Bonus & Gratuity

The Payment of Bonus Act, 1965.

 Meaning of Bonus.
 Eligibility for Bonus
 Disqualification for bonus
 Determination of Bonus
 Special Provisions with Respect to Certain
Establishments
 Inspectors
 Penalties
 Offences
 Recovery of Bonus due from the Employer
 Meaning of Bonus
• The Dictionary meaning of the word bonus is
something to the good, extra dividend to the
shareholders of a company or gratuity to workmen
beyond their wages‟.
• It is the last meaning of the word which has
acquired the significance for the labour-
management relations in India.
• Till recently, bonus was regarded as the ex-gratia
payment made by the employer to his workers for
the extra effort by them in production process.
• From this limited connotation of the word, we have
travelled a long way to reach the stage of
enactment of the Payment of Bonus Act, 1965,
which makes this annual payment obligatory on the
employers.
Eligibility and Disqualification for
Bonus
 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 the Act, provided he has
worked in the establishment for not less than 30 working
days in that year. Where an employee has not worked for
all the working days in an accounting year, the bonus
payable to him shall be proportionately reduced.

 Disqualification for bonus: Notwithstanding anything

contained in the Act, an employee shall be disqualified
from receiving bonus under the Act, if he is dismissed from
service for:
i) Fraud
ii) Riotous or violent behavior while on the premises of the
establishment
iii) Theft, misappropriation or sabotage of any property of
the establishment.
 Determination of Bonus
 Bonus under the Payment of Bonus Act, 1905,
cannot be claimed by the workers as a matter
of right. The Bonus Formula under the Act
rests on the Calculation of the „available surplus‟
and it envisage the following steps.
i) Computation of Gross profits
ii) Determination of Available Surplus.
iii) Allocable Surplus:
The rules followed for distribution of allocable
surplus are:
1. Amount of Bonus: How much to pay, and has to
be paid even in losses also.
a) Minimum Bonus: As per the act that is 8.33% of the
wages or salary or Rs.100 whichever is higher.
b) Maximum Bonus: Bonus at a rate higher than the
minimum is payable only when the allocable surplus
in a particular accounting year exceeds the amount
of minimum bonus payable to employees.
Maximum bonus paid can be 20% of such salary
or wages.
2. Calculation of bonus with respect to certain
employees:If an employees salary exceeds
Rs.3500 p.m. than for purpose of calculation of
bonus his salary will be taken as Rs.3500/-
p.m.
 Calculation of Bonus
• Where the salary or wages of an employee
exceeds Rs.3500 p.m the bonus payable will be
calculated as if his salary or wages were
Rs.3500 p.m.
• Accordingly, if any employee‟s salary is
Rs.5000p.m. and the bonus declared by the
employer is 15%, he will be entitled to the
amount of the bonus of Rs.6300, calculated in
the following manner:
=3500 * 15 * 12 = 6300
100
3. Set on & Set of f of allocable surplus:
a) Set on: In any accounting year if the allocable
surplus exceeds the amount of maximum bonus
than then the excess will be carried forward for
being „set on‟ to the succeeding accounting year
and so on up to and inclusive of the 4th accounting
year.
b) Set off: in any accounting year if there is no
allocable surplus , or where the allocable
surplus falls short of the amount of minimum
bonus, and there is no amount of sufficient
amount carried
forward and „set on‟ which could be utilize for the
purpose of payment of minimum bonus. In such
cases, the minimum amount of deficiency, as the
case may be, shall be carried forward for being „set-
4)Proportionate reduction in bonus in certain cases: When an
employee has not worked for all the working days in any
accounting year, the minimum bonus of Rs100 or Rs.60 as the
case may be, if such bonus is higher than the 8.33% of his
salary for the days he has worked I that accounting year shall
be proportionately reduced.
5) Adjustment of customary or interim bonus against bonus
payable under the Act.
6) Deduction of certain amounts from bonus.
7)Time limit for payment of bonus: All amounts, payable to an
employee by his employer by way of bonus under the Act,
must be paid in cash. Further, the amount of bonus must be
paid in the following manner in respect of the relevant cases:
i) In the cases where a dispute regarding the payment of
bonus is pending before any authority, the amount of
bonus must be paid within one month from the date on
which the award becomes enforceable, or settlement
comes into operation, in respect of such dispute.
ii) In other cases, however, the amount of bonus must be
paid within a period of 8 months from the close of the
accounting year.
 Special Provisions with respect to
certain Establishments
 Provision regarding New Establishments: In such
new establishments, the employees of such
establishments shall be entitles to be paid bonus
as per the provisions:
 First 5 accounting years: In case of newly
establish firms, in the first 5 accounting year,
following the accounting year in which,the
employer sells the goods produced ,
manufactured by him or render services as the
case maybe, the bonus shall be payable by such
firm only in respect of the accounting year in
which the employer earns profits from such
newly set-up establishments.
 6th & 7th Accounting Years: The provision of „set-on‟
and „set-off‟ will be allowed for the 5th & 6th year.
And in case of 7th year again set on and set off will be
allowed of allocable surplus for 5th, 6th and 7th year.

