Bonus
What is a bonus?
A bonus is an additional payment made by an employer to an employee, over and above the regular salary, usually in recognition of performance, tenure, or a company milestone. Bonuses may be discretionary or governed by statutory rules.
In India, bonuses can be broadly categorised into statutory bonus (governed by the Payment of Bonus Act, 1965), performance-linked bonus, retention bonus, festival bonus, and joining bonus. Each type has different rules for eligibility, computation, and taxation.
Why is a bonus important?
Bonuses reward employees for performance, effort, or long service, boosting motivation, retention, and morale. Well-designed bonus schemes help employers attract and retain talent while linking rewards to business outcomes.
Bonuses are also important from a compliance and tax perspective. The statutory bonus under the Payment of Bonus Act is a legal entitlement for eligible employees in covered establishments. All bonuses are fully taxable as part of salary income under the Income Tax Act and must be reported accurately in payroll and tax filings.
How does a bonus work?
1. Defining the bonus scheme
The employer defines the type of bonus, eligibility criteria, computation method (fixed amount, percentage of salary, or performance-based), and payment schedule.
2. Computing statutory bonus where applicable
For establishments covered by the Payment of Bonus Act, the statutory bonus is calculated as a percentage of the eligible employee's salary or wage, subject to the prescribed minimum and maximum limits.
3. Assessing performance for variable bonus
Performance-linked bonuses are assessed against individual, team, or company targets, and computed based on the achievement level and the pre-agreed formula.
4. Processing the bonus through payroll
The approved bonus is processed as part of the relevant payroll cycle, added to the gross salary for that period, and subjected to TDS along with other salary income.
5. Reporting in tax records and salary slip
The bonus payment appears on the employee's salary slip, in the payroll register, and in the annual Form 16 issued by the employer.
Example
An employee at a manufacturing company in Faridabad earns a monthly basic salary of ₹30,000 and is eligible for the statutory bonus under the Payment of Bonus Act. For the financial year, the company declares a bonus of 15 percent of eligible salary, subject to statutory limits.
The employee also receives a performance-linked bonus of ₹50,000 based on annual appraisal, and a Diwali festival bonus of ₹10,000. All three bonuses are processed through payroll in the months they are paid.
Each bonus is added to gross salary for the relevant month, and TDS is deducted at the applicable rate. The bonuses appear on the salary slips for those months, in the payroll register, and are consolidated in the annual Form 16 issued to the employee.
Key points to remember
- A bonus is an additional payment made by an employer over and above the regular salary.
- Common types in India include statutory bonus, performance-linked bonus, retention bonus, festival bonus, and joining bonus.
- The Payment of Bonus Act, 1965 governs statutory bonus for eligible employees in covered establishments.
- Bonuses are fully taxable as salary income under the Income Tax Act.
- Bonuses are processed through payroll along with regular salary in the month they are paid.
- Bonuses appear on salary slips, in payroll registers, and in the annual Form 16.
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A statutory bonus is a legal entitlement under the Payment of Bonus Act, 1965 for eligible employees in covered establishments, computed within prescribed limits. A performance bonus is a discretionary payment based on individual, team, or company performance, and is not mandated by law.
Yes. Bonuses are fully taxable as part of salary income under the Income Tax Act. TDS is deducted on the bonus payment along with regular salary income, and the total is reflected in the annual Form 16.
Under the Payment of Bonus Act, employees drawing a salary or wage up to the prescribed limit, who have worked for a minimum specified period in an accounting year, are generally eligible for statutory bonus, subject to conditions specified in the Act.
Statutory bonus is typically paid within eight months from the close of the accounting year. Performance bonuses are usually paid at the end of the appraisal cycle or financial year. Festival bonuses are commonly paid around major festivals such as Diwali.
Yes, in most cases. Joining bonuses typically come with a service condition, requiring the employee to remain with the employer for a minimum period (often one or two years). If the employee leaves earlier, the joining bonus may need to be refunded partly or fully.
