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Bonus (Full Details)

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Old 12-15-2008, 05:30 AM
supercool supercool is offline
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Dec 2008
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Default Bonus (Full Details)

The Payment Of Bonus Act, 1965

Bonus payment started much before the law was enacted in Ahmedabad textile mills both in cash and kind. It was a payment to employees to face the rigours at work. Gradually by 1929-30, large number of employers all over the country started it out of his own sweet will. It was an ex-gratia concept. By 1930’s, the union started clamoring for such payments on claims that they are also entitled to a share in company’s profits since they contribute a great deal to earn it. Hence, the concept changed from ex-gratia to Profit sharing. The problem now faced by the management was computation of accurate profits. A High court Commission was ordered to compute the profits. In 1961, Bonus Commission was set up by the Government of India. Later unions felt that bonus should be paid to everyone and devised a new concept called Deferred Wages. The argument was that their wages were so low that they were unable to save any sum of money. Demand under deferred wages was 13 months wages for 12 months i.e. 1 month wage to be paid during festivals.

In the Law, Concept of Profit sharing and deferred wages was integrated and the Payment of Bonus Ordinance, 1965 was converted to The Payment of Bonus Act, 1965. The law is applicable to factories and other establishments employing 20 or more persons.

Since, the main concept of the act is Profit sharing, Bonus is calculated on the basis of trading results of an establishment during a particular accounting year. Each accounting year is a unit and there is no relationship between last and next accounting year.

Only those employees who are drawing a salary/wage not more than Rs. 3500 per month are covered under this act. Capacities of the employees on the basis of s****ed/uns****ed are not taken into consideration.

Computation of Bonus: Hypothetical example Rs.

Net Profit 10,00,000

Add: Add backs charged to

Profit & Loss account in respect

Of those items included in

Schedules I and II 5,00,000

Gross Profit 15,00,000

Less: Deductions like direct tax,

Depreciation and 6%-8.5% of

Equity capital 7,50,000

Available Surplus 7,50,000


60% of Available surplus is

Allocable surplus 4,50,000

Allocable surplus is to be distributed as Bonus to the employees. The law obliges an employer to pay a minimum of 8.33% of the wage bill as bonus subject to a maximum of 20% of wage bill. This will be made clear from the following examples.

Hypothetical example: Rs.

Total wage bill 45,00,000

Allocable surplus (from the above example) 4,50,000

Therefore, 10% of the wage bill (Rs. 4,50,000) will be paid as bonus to the employees with salary not more than Rs. 3500/month.

Yearly wage (Rs.) Bonus @ 10% (Rs.)

Employee X 30,000 3,000

Employee Y 15,000 1,500

: : :

: : :

: : :

: : :

: : :

45,00,000 4,50,000

If wage bill is Rs. 90,00,000, then allocable surplus of Rs. 4,50,000 would form only 5% of the wage bill. This is less than the minimum amount of bonus payable i.e. 9.33% of wage bill. The minimum amount to be paid is Rs. 7,50,000 (8.33% of Rs. 90,00,000) and the allocable surplus is Rs. 4,50,000. A shortfall of (Rs. 7,50,000 - Rs. 4,50,000) Rs. 3,00,000 is created which is set off against next accounting year’s allocable surplus. Hence, Set off can be defined as – When there is no Available surplus or the Allocable surplus is insufficient to pay the minimum Bonus payable, then that shortfall will be carried forward to the next accounting year and upto and including four consecutive accounting years.

Similarly, if the wage bill is Rs. 9,00,000, the allocable surplus of Rs. 4,50,000 forms 50% of the wages paid. Maximum bonus that can be paid is 20% of the wage bill i.e. Rs. 1,80,000. So, the excess allocable surplus of Rs. 2,70,000 (Rs, 4,50,000 – Rs. 1,80,000) will be set on to the next accounting year and upto and including four accounting years subject to a maximum of 20% of the wages. This means that only Rs. 1,80,000 will be set on for the next accounting year and the rest Rs. 90,000 will get cancelled.

The Bonus on a wage of Rs. 2500 and upto Rs. 3500 will be calculated on the amount of Rs. 2500.

Hypothetical example.

Monthly Yearly Bonus declared

Wages (Rs.) Wages (Rs.) @ 10%

Employee A 1,500 18,000 1800

Employee B 2,000 24,000 2400

Employee C 3,000 36,000 3000

Employee D 36,000 4,32,000 ***

Employee C will get a bonus on Rs. 30,000 (Rs. 2500 *12) @ 10% i.e. Rs. 3000 whereas Employee D is not eligible for a bonus as his salary exceeds the maximum amount of Rs. 3500 per month.
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