 8th Accounting year: From the 8th a/c year, following

accounting year in which the employer sells the
goods produced or manufactured by him, or renders
the services, from such establishment, the provisions
of the Act will apply in respect of such
establishments also as they apply in respect of any
other establishment.
Bonus Linked with Production or
Productivity
• In some cases, there maybe an agreement between
the employee and the employer for bonus linked to
production or performance before the
commencement of Bonus Act 1975, then such
employees shall be entitled to receive bonus due to
them under such agreement.
• But any such agreement or settlement whereby the
employees relinquish there right to receive the
minimum bonus, shall be null & void in so far as it
purports to deprive them of such right.
• Further, such employees shall not be entitled to be
paid any bonus in excess of 20% of the salary or
wages earned by them during the relevant
accounting year.
 Inspectors
 The appropriate Government may appoint such
persons as it thinks fit to be Inspectors for the
purpose of the Act and define the limits
within which they shall exercise jurisdiction.
 Powers of the Inspectors: Same that of Factories
& Wages Act.
 Penalties
If any person contravenes any of the provisions of
the Act or any rule made there under, he shall be
punishable with imprisonment for a term which
may extend to 6 months, or fine which may extend
to Rs.1000 or with both.
 Recovery of Bonus due from
Employer
 In cases where any amount is due to an
employee by way of his bonus under an
agreement, a settlement or an award, the
employee himself or any other person authorised
by him , or in the case of death of employee his
assignee or heirs may make an application to
the appropriate Govt. for the recovery of the
amount of bonus due to him.
 But such application has to be made within 12
months of the amount due.
The Payment of Gratuity
Act,1972
 What is Gratuity
 Payment of Gratuity
 Forfeiture of Gratuity
 Nomination
 Determination of Gratuity
 Recovery of Grauity
 Inspectors
 Penalties & offences
 What is Gratuity
• Gratuity is a kind of retirement benefit, like
provident fund or pension.
• It is a payment which is intended to help an
employee after his retirement whether the
retirement is result of the rules of
superannuation or of some physical disability.
• The general principal of Gratuity scheme is that
by faithful service over a long period the
employee is entitled to claim certain amount as
retirement benefit.
• Thus it is earned by an employee as a reward
for long and meritorious services.
 How Gratuity is calculated

• It is to be calculated at the rate of 15 days

salary for every completed year of service,
subject to maximum of Rs 10,00,000.
• The right of a workman to claim gratuity can be
forfeited by the employer in certain cases.
Payment & Forfeiture of Gratuity and
Exemption
 Payment of Gratuity:
a) Gratuity payable on termination of employment: To
be paid to employee on his termination of his
employment after has has rendered his services for
not less than 5 years.
b) Rate of Gratuity: For every completed year of
service or part thereof in excess of 6 months, the
employer shall pay gratuity to an employee at the
rate of 15 days wages based on the rate of wages
last drawn by employee.
 Maximum Gratuity: Not more than Rs 10,00,000
 Forfeiture of Gratuity: If he services of an
employee are terminated due to any act , willful
omission, or negligence causing any damage or
loss to, or destruction of property belonging to the
employer, shall be forfeited to the extent of the
damage or loss caused.
 Compulsory Insurance and
Protection of Gratuity
 Complusory Insurance: As per the Act to
ensure that the loyal and commited employees
get the gratutity the employers are asked to
take Insurance from the LIC or any other
company for safegaurding this Gratuity fund in
any uncertain event. This rule is applicable for
establishments having more than 500
employees
 Exemption:The companies who have intiated a
sperate Gratuity Fund than they are exempted
from taking Insurance after they take appropriate
approval from the Central Government.
 Protection of Gratuity: Case in Civil or
Criminal Court may be filed.
 Nomination
 Each employee is required to make nomination within a
specified period and in the specified manner. The rule are:
1) Nomination within 90/30 days: Employee who has
completed 1 year of service before commencement of
Gratuity Act 1972, shall make within 90 days, and each
employee who completes 1 year of service after the date
of commencement of these rules, within 30 days of
completion of 1 year of service nomination has to be
made.
2) Distribution of amount of Gratuity: Can be paid to more
than one nominee.
3) Nomination in favour of family members:
4) Modification of nomination:
5) Death of nominee:
6) Safe custody of nomination:
Determination & Recovery of Gratuity
 Determination of Gratuity: As soon as gratuity is
payable the employer shall determine the amount and
give notice to the employee/nominee to whom the
gratuity is payable and to the Controlling Authority
specifying the amount of gratuity determined. This
exercise is to be done irrespective of the fact whether an
application for payment has been made or not.
 Payment of Gratuity: Within 30 days from the date when
it becomes payable.
 Payment of Interest: If the amount is not paid within 30
days than interest as per the Simple Rate of Interest which
is earned on long-term Govt. deposits will be paid till the
date the payment is made.
 Dispute as to gratuity: If there is any dispute in regards
to receiving of gratuity than the employer will deposit the
amount with the Controlling authority.
 Powers of Controlling Authority: Powers as
that of Civil Court.
 Appeal: If any person wants to appeal against any
desicion of Controlling Authority than within 60 days
form the date of receipt of the order to the appropriate
Government. In case of employer, for his appeal will
only be entertained when he produces a certificate
showing that the disputed amount has been
deposited with the Controlling Authority and than only
his appeal can be heard.
 Recovery of Gratuity: employee can make an
application to the Controlling Authority of non-
payment of the prescribed amount and the Authority
after investigation can issue a certificate of amount
to Collector to recover the amount together with
compound interest thereon.
 Inspector
 Appointed by the State or Central Governement.
 Have power to enter, investigate the premises
 Take evidences.
 Question witnesses etc.
 Examine the premises and the records
 Exercise such other powers as prescribed by the
law.
 Penalties and Offences
 Penalty for False statement or false
representation: Imprisonment upto 6 months
and fine upto Rs. 10,000 or both.
 For Contravention of the Act: Imprisonment
shall not be less than 3 months but may extend
to 1 year and fine shall not be less than
Rs.10,000 but it may extend to Rs.20,000.