Bonus

A bonus is a payment made by employers to employees in addition to their salary. It serves as a reward for exceptional performance, meeting specific targets, or as part of a company’s payroll policy. Bonuses can also be given on special occasions, such as Diwali, and are often used to boost employee morale and motivation.

Types of Bonuses

• Discretionary Bonus: Given at the employer’s discretion and usually unexpected. It rewards exceptional individual or team performance.
• Nondiscretionary Bonus: Pre-determined and promised to employees if specific conditions or performance benchmarks are met.

Minimum and Maximum Bonus

Under the Payment of Bonus Act (1965), the minimum bonus payable is 8.33% of salary, while the maximum can be up to 20%. This ensures employees receive fair compensation for their contributions, while employers retain flexibility in their rewards.

Bonuses are a valuable tool for both recognising achievement and reinforcing company culture. By aligning bonuses with performance and company milestones, businesses can foster higher productivity and employee satisfaction.

Frequently Asked Questions (FAQ)

Q. Are bonuses subject to income tax, and how are they taxed in India?

A. Yes, bonuses are subject to income tax in India. They are considered part of your salary and taxed accordingly. The amount is added to your annual income, and the tax is calculated based on the income slab you fall under. Therefore, if you are in a higher tax bracket, you may end up paying more tax on the bonus amount. However, employers deduct taxes at the source before disbursing the bonus, ensuring compliance with tax regulations.

Q. How do companies typically calculate performance-based bonuses for employees?

A. Companies usually link performance-based bonuses to individual or team performance metrics. These metrics could include meeting sales targets, completing projects successfully, or improving operational efficiency. Employers may also tie bonuses to broader company goals, like revenue growth. The actual amount can vary and is often calculated as a percentage of the employee’s salary, ensuring it aligns with the company’s overall payroll structure.

Q. Are all employees eligible for a bonus under the Payment of Bonus Act (1965), or are there specific eligibility criteria?

A. Not all employees qualify for bonuses under the Payment of Bonus Act (1965). To be eligible, employees must earn a salary of ₹21,000 or less per month and have worked for at least 30 days in the financial year. Therefore, higher-paid employees or those who have not met the minimum working period may not be entitled to this statutory bonus. However, companies may still choose to offer discretionary bonuses to those outside the Act’s criteria.