Payment of Bonus Act, 1965: Eligibility, Calculation & 2026 Update
Table of Contents
The Payment of Bonus Act, 1965 was repealed with effect from 21 November 2025 and subsumed into the Code on Wages, 2019, along with three other wage laws. For nearly nine months after that date, employers calculated bonuses using the old eligibility and calculation ceilings by convention rather than by any fresh notification. That changed on 25 August 2026, when the Ministry of Labour and Employment issued two notifications that gave those ceilings formal legal backing under the Code. However, this update raised a new question for employers operating in states with independent minimum wage rates.
Key Takeaways
- Understand the replacement of the 1965 Act under the Code on Wages, 2019, and identify which provisions remain unchanged.
- Check who is covered, who is exempt, and who qualifies for a bonus payout each year.
- Follow the required calculation steps, adhering to the 8.33% floor and 20% ceiling.
- Review the August 2026 notifications that formally fixed the eligibility and calculation ceilings.
- Understand the live ambiguity over central versus state minimum wages for the calculation ceiling.
- Use set-on and set-off correctly when allocable surplus runs short or over in a given year.
What is the Payment of Bonus Act, 1965?
The Payment of Bonus Act, 1965 was an Indian labour law that required covered employers to pay statutory annual bonuses to eligible employees, subject to prescribed rules on eligibility, calculation, and payment.
The Act governed key aspects such as employee eligibility, minimum and maximum bonuses, bonus calculation, disqualification, and the set-on and set-off of allocable surplus. It was later subsumed into the Code on Wages, 2019 as part of India’s consolidation of wage-related labour laws.
Which Establishments are Covered?
Coverage did not change in the transition, so the same two tests from the old Act still decide whether an establishment owes a statutory bonus.
- Establishments with 20 or more employees: Applies to factories and establishments that employed 20 or more persons on any day during the accounting year.
- Lower threshold flexibility: The appropriate government retains the power to extend coverage to establishments with 10 or more employees.
- Continued coverage: Once covered, an establishment remains covered even if its employee count later falls below the threshold.
- Exempt establishments: Certain institutions, including LIC, specified charitable organizations, educational institutions, hospitals, RBI, and certain financial institutions, are exempt subject to applicable conditions.
Note: An establishment may lose its exempt status if it fails to fulfill the underlying exemption conditions (e.g., if it begins generating profits from core activities).
Who Qualifies, and Who is Disqualified?
| Criterion | Statutory Requirement |
|---|---|
| Minimum service | At least 30 days worked in the accounting year |
| Eligibility ceiling | Monthly wage (Basic + Dearness Allowance) must not exceed ₹21,000. |
| Disqualifying conduct | Dismissal for fraud, riotous or violent behavior on the establishment’s premises, theft, misappropriation, or sabotage of company property. |
Employees earning above the ₹21,000 threshold are exempt from the statutory bonus mandate. While employers may issue ex gratia payments to these employees, such payments do not qualify as statutory bonuses.
How Bonus is Calculated
Determine Eligibility
Confirm that the employee has worked for at least 30 days during the accounting year and meets the applicable ₹21,000 monthly wage ceiling.
Apply Calculation Ceiling
Calculate the bonus based on ₹7,000 per month or the applicable minimum wage for the scheduled employment, whichever is higher.
Calculate Allocable Surplus
Calculate the allocable surplus from gross profits after deducting set-off amounts, taxes, and statutory reserves as prescribed under the applicable schedules.
Apply the Minimum Bonus
The statutory minimum bonus is 8.33% of the eligible annual wage, even where the allocable surplus is insufficient.
Observe the Maximum Limit
Where the allocable surplus permits, the bonus may be paid up to the statutory maximum of 20%.
Account for Set-On or Set-Off
Adjust the bonus using any applicable surplus or shortfall carried forward from the preceding four accounting years.
Pay within the Prescribed Time
The bonus must generally be paid within eight months of the close of the accounting year, subject to any permitted extension.
Calculation Example: An employee earns ₹18,000 per month, and the applicable minimum wage is ₹8,500. Because ₹8,500 exceeds the ₹7,000 baseline ceiling, the bonus is calculated based on ₹8,500 per month (₹1,02,000 annually) rather than the actual annual wage of ₹2,16,000.
The August 2026 Notifications that Formalized the Ceilings
The two key ceilings continued in practice from the repealed Act after the Code on Wages, 2019 came into effect. However, for nearly nine months, employers operated under the legacy ceilings without an explicit notification under the new Code.
In these notifications, the Ministry of Labour and Employment formally confirmed the ceilings through two notifications, retrospectively effective from 21 November 2025:
- S.O. 4711(E): Formally prescribes the ₹21,000 monthly wage eligibility ceiling.
