Industrial Relations

Payment of Bonus Act, 1965

Submitted By: Milani, MBA 3rd Sem., GU-2017-0164

GNA UNIVERSITY, GNA BUSINESS SCHOOL
 Table of Contents
Sr.
No. Particulars Page No.
1 Introduction to Payment of Bonus Act 1965 1
2 Definition of Bonus 1
3 Objective of the Act 1
4 Four dimensions of Act 1
5 Extent of the Act 2
6 Applicability of the Act 2
7 Exemption of the Act 3
8 Definitions covered under act 4-5-6
Establishment to include departments, undertaking
9 and branches (Sec. 3) 6
10 Payment of Bonus 7
11 Consequences of misconduct 8
12 Time limit for payment of Bonus (Sec. 19) 8
13 Recovery of bonus due from an employer (Sec. 21) 8-9
14 Computation of number of working days Sec. 14 9
15 Calculation of Bonus 9
16 Payment of minimum bonus (Sec. 10) 10
17 Payment of maximum bonus (Sec. 11 & 12) 10
18 Set-on & Set-off of allocable surplus (Sec.15) 10-11
Special provisions with respect to certain
19 establishments 12
20 Inspectors 13
21 Offences & Penalties (Sec. 28) 14
Act not to apply to certain classes of employees
22 (Sec.32) 14-15
23 Power of exemption (Sec. 36) 15
Obligations of Employers, Rights of Employers,
24 Rights of Employees 16

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1. Introduction to Payment of Bonus Act, 1965
This is an act intended to provide for the payment of bonus to persons employed in certain
establishments on the basis of profits or on the basis of production or productivity and for
matters connected therewith. It came into force from 25th September, 1965. This act is an
outcome of the recommendation of the Bonus Commission set up by the Government of India in
1961. The Payment of Bonus Act, 1965 has undergone several amendments.
Before coming to the Payment of Bonus Act, 1965, we should understand what we mean by term
‘Bonus’.

2. Meaning of Bonus
The term ‘Bonus’ is not defined under the Payment of Bonus Act, 1965 nor there exists any
definition of bonus under any other enactment.
Dictionary Meaning of the word ‘Bonus’ is something to the good; especially extra dividend to
the shareholders of the company; distribution of the profits to the insurance policyholders;
gratuity to the workmen beyond their wages.
According to the definition given in the New English Dictionary is, "A boon or gift over and
above what is normally due as remuneration to the receiver and which is, holy to the good.”

3. Objectives of the Act

• Its object is to provide for the payment of bonus to persons employed in certain
establishments and for matters connected herewith.
• Bonus is no longer linked with production or profitability.
• It is a socio-economic legislation intended to achieve the object of meeting the challenge
which necessarily flows from unsatisfied human desires & ambitions.

4. Four-Dimensional Act
The Payment of Bonus Act, 1965 is four dimensional:
 Imposes a Statutory liability upon an employer of every establishment covered by the act to
pay bonus to employees in establishment

 Defines the principle of payment of bonus according to the prescribed formula

 Provides for payment of minimum & maximum bonus with the scheme of ‘set off’ & ‘set
on’

 Provides machinery for enforcement of the liability for payment of bonus.

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5. Extent of the Act
The Payment of Bonus Act, 1965, extends to the whole of India including the state of Jammu
& Kashmir.

6. Applicability of the Act

 Every factory
 Every other establishment in which 20 or more persons are employed on any day during
an accounting year.
 The appropriate government may, however, extend the provisions of this Act to any
establishment employing less than 20 but not less than 10 persons. It can do so by giving
not less than 2 months notice of its intention by notification in the official gazette.

The employment of 20 or more persons even for one day in a year is sufficient to attract the
provisions of this act. Once the act has been made applicable to an establishment, it shall
continue to thereafter irrespective of the fact that the number of persons employed therein falls
below 20 or below the number specified in the notification as the case may be at a later stage.

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7. Exemption of the Act
The Bonus Act excludes or exempts the following establishments:

 Small factories and establishments having less than 20 or 10 employees, as the case may be.
 Establishments excluded by Sec. 32
-L.I.C
-Hospitals
-Chambers of Commerce etc.
 New establishments covered by Sec. 16
 Establishments where employees have entered into the contract with the employer Sec. 31-
A
 Establishments specially exempted by the appropriate govt. u/s 36 (Sick Units etc.)

8. Definitions covered under the Act

(1) "Accounting Year" [Sec. 2(1)] 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.

