic, equal across grades.
Three different bonus regimes. Different laws. Different tax treatment. Anushka has 14 days to design the allocation and execute the payroll cycle.
- Statutory bonus under the Payment of Bonus Act 1965: mandatory for factories + establishments with ≥20 employees, for employees earning ≤ ₹21,000/month (capped for computation at ₹7,000/month or state minimum wage, whichever higher). Range: 8.33% to 20% of salary, depending on allocable surplus. Paid annually within 8 months of FY end.
- Performance bonus: contractual or discretionary, depends on employer's policy. Common terms: % of CTC, % of department target, individual rating multiplier. Fully taxable as "salary" at employee's slab rate.
- Ex-gratia / festival bonus: discretionary, voluntary, no statutory requirement. Common Diwali/Onam/Eid payments. Tax treatment same as salary.
- From the employer side: all three forms are deductible business expenses under Sec 37 (revenue expenditure). TDS on the bonus payment (Sec 192 on salary side, deducted in the month of payment).
- The statutory regime applies to employees on the lower end. The performance regime applies to the rest. Both can coexist for the same person if salary ≤ ₹21k (rare for skilled roles).
Statutory bonus under the Payment of Bonus Act 1965
The Payment of Bonus Act is one of India's older labour statutes. Its core principle: workers in profitable establishments are entitled to share in a portion of the profits, on a formula-driven basis.
Who's covered
Establishment + employee
Establishment: factory under Factories Act + every other establishment with 20+ employees on any day in the FY. Employee: drawing wages ≤ ₹21,000/month (latest amendment); worked at least 30 days in the FY.
The formula
8.33% min, 20% max
Minimum bonus: 8.33% of salary or ₹100, whichever is higher. Maximum bonus: 20% of salary. For computation: salary is capped at ₹7,000/month or state minimum wage, whichever is higher. So even an employee earning ₹20k/month has their bonus calculated on ₹7k base.
Timing
Within 8 months
Must be paid within 8 months of FY end — so by 30 November for an April-March FY. Annual return in Form D with Inspector under the Act. Some states / companies pay statutorily-aligned bonus at Diwali to coincide with traditional festival expectation.
The allocable surplus formula (simplified)
The Act says: bonus = a function of "allocable surplus" of the establishment, where allocable surplus is broadly:
- Start with the gross profit per the audited P&L.
- Deduct depreciation as per Income Tax Act, development rebate.
- Deduct prior accumulated losses.
- Add back disallowable expenses (Sec 32(2) etc.).
- Result: "available surplus".
- Allocable surplus = 60% of available surplus (or 67% for banks).
The allocable surplus is then divided among all eligible employees proportionate to their bonus-base salary. If allocable surplus is high enough that 8.33% is comfortably covered → minimum bonus paid. If allocable surplus would yield more, pay up to the 20% maximum.
The "set-off / set-on" mechanic
If allocable surplus in a particular year is insufficient to pay even the minimum 8.33%, the company still pays 8.33% (it's the floor). The deficit is "set off" — i.e., recouped from allocable surplus of future years.
Conversely, if allocable surplus exceeds the 20% maximum payable, the excess is "set on" — carried forward (up to 20% of pay) to future years when surplus might be short.
This rolling reservoir means that in a normal year, allocable-surplus computation might give 12% bonus, in a great year 20% (with carry-forward), in a lean year 8.33% (floor, dipping into set-on).
FieldNotes' actual bonus matrix
- 10 employees earning ≤ ₹21,000/month: statutory bonus mandatory. Assume allocable surplus computation yields 12% bonus.
- Bonus base: ₹7,000/month × 12 months = ₹84,000 each (capped at ₹7k).
- Bonus 12% of ₹84,000 = ₹10,080 each. × 10 employees = ₹1,00,800.
- 46 employees earning > ₹21,000/month: NOT covered by Payment of Bonus Act. Get performance bonus per offer letters. Pool: ₹35 lakh.
- Diwali ex-gratia for everyone: ₹4 lakh pool, distributed as ~₹6,600 each.
- Total bonus outgo: ₹1,00,800 + ₹35,00,000 + ₹4,00,000 = ~₹40 lakh. Matches the founder's allocation.
