For services rendered, employees of any profit-making organization are entitled to monetary compensation. Bonus is a form of monetary incentive that is paid by the employer to his/her employee. Incentives can be given to employees to show appreciation for their dedicated work or to motivate employees to perform better at the workplace. The guidelines, inclusive of the detailed procedure for providing a bonus in India are laid down in the Payment of Bonus Act of 1965.
This Act of 1965 is applicable throughout the entire Union of India. The objective of this legislation is to ensure payment of bonus to employees of certain establishments, with respect to the profits earned or the production/productivity matters concerned therewith, in the duration of a particular accounting year. This Act has been amended a number of times since its introduction in 1965. The latest of these amendments were done in 2015.
Read Also – 6 Key Responsibilities of a General Counsel Attorney
History of Payment of Bonus Act:
- 1917: During the First World War, certain textile mills granted 10% of the ‘war bonus’ to the wages of the workers under their employment.
- 1950: A full bench of Labour Appellate came up with a formula for payment of Bonus to employees.
- 1961: A tripartite commission was set up by the Central Government to recommend the payment of bonus in a comprehensive manner
- 1965: The Payment of Bonus Act came into existence and was implemented on 29th May 1965.
Read Also – Importance of online payment for law firms
Important Definitions and Provisions under the Payment of Bonus Act, 1965:
Who is the Act applicable to?
Under section 1 of the Act, it is specified that the Payment of Bonus Act is applicable to the whole of India. The Act also mentions the type of workspaces that are included within the scope of this Act in which payment of bonus to employees is mandatory.
1(3). Save as otherwise provided in this Act, it shall apply to –
(a) every factory; and
(b) every other establishment in which twenty or more persons are employed on any day during an accounting year.’
It is further elaborated within this section itself that any other establishment with less than 20 employees may also be considered for the purpose of this Act if notified in the official gazette by the Government.
Read Also – Payment of Gratuity Act, 1978
What is an Accounting Year?
The definition and elaboration of the accounting year are provided in section 2 of the Act. It reads as:
2.(1) “accounting year” means –
(i) in relation to a corporation, the year ending on the day on which the books and accounts of the corporation are to be closed and balanced.
(ii) in relation to a company, the period in respect of which any profit and loss account of the company laid before it in annual general meeting is made up, whether that period is a year or not;
(iii) in any other case –
(a) the year commencing on the 1st day of April; or
(b) if the accounts of an establishment maintained by the employer thereof are closed and balanced on any day other than the 31st day of March, then, at the option of the employer, the year ending on the day on which its accounts are so closed and balanced. 
Employer, Employee, and Establishment:
Employee: An employee is any individual who is hired in any industry to do any skilled or unskilled manual, supervisory, managerial, administrative, technical, or clerical work. As per the latest amendment to this Act (2015), to be considered an employee eligible for a bonus, the persons have to earn Rs 21,000 per month. 
Employer: Employer under the scope of this Act is considered in two ways- in relation to any establishment that is a factory, or in relation to any other establishment. Section 2(14) of the Act reads as:
2.(14) Employer includes-
(i) in relation to an establishment which is a factory, the owner or occupier of the factory, including the agent of such owner or occupier, the legal representative of a deceased owner or occupier and where a person has been named as a manager of the factory under clause (f) of subsection (1) of section 7 of the Factories Act, 1948 (63 of 1948), the person so named; and
(ii) in relation to any other establishment, the person who, or the authority which, has the ultimate control over the affairs of the establishment and where the said affairs are entrusted to a manager, managing director or managing agent, such manager, managing director or managing agent. 
Establishment: Section 2(15) of this Act specifies the definition of an establishment in private sector. Apart from this, section 2(16) of the Act lays down the definition of an establishment in public sector. An establishment in the public sector may include any profit-making establishment that is owned, controlled or managed by the Government, in which not less than 40 percent of the capital in the corporation is helping either by the Government or the Reserve Bank of India, or a corporation owned by the Government or the Reserve Bank of India. 
There are also certain establishments that are exempted under this Act, including employees of Life Insurance Corporation, employees of non-profit organizations, hospitals, employees of IFCI, and so on. 
Disqualification of Employee:
An employee, engaged in work in any industry can be disqualified from payment of bonus, in case of certain situations.
19. Notwithstanding anything contained in this Act, an employee shall be disqualified from receiving a bonus under this Act, if he is dismissed from service for
(a) fraud; or
(b) riotous or violent behavior while on the premises of the establishment; or
(c) theft, misappropriation or sabotage of any property of the establishment.
Thus an employee can also be disqualified from receiving a bonus under the Act.
Minimum and Maximum Amount for Payment of Bonus:
For the payment of bonus, the upper and lower limits are fixed under this Act. If the employee has reached the age of 15, then the employer is liable to pay to him/her a minimum bonus of 8.33 higher. In case the employee is under 15 years of age, he/she is entitled to receive 8.33 percent of his/her wages earned during the accounting year or a sum of Rs 60, whichever is higher. 
Read Also: Advance Tax Payment
The maximum bonus that can be received by an employee from his/her employer, including productivity linked bonus, in an accounting year cannot exceed 20 percent of his/her wages during the accounting year. 
Other Provisions under this Act:
Other Provisions in this Act entail the calculation of bonus for a particular financial year. This Act lays down the definition of working days and expands its scope to include maternity leave, leave due to injury, temporary leave with salary, and more. According to this Act, the employer is allowed to make permissible deductions from bonus paid to the employees. The time limit of payment of bonus is within a period of 8 months from the end of the financial year. 
Penalty for Contravention:
In case any person is found guilty of violating any of the provisions laid under this act, he/she may be punishable with imprisonment that may extend to six months or fine which may extend to a sum of Rs. 1000 or both. For corporations contravening this Act, its director, partner, or principal officer responsible for the conduct of its business will be held liable. However, if the person is able to prove that the offense was conducted without his knowledge, he will not be found guilty. 
Bonus, therefore, forms an essential component of an individual’s salary or wage. The Payment of Bonus Act of 1965 has undergone a series of amendments- in 1985, 1995, 2007 and most recently in 2015. The amendment of 2015 has brought in significant changes with regard to the minimum and maximum limit for payment of bonus. The wage threshold for determining the eligibility of employees has also been increased via this amendment.
 The Payment of Bonus Act (21 of 1965), section 1(2)
 The Payment of Bonus Act (21 of 1965), section 1(3)
 The Payment of Bonus Act (21 of 1965), section 2(1)
 The Payment of Bonus Act (21 of 1965), section 2(13)
 The Payment of Bonus Act (21 of 1965), section 2(14)
 The Payment of Bonus Act (21 of 1965), section 2(15)
 The Payment of Bonus Act (21 of 1965), section 2(16)
 The Payment of Bonus Act (21 of 1965), section 32
 The Payment of Bonus Act (21 of 1965), section 19
 The Payment of Bonus Act (21 of 1965), section 10
 The Payment of Bonus Act (21 of 1965), section 11
 The Payment of Bonus Act (21 of 1965), section 14
 The Payment of Bonus Act (21 of 1965), section 18
 The Payment of Bonus Act (21 of 1965), section 19
 The Payment of Bonus Act (21 of 1965), section 28
 The Payment of Bonus Act (21 of 1965), section 29
Try our all-in-one Legal Practice Management Software START FREE TRIAL!