The Payment of Bonus Act, 1965

The practice of paying bonus in India appears to have originated during First World War when certain textile mills granted 10% of wages as war bonus to their workers in 1917.   In certain cases of industrial disputes demand for payment of bonus was also included.   In 1950, the Full Bench of the Labour Appellate evolved a formula for determination of bonus.   A plea was made to raise that formula in 1959.   At the second and third meetings of the Eighteenth Session of Standing Labour Committee (G. O.I.) held in New Delhi in March/April 1960, it was agreed that a Commission be appointed to go into the question of bonus and evolve suitable norms.   A Tripartite Commission was set up by the Government of India to consider in a comprehensive manner, the question of payment of bonus based on profits to employees employed in establishments and to make recommendations to the Government.   The Government of India accepted the recommendations of the Commission subject to certain modifications.   To implement these recommendations the Payment of Bonus Ordinance, 1965 was promulgated on 29th May, 1965.   To replace the said Ordinance the Payment of Bonus Bill was introduced in the Parliament.

The Bonus Formula:

The Bonus Formula was first evolved in the case of Mill Owners Association, Bombay v. Rashtriya Mill Mazdoor Sangh, Bombay, (1950). The formula, which came to be known as ‘the Full Bench Formula or the Available Surplus Formula is as follow:

“As both labour and capital contribute to the industrial concern it is fair that labour should derive some benefit if there is surplus after meeting prior or necessary charges. These first charges on gross profit are:

  • Provision for depreciation
  • Reserve for rehabilitation
  • A return of six percent on the paid-up capital, and
  • A return on the working capital at a lower rate than the return on paid-up capital.

Bonus Commission:

The government of India appointed a commission by the suggestion given by the associated cement company’s known as the bonus commission, by its resolution dated 6th Dec, 1961.   The bonus commission submitted its report to the government on 18th Jan, 1964.   Then the government accepted the report with slight modification by their resolution dated 2nd Sept, 1964, and in order to give statutory effect to the recommendation made by the bonus commission an, ordinance known as the payment bonus ordinance was promulgated in may 1965.   The ordinance was later replaced by the payment of bonus act 1965 in September of that year.   The act came into operation with effect from 25th Sept, 1965.

To review the operation of the payment of bonus act 1965 the governments setup in 1972 a bonus review committee.   As a result of the recommendation of this committee, the payment of bonus (Amendment) act, 1972 was passed.   This amendment increases the minimum compulsory payment of bonus from 4% to 8 1/3%.

Payment of Bonus (Amendment) Act 1977:

Presidential ordinaries was promulgated on 3rd Sept, 1976 to give statutory effect to the government’s decision taken on 18th August, 1977 for restoring the payment of a minimum bonus of 8.33%, the legal right for which had been taken away from the employees during emergency.

The ordinance was replaced by the payment of bonus (Amendment) act, 1977 which was come into force retrospectively from the 3rd of September, 1977.   The important provisions of the Amendment Act have been discussed at relevant places.

The Act does not preclude “employees employed in any establishment or class of establishment from entering into agreement with their employer for granting them an amount of bonus under a formula which is different from that under this Act”.   But no such agreement shall have effect unless it is entered into with the previous approval of appropriate government.   This is subject to stipulations which among other things, provide that such employees shall not be entitled to be paid bonus in excess of–

  • 8.33% of the salary or wage earned by them during the accounting year if the employer has no allocable surplus in the accounting year or the amount of such allocable surplus is only so much that, but for the provisions of Sec. 10(2-A), it would entitle the employees only to receive an amount of bonus which is less than the aforesaid percentage; or,
  • 20% of the salary or wage earned by them during the accounting year.” (Sec.34 as substituted by the Amendment Act of 1977).

Eligibility for Bonus:

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.

Disqualification for Bonus:

Notwithstanding anything contained in this Act, 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.

Payment of Minimum Bonus:

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, the provisions of this section shall have effect in relation to such employee as if for the words “one hundred rupees”, the words “sixty rupees” were substituted.

Payment of Maximum Bonus:

1.           Where is 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 twenty percent of such salary or wage.

2.           In computing the allocable surplus under this section, the amount set on the amount set off under the provisions of section 15 shall be taken into account in accordance with the provisions of that section.

Proportionate Reduction in Bonus in Certain Cases:

Where an employee has not worked for all the working days in an accounting year, the minimum bonus of one hundred rupees or, as the case may be, of sixty rupees, if such bonus is higher than 8.33 per cent, of his salary or wage for the days he has worked in that accounting year, shall be proportionately reduced

Deduction of Certain Amounts from Bonus Payable under the Act:

Where in any accounting year, an employee is found guilty of misconduct causing financial loss to the employer, then, it shall be lawful for the employer to deduct the amount of loss from the amount of bonus payable by him to the employee under this Act in respect of that accounting year only and the employee shall be entitled to receive the balance, if any.

Time-Limit for Payment of Bonus:

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.


If any person-

(a)             contravenes any of the provision of this Act or any rule made there under, or

(b)           to whom a direction is given or a requisition is made under this Act fails to comply with the direction or requisition,

He shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both.


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