(2) "Allocable Surplus" [Sec. 2(4)] means-

(a) in relation to an employer, being a company (other than a banking company)] which has
not made the arrangements prescribed under the Income-tax Act for the declaration and
payment within India of the dividends payable out of its profits in accordance with the
provisions of section 194 of that Act, 67% of the available surplus in an accounting year;

(b) in any other case, 60% of such available surplus;

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(3) "Corporation" [Sec. 2(11)] means a body corporate established by or under any Central,
Provincial or State Act but does not include a company or a co-operative society;

(4) "Direct Tax” [Sec. 2(12) means-

(a) any tax chargeable under-
(i) the Income-tax Act;
(ii) the Super Profits Tax Act, 1963 (14 of 1963);
(iii) the Companies (Profits) Surtax Act, 1964 (7 of 1964);
(iv) the agricultural income-tax law; and

(b) any other tax which, having regard to its nature or incidence, may be declared by the
Central Government, by notification in the Official Gazette, to be a direct tax for the purposes
of this Act.

(5) "Employee” [Sec. 2(13) means-

1. Any person employed on any industry to do the following categories of work namely:
 Skilled, unskilled or manual;
 Supervisory;
 Managerial;
 Administrative;
 Technical; or
 Clerical
2. Who is employed to do such work for hire or reward;
3. Whose salary doesn’t exceed Rs.10000 per month; and
4. Who is not an apprentice

(6) "Employer” [Sec. 2(14) means-

1. The owner or occupier of the factory;

2. The agent of such owner or occupier;
3. Legal representative of the deceased owner or occupier; and
4. Any person named as manager of the factory

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(7) "Salary” [Sec. 2(21) means-

“Salary or Wage” means all remuneration (other than remuneration in respect of over-time
work) capable of being expressed in terms of money, which would, if the terms of
employment, express or implied, were fulfilled, be payable to an employee in respect of his
employment or of work done in such employment and includes dearness allowance (that is to
say, all cash payments, by whatever name called, paid to an employee on account of a rise in
the cost of living), but does not include—
(i) any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or of supply of light, water, medical attendance or
other amenity or of any service or of any concessional supply of food grains or other articles;
(iii) any travelling concession;
(iv) any bonus (including incentive, production and attendance bonus);
(v) any contribution paid or payable by the employer to any pension fund or provident fund or
for the benefit of the employee under any law for the time being in force;
(vi) any retrenchment compensation or any gratuity or other retirement benefit payable to the
employee or any ex gratia payment made to him;
(vii) any commission payable to the employee.

9. Establishment to include departments, undertaking and branches (Sec. 3)

According to this section all the different departments or undertakings or branches of an
establishment whether situated in the same place or at different places should be treated as
parts of the same establishment for computation of bonus under the act. If an establishment at
Madras has branches at Bombay and Calcutta, they would all be treated as one establishment
situated at Madras and one computation would be made for bonus for any accounting year.

An exception is that where a separate balance sheet & profit and loss account are prepared in
respect of any such department, undertaking or branch for any accounting year, it will be
treated as a separate establishment provide it was not a part of establishment in the previous
year.

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10. Payment of Bonus

Payment of Bonus

Eligibility for Bonus (Sec. 8) Disqualification for Bonus (Sec. 9)

Eligibility for Bonus (Sec. 8)

Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in
accordance with the provisions of this Act, provided he has worked in the establishment for
not less than thirty working days in that year. However, it is not necessary that these thirty
days of work should be a continuous period.

The word ‘worked’ in section 8 means ‘ready and willing to work’. Where an employee is
prevented from working by an act on the part of the employer which is ultimately declared
illegal, the employee’s eligibility for bonus under section 8 shall not be lost. Thus, an
employee shall be deemed to have ‘worked’ for the days for which he has not actually worked
on account of wrongful discharge or dismissal. An employee suspended but subsequently
reinstated with full back wages cannot be treated to be ineligible for bonus for the period of
suspension.

Disqualification for Bonus (Sec. 9)

An employee shall be disqualified from receiving 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

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11. Consequences of two types of misconduct
 In the case of misconduct of an employee causing any financial loss to the employer, it is
lawful for the employer u/s 18 of the act to deduct the amount of loss, from the amount of
bonus payable to the employee. Thus, sec. 18 deals with the case of minor misconduct.

 Sec. 9 takes note of more serious acts of misconduct and completely disqualified a
workman from receiving bonus.

