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Bonus Eligibility

Bonus Eligibility

The Principal Act provides for the mandatory annual payment of bonuses to eligible employees of establishments that employ 20 or more persons. In accordance with the terms of the Principal Act, every employee who draws a salary of INR 10,000 or below per month and who has worked for not less than 30 days in an accounting year, is eligible for a bonus (calculated as per the methodology provided under the Principal Act) with the floor of 8.33% of the salary payable to him/her and a cap on the maximum bonus statutorily payable (20% of the salary). Apart from seeking to broaden the eligibility limit, (from INR 10,000 set out under the Principal Act, the Amendment Act also raises the calculation ceiling for payment of bonuses and retrospectively places the onus on employers to make payment of bonuses to eligible employees effective from 1 April 2014.

Amendment of Eligibility Limit

By amending Section 2(13) of the Principal Act, the Amendment Act has now widened the scope of employees eligible for payment of bonus from those drawing salary of INR 10,000 per month, to INR 21,000 per month.

The amendment in the eligibility limit appears to be an initiative that forms a part of the Central Government’s pro-labour policy. Interestingly, the last amendment to the eligibility limit was carried out in the year 2007 and over the past decade, the economy has seen significant reforms. These economic reforms have contributed towards an exponential increase in pay scales making this amendment to the Principal Act very important to the larger populace of the workforce which earns between INR 10,000 and INR 21,000 per month.

Calculation of Bonus

Taking the demands of the trade unions head-on, Section 12 of the Principal Act has been amended to state that where the salary or wage of an employee exceeds INR 7,000 per month or the minimum wage for the scheduled employment, the bonus payable to such employee shall be calculated as if his salary or wage were INR 7,000 per month or the minimum wage for the scheduled employment, whichever is higher.

The Principal Act provided that the bonus payable to an employee shall be in proportion to his/her salary. However, where an employee’s salary was over INR 3,500 per month, for the purposes of calculating the bonus, the salary was to be assumed to be INR 3,500 per month. With a view to maximising bonus earnings, the Amendment Act has increased the wage ceiling for the calculation to INR 7,000 and has also factored in possibilities where the minimum wage payable to such employees may be over INR 7,000, thereby giving employees the flexibility to draw a higher amount as bonus.

While this appears to be yet another attempt made by the Government at ensuring employee satisfaction, the inclusion of the minimum wage component in calculating bonuses may hinder the accounting policies of companies having a national presence. It may be noted that in accordance with the provisions of the Minimum Wages Act, 1948, minimum wage rates may be prescribed at a State as well as a central level. More often than not, the publication of notifications pertaining to minimum wage rates are delayed and have been subject to anomalies. Aggregating relevant data pertaining to minimum wage rates and ensuring that accurate calculations are made, for each state, may obstruct companies in processing the payment of bonuses.