Understanding ‘Bonus’ and its nitty-gritties

By greytHR
2 minute read ● October 14, 2020
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Understanding ‘Bonus’ and its nitty-gritties

Discover the essential facts about Bonus

Employee compensation and benefits have four major categories: guaranteed pay, the variable pay, benefits, and equity-based compensation. Bonus is a kind of variable pay and is usually given as an award to employees to achieve specific performance objectives. As Bonus is directly related to employee morale and organizational growth, HR needs to have a good understanding of Bonus and incentives.

We have recently had a round of insightful discussion in our greytribe community on Bonus and its various implications on employees and employers. Here are the answers to the few questions to help you get a quick overview of this interesting conversation.

Is it mandatory for organizations to pay Bonus to their employees?

Answering to this question Aparna Yadav, a greytribe community member, said,

“As per payment of Bonus Act, a newly formed company is exempted from paying Bonus to its employees for the first five years. But in these five years, if the company generates profits, then it is the liability of the company to pay Bonus (Minimum 8.33%) to its employees.”

Further elaborating on this, Mr. Umakanthan, Additional Commissioner of Labour (Rtd.) Tamil Nadu Labour Service Expert Desk member said, “ Exemption from the entire PB Act,1965 lies in Sec.32 of the Act that too in respect of certain classes of employees of certain specified institutions only. These institutions are as follows: They are employees of LIC of India, registered or listed under the Dock Workers Act,1948, employed in any industry carried on by any department of the Central or State Government or a Local Authority, Indian Red Cross Society, or other institution of like nature, Universities and other Educational Institutions, institutions including hospitals, chambers of commerce and social welfare institutions established not for purposes of profit, the RBI, IFCI, DIC, NABARD, UTI, IDBI, etc.”

When is the bonus payment supposed to be made to employees who have worked in the preceding financial year?

As per the bonus act, the employer is supposed to pay the Bonus within nine months of completing the Financial Year. This means the Bonus needs to be paid by Nov 30th, and the Bonus return should be filed within Dec 31st’. The bonus amount can be between 8.33% to 20% (Max) on Gross Earning.

Who qualifies for mandatory Bonus?

Every employee who earns less than or equal to Rs. 21,000/- per month, and has worked for a minimum of 30 days in an accounting year shall be eligible for the Bonus. However, when the employee does not qualify for the Bonus, but the employer wants to share the Bonus voluntarily, it is given as ex-gratia.

Is an annual Bonus considered to be a part of the ESIC calculation in an employee salary?

ESI calculation includes regular salary components like Basic Pay, Dearness Allowance, City Compensatory Allowance, House Rent Allowance, Attendance & Overtime Pays, Meal Allowance, etc. However, it does not include the one-time payment components like annual Bonus, retrenchment compensation, encashment of leave, and gratuity. Hence, the annual Bonus is not considered in ESI calculation.

This topic was discussed at length with various inputs flooding in from experts and community members. This blog is an attempt to summarize the discussion and give our readers a flavor of our greytribe community. Here is an elaborate article for you to read to know more about Bonus and its applicability in detail.

Payment of Bonus Act: Applicability, Calculation and Commonly Asked Questions

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