12. Time limit for payment of bonus (Sec. 19)

All amounts payable to an employee by way of bonus under this Act shall be paid in cash by
his employer:
(a) where there is a dispute regarding payment of bonus pending before any authority under
section 22, within a month from the date on which the award becomes enforceable or the
settlement comes into operation, in respect of such dispute;
(b) in any other case, within a period of eight months from the close of the accounting year:
This section, however, empowers the appropriate government to extend the time for
payment of bonus, if the following requirements are satisfied:
1. The employer should make an application to the appropriate government;
2. The application should disclose sufficient reasons;
3. The appropriate government may make an order extending the period for payment of
bonus but the total period so extended shouldn’t in any case exceed a period of 2 years.
The claim for bonus can be made only after the close of the accounting year and in accordance
with the provisions of the act, whether it’s the minimum bonus or the maximum bonus, they
have to be paid within the period mentioned in Sec. 19

13. Recovery of bonus due from an employer (Sec. 21)

Where any money is due to an employee by way of bonus from his employer under a
settlement or an award or agreement, the employee himself or any other person authorized by
him in writing in this behalf, or in the case of the death of the employee, his assignee or heirs
may, without prejudice to any other mode of recovery, make an application to the appropriate
Government for the recovery of the money due to him, and if the appropriate Government or
such authority as the appropriate Government may specify in this behalf is satisfied that any

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money is so due, it shall issue a certificate for that amount to the Collector who shall proceed
to recover the same in the same manner as an arrear of land revenue.
Provided that every such application shall be made within one year from the date on which the
money became due to the employee from the employer: Provided further that any such
application may be entertained after the expiry of the said period of one year, if the
appropriate Government is satisfied that the applicant had sufficient cause for not making the
application within the said period.

14. Computation of number of working days Sec. 14

The number of working days of an establishment is the number of days on which it worked.
To get the number of days on which an employee worked, one has to consider the actual
number of days of attendance according to the attendance register and add thereto the days on
which he has been absent on any of the following causes:
• Layoff;
• Leave with salary or wage;
• Temporary disablement caused by accident arising out of & in the course of employment;
and
• Maternity leave with salary or wage.

15. Calculation of Bonus

Computation of available surplus (Sec. 5)

Available surplus = Gross Profit – Deductions

The sums so deductible from the gross profits are:
1. Depreciation admissible u/s 32 of the Income Tax Act.
2. Any development rebate or investment allowance or development allowance
3. All direct taxes payable for the accounting year (calculated as per provisions of Sec. 7)
4. The sums specified in the Third schedule: In respect of a company other than a banking
company
 The dividends payable on its preference share capital for the accounting year calculated
at the actual rate at which such dividends are payable;
 8.5% of its paid-up equity share capital as at the commencement of the accounting year;
 6% of its reserves shown in its balance sheet as at the commencement of the accounting
year, including any profits carried forward from the previous accounting year.

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16. Payment of minimum bonus (Sec. 10)
Subject to the other provisions of this Act, every employer shall be bound to pay to every
employee in respect of the accounting year commencing on any day in the year 1979 and in
respect of every subsequent accounting year, a minimum bonus which shall be 8.33%. of the
salary or wage earned by the employee during the accounting year or one hundred rupees,
whichever is higher, whether or not the employer has any allocable surplus in the accounting
year.

Provided that where an employee has not completed fifteen years of age at the beginning of
the accounting year, he will be entitled to a minimum bonus which shall be 8.33% of the
salary or wage, during the accounting year or Rs.60 whichever is higher.

17. Payment of maximum bonus (Sec. 11&12)

(1) Where in respect of any accounting year referred to in section 10, the allocable surplus
exceeds the amount of minimum bonus payable to the employees under that section, the
employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect
of that accounting year bonus which shall be an amount in proportion to the salary or wage
earned by the employee during the accounting year subject to a maximum of 20% of such
salary or wage.

(2) In computing the allocable surplus under this section, the amount set on or the amount set
off under the provisions of section 15 shall be considered in accordance with the provisions of
that section.

18. Set-on of allocable surplus (Sec. 15)

Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus
payable to the employees in the establishment under section 11, then, the excess shall, subject
to a limit of twenty percent of the total salary or wages of the employees employed in the
establishment in that accounting year, be carried forward for being set on in the succeeding
accounting year and so on up to and inclusive of the fourth accounting year to be utilized for
the purpose of payment of bonus in the manner illustrated in the Fourth Schedule.

Set-off of allocable surplus (Sec. 15)

Where for any accounting year, there is no available surplus or the allocable surplus in respect
of that year falls short of the amount of minimum bonus payable to the employees in the
establishment under section 10, and there is no amount or sufficient amount carried forward
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and set on under sub-section (1) which could be utilized for the purpose of payment of the
minimum bonus, then such minimum amount or the deficiency, as the case may be, shall be
carried forward for being set off in the succeeding accounting year and so on up to and
inclusive of the fourth accounting year in the manner illustrated in the Fourth Schedule.