- S.O. 4710(E): Formally prescribes the ₹7,000 (or applicable minimum wage) monthly calculation ceiling.
For most employers, this is a confirmation of existing practice rather than a change in the figures. The key change is that the ceilings now have formal legal backing under the Code.
Central vs State Minimum Wage
The August 2026 notification has created uncertainty over whether the central government minimum wage or the applicable state minimum wage should be used when calculating statutory bonus.
| Establishment | Section 26(2) | S.O. 4710(E) |
|---|---|---|
| Central-sphere | Central Government minimum wage | Central Government minimum wage |
| State-sphere | State Government minimum wage | Specifies Central Government minimum wage (creating ambiguity for state-sphere units). |
What Employers Should Know
- Identify Jurisdiction Risk: The ambiguity primarily affects state-sphere establishments where the state-mandated minimum wage exceeds the Central rate.
- Monitor Official Guidance: The Ministry has yet to issue a clarifying circular or amendment regarding this discrepancy.
- Maintain an Audit Trail: Document the minimum wage benchmark used for each bonus calculation and retain statutory records as part of your payroll audit checklist.
Set-On and Set-Off of Allocable Surplus
The set-on and set-off mechanisms enable employers to absorb fluctuations in allocable surplus across accounting years, maintaining consistent annual bonus payouts.
- Set-on: When the allocable surplus exceeds the maximum bonus payable (20%), the surplus amount is carried forward to cover shortfalls in future years, subject to statutory limits.
- Set-off: When the allocable surplus is insufficient to pay the minimum bonus (8.33%), the shortfall is offset against the set-on carried forward from previous accounting years.
- Carry-forward period: Both set-on and set-off balances may be carried forward for up to four succeeding accounting years.
For example, if the allocable surplus for a given year covers only a 5% bonus, accumulated set-on funds from prior years can be applied to meet the mandatory 8.33% minimum bonus requirement.
A Compliance Checklist for Employers
Use this checklist to keep bonus processes aligned with the Code on Wages, 2019 and the latest requirements:
- Update policy references: Replace all references to the Payment of Bonus Act, 1965 with Chapter IV of the Code on Wages, 2019.
- Verify eligibility thresholds: Evaluate employee eligibility against the ₹21,000 monthly wage ceiling (based on basic wage plus dearness allowance).
- Apply calculation wage caps: Calculate bonuses using ₹7,000 per month or the applicable minimum wage, whichever is higher.
- Track minimum wage variations: Where Central and State minimum wage rates diverge, document the specific baseline used for statutory calculations.
- Maintain set-on/set-off ledgers: Maintain detailed accounting records throughout the four-year carry-forward window.
- Adhere to payment timelines: Disburse annual bonus payments within 8 months from the close of the accounting year.
- Document statutory disqualifications: Maintain formal records detailing specific statutory grounds whenever bonus eligibility is denied.
Conclusion
The transition from the Payment of Bonus Act, 1965 to the Code on Wages, 2019 largely preserves the foundational bonus framework, while the August 2026 notifications have brought greater clarity to the key wage ceilings. However, the question around Central and State minimum wages indicates that regulatory guidance on statutory calculations continues to develop.
For employers, key priorities include updating payroll systems, documenting calculation methodologies, and tracking regulatory updates. A proactive approach ensures ongoing statutory alignment as wage compliance rules are finalized.
Frequently Asked Questions
Has the Payment of Bonus Act, 1965 been Repealed?
Yes. The Act was officially repealed with effect from 21 November 2025, and statutory bonus provisions are now governed under Chapter IV of the Code on Wages, 2019.
What is the Bonus Eligibility Limit in 2026?
The statutory bonus eligibility ceiling is ₹21,000 in monthly wages. This ceiling was formally notified through Notification S.O. 4711(E) dated 25 August 2026, with retrospective effect from 21 November 2025.
How is Statutory Bonus Calculated in India?
Bonus is calculated using ₹7,000 per month or the applicable minimum wage, whichever is higher. Using a bonus calculator is recommended to estimate the statutory bonus at the applicable rate, which ranges from 8.33% to 20%.
What is the Minimum and Maximum Bonus Payable?
The minimum statutory bonus is 8.33% of eligible annual wages (or ₹100, whichever is higher), payable regardless of allocable surplus. The maximum bonus is 20% of eligible annual wages, dependent on the availability of allocable surplus.
Which Minimum Wage Should be Used for Bonus Calculation?
The August 2026 notification has created some uncertainty for state-sphere establishments where the State minimum wage exceeds the Central figure. Employers should document their approach and monitor further clarification.
Can Set-On and Set-Off Amounts be Carried Forward?
Yes. Under the Code on Wages, allocable surplus set-on and set-off amounts can be carried forward for up to four succeeding accounting years.
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