Tax treatment
Employee side
Slab rate
All forms of bonus = "salary" income under Sec 17(1)(iv). Taxed at slab rate in the year of receipt. Employer deducts TDS via Sec 192 in the payment month. Show in Form 16 + ITR Schedule S.
Employer side
Deductible
Bonus paid is fully deductible business expense under Sec 37(1). Must be paid before due date of ITR filing to qualify for that year's deduction (Sec 43B). If accrued but unpaid by ITR deadline → disallowed for that year, deductible in year of actual payment.
Bonus is one of the listed "actually paid" expenses under Sec 43B. If accrued in March 2026 books but paid in November 2026 (8-month window per Bonus Act), and ITR is filed in September 2026 → the bonus has NOT been paid by ITR-filing date → disallowed as deduction for FY 25-26. Deductible only in FY 26-27 when actually paid. Many small companies trip on this — accrue in books, file ITR before paying, lose the current-year deduction.
The performance bonus side — what the offer letter really says
For employees outside the Bonus Act ambit (salary > ₹21k/month), bonus is purely contractual. Common structures:
- % of CTC: e.g., "annual performance bonus up to 15% of CTC". Discretionary, subject to company performance + individual rating.
- Sign-on bonus: one-time, often with claw-back if employee leaves within 12-24 months.
- Retention bonus: scheduled payouts conditional on continued employment.
- Variable pay tied to OKR / KPI: quarterly or annual, scored against pre-defined targets.
- ESOP / RSU: equity-side bonus, taxed differently (see our ESOP tax guide).
Tax treatment is identical to statutory bonus — full slab tax in employee's hands. The "guaranteed" / "promised" framing in offer letters matters legally but doesn't change the tax handling.
The ex-gratia / Diwali question
Ex-gratia means "by favour" — no underlying contractual or statutory obligation. Companies pay festival bonuses for cultural and morale reasons. Tax-wise, ex-gratia is also salary in the recipient's hands.
One exception worth knowing: gift voucher / non-cash benefit up to ₹5,000/year is exempt under Sec 17(2)(viii) read with Rule 3 (perquisite valuation rules). A ₹5,000 Diwali gift voucher to all employees is tax-free for them, deductible for the company. Above ₹5,000 it becomes taxable perquisite. Cash gifts are always taxable.
The funny historical wrinkle
The Payment of Bonus Act 1965 came from the Bonus Commission (Bagchi Commission) report of 1964 — itself born out of repeated industrial disputes in jute mills and cotton textile factories over annual bonus payments. The "deferred wage" theory (workers have earned a share of profit and bonus is part of compensation, not gift) eventually won out. The ₹21,000 eligibility ceiling has been revised multiple times — from ₹2,500 in 1985 to ₹10,000 in 2007 to ₹21,000 today.
The Code on Wages 2019 subsumes the Payment of Bonus Act. When fully operationalised, bonus provisions move into the new Code with similar but cleaner formulation. The 8.33% floor / 20% ceiling continues. The salary cap may be revisited under the new Code.
Quick answers
No — the Payment of Bonus Act eligibility ceiling is ₹21,000/month. Above that, statutory bonus doesn't apply. Your bonus is whatever your offer letter / employer policy says.
Payment of Bonus Act applies to establishments with 20+ employees. At 18, your company is outside its scope. They may pay a Diwali bonus voluntarily but no statutory obligation. (If they had 20+ at any point in the FY, the Act bites for that year.)
Worked at least 30 days in the FY → eligible (pro-rated). Bonus computed pro-rata to days worked.
Yes — minimum 8.33% is the floor regardless of profitability. The deficit gets "set off" against future allocable surplus. Loss-making companies do still owe statutory bonus.
Bonus is fully taxable as salary. Some employers offer to "spread" the bonus across months via flexible benefits, but the total slab-rate liability doesn't change. The only real planning lever: time bonus payments across two FYs if you're at a slab threshold.
When you might want help
Two situations: (1) Small-mid company doing first-time statutory bonus calculation + Form D filing. (2) Multi-component bonus design — performance + statutory + ex-gratia + ESOP — for a profitable scale-up that wants clean tax treatment + Sec 43B-compliant timing.
Designing year-end bonus?
Statutory bonus allocable-surplus computation + Form D filing + performance bonus design + Sec 43B-aware timing. Fixed scope.
"Anushka" and FieldNotes are composite illustrations. Your bonus design depends on actual establishment size, salary mix, and profitability.