Illustration:
 In this Schedule, the total amount of bonus equal to 8.33 per cent of the annual salary or
wage payable to all the employees is assumed to be Rs.1,04,167. Accordingly,
 Maximum bonus to which all the employees are entitled to be paid (20% of the annual
salary or wage of all the employees) would be Rs. 2,50,000.

Year Amount equal to Amount payable as bonus Set on or set off Total set on or
sixty per cent. or the year carried set off Carried
sixty-seven per cent., forward Forward
as the case may be, of
a available surplus
allocable as bonus
Rs. Rs. Rs. Rs. of (year)
1. 1.04.167 1.04.167** Nil Nil
2. 6,35,000 2,50,000* set on 2,50,000* set on 2,50,000* (2)
3. 2,20,000 2,50,000* (inclusive of Nil Set on 2,20,000 (2)
30,000 from year-2)
4. 3,75,000 2,50,000* Set on 1,25,000 Set on 2,20,000 (2)
1,25,000 (4)
5. 1,40,000 2,50,000* (inclusive of Nil Set on 1,10,000 (2)
1,10,000 from year-2) 1,25,000 (4)
6. 3,10,000 2,50,000* Nil Set on Nil + (2)
1,25,000 (4)
60,000 (6)
7. 1,00,000 2,50,000* (Inclusive of Nil Set on 35,000 (6)
1,25,000 from year-4 and
25,000 from year-6)
8. Nil 1,04,167** (inclusive of Set off 69,167 Set off 69,167 (8)
(due to loss) 35,000 from year-6)
9. 10,000 1,04,167*** Set off 94,167 Set off 69,167 (8)
94,167 (9)
10. 2,15,000 1,04,167** (after setting off Nil Set off 52,501 (9)
69, 167 from year-8 and
41,666 from year-9)

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19. Special provisions with respect to certain establishments (Sec.16)
[(1) Where an establishment is newly set up, whether before or after the commencement of
this Act, the employees of such establishment shall be entitled to be paid bonus under this Act
in accordance with the provisions of sub-sections (1A) (1B) and (1C).
(1A) In the first five accounting years following the accounting year in which the employer
sells the goods produced or manufactured by him or renders services, as the case may be, from
such establishment, bonus shall be payable only in respect of the accounting year in which the
employer derives profit from such establishment and such bonus shall be calculated in
accordance with the provisions of this Act in relation to that year but without applying the
provisions of section 15.

(1B) For the sixth and seventh accounting years following the accounting year in which the
employer sells the goods produced or manufactured by him or renders services, as the case
may be, from such establishment, the provisions of section 15 shall apply subject to the
following modifications, namely:
(i) for the sixth accounting year: set on or set off, as the case may be, shall be made in the
manner illustrated in the Fourth Schedule considering the excess or deficiency, if any as the
case may be, of the allocable surplus set on or set off in respect of the fifth and sixth
accounting years;

(ii) for the seventh accounting year: set on or set off, as the case may be, shall be made in
the manner illustrated in the Fourth Schedule considering the excess or deficiency, if any as
the case may be, of the allocable surplus set on or set off in respect of the fifth, sixth and
seventh accounting years.

(1C) From the eighth accounting year following the accounting year in which the employer
sells the goods produced or manufactured by him or renders services, as the case may be, from
such establishment, the provisions of section 15 shall apply in relation to such establishment
as they apply in relation to any other establishment.

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20. Inspectors
 Sec. 27 empowers the appropriate Government may, by notification in the Official Gazette,
appoint such persons as it thinks fit to be Inspectors for the purposes of this Act and may
define the limits within which they shall exercise jurisdiction.
 The inspector appointed under this section have been given the following powers for the
purpose of ascertaining whether the provisions of the act have been compiled with:

(a) require an employer to furnish such information as he may consider necessary;

(b) at any reasonable time and with such assistance, if any, as he thinks fit, enter any
establishment or any premises connected therewith and require any one found in charge
thereof to produce before him for examination any accounts, books, registers and other
documents relating to the employment of persons or the payment of salary or wage or
bonus in the establishment;

(c) examine with respect to any matter relevant to any of the purposes aforesaid, the employer,
his agent or servant or any other person found in charge of the establishment or any
premises connected therewith or any person whom the Inspector has reasonable cause to
believe to be or to have been an employee in the establishment;

(d) make copies of, or take extracts from, any book, register or other document maintained in
relation to the establishment;

(e) exercise such other powers as may be prescribed.

 Every Inspector shall be deemed to be a public servant within the meaning of the Indian
Penal Code.
 Any person required to produce any accounts, book, register or other documents or to give
information by an Inspector shall be legally bound to do so.
 Nothing contained in this section shall enable an Inspector to require a banking company to
furnish or disclose any statement or information or to produce, or give inspection of, any of
its books of account or other documents, which a banking company cannot be compelled to
furnish, disclose, produce or give inspection of, under the provisions of section 34A of the
Banking Regulation Act, 1949.

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21. Offences & Penalties (Sec.28)

Offence Penalty
1. Contravention of the provisions of the Imprisonment upto 6 months, or fine upto
Act or rules Rs.1000, or both.
2. Failure to comply with the directions Imprisonment upto 6 months, or fine upto
or requisitions made. Rs.1000, or both.

22. Act not to apply to certain classes of employees (Sec.32)

 Employees employed by the Life Insurance Corporation of India;
 seamen as defined in clause (42) of section 3 of the Merchant Shipping Act, 1958;
 employees registered or listed under any scheme made under the Dock Workers
(Regulation of Employment) Act, 1948 and employed by registered or listed employers;
 employees employed by an establishment engaged in any industry carried on by or under
the authority of any department of the Central Government or a State Government or a local
authority;
 employees employed by:

(a) the Indian Red Cross Society or any other institution of a like nature (including its
branches);

(b) universities and other educational institutions;

(c) institutions (including hospitals, chambers of commerce and social welfare institutions)
established not for purposes of profit;

 employees employed by the Reserve Bank of India;

 employees employed by—

(a) the Industrial Finance Corporation of India;

(b) any Financial Corporation established under section 3, or any Joint Financial
Corporation established under section 3A, of the State Financial Corporations Act, 1951;

(c) the Deposit Insurance Corporation;

(d) the National Bank for Agriculture and Rural Development;

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 (e) the Unit Trust of India;

(f) the Industrial Development Bank of India;

g) the Small Industries Development Bank of India;

(h) the National Housing Bank;

(i) employees employed by inland water transport establishments operating on routes

passing through any other country.

(j) any other financial institution other than a banking company, being an establishment in
public sector, which the Central Government may, by notification in the Official Gazette,
specify, having regard to:

-its capital structure;

-its objectives and the nature of its activities;

-the nature and extent of financial assistance or any concession given to it by the
Government; and

-any other relevant factor

23. Power of exemption (Sec.32)

If the appropriate Government, having regard to the financial position and other relevant
circumstances of any establishment or class of establishments, is of opinion that it will not be
in public interest to apply all or any of the provisions of this Act thereto, it may, by
notification in the Official Gazette, exempt for such period as may be specified therein and
subject to such conditions as it may think fit to impose, such establishment or class of
establishments from all or any of the provisions of this Act.

24. Obligations of Employers, Rights of Employers, Rights of Employees

(Sec.32)
A. Obligations of Employers
1. To calculate and pay the annual bonus as required under the Act.

2. To maintain the following registers:

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  Register showing the computation of allocate surplus in form A
 Register showing set on & set off of the allocate surplus in form B
 Register showing the details of the amount of bonus due to each employee, deductions
therefrom & the amount disbursed in from C

3. To submit an annual return of bonus paid to employees during the year, in form D, to the
inspector, within 30 days of the expiry of the time limit specified for the payment of bonus.

4. To co-operate with the Inspector, produce before him the registers/records maintained and
such other information as may be required by them.

5. To get his account audited as per the directions of a Labour Court/Tribunal or of any such
other authority.

B. Rights of employers

1. Right to forfeit bonus of an employee, who has been dismissed from service for fraud,
riotous or violent behaviour, of theft mis-appropriation or sabotage of any property of the
establishment.

2. Right to make permissible deductions from the bonus payable to an employee, such as,
festival bonus paid and financial loss caused by misconduct of the employee.

3. Right to refer any dispute relating to application or interpretation of any provision of the
Act, to the Labour Court or Labour Tribunal

C. Rights of Employees

1. Right to claim bonus payable under the Act and to make an application to the Government,
for the recovery of bonus due and unpaid, within one year of its becoming due.

2. Right to refer any dispute to the Labour Court/ Labour Tribunal. Employees to whom the
Payment of Bonus Act doesn’t apply can’t raise a dispute regarding bonus under the Industrial
Dispute Act

3. Right to seek clarification and obtain information, on any item in the accounts of the
establishment.

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