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The Burning Tale
Diwali Bonus this year?
With the festivities just around the corner, employees are eagerly expecting a Diwali bonus from their companies and many PSUs and Corporates have declared the bonus. But is it mandatory to give a Diwali Bonus? How is it calculated? Let’s understand it better.
Bonus vs Diwali Bonus
The Payment of Bonus Act, 1965 provides for the payment of bonus to employees. An employer who is working with 20 or more than 20 employees is liable to pay them a bonus, once every year. The objective of the Payment of Bonus Act is to reward the employee of the organization by sharing the profits earned and is linked to productivity.
Under the Bonus Act, an employer is required to pay the bonus within 8 months from the close of the accounting year. Therefore, the bonus is given around Diwali and hence it is popularly known as Diwali bonus. Startup to pay bonus in the first year? For the first 5 years, organizations need not pay bonus if they have made losses. If they have made profits in any year in the first 5-year period, they will have to pay out a bonus for that particular year.
After the completion of 5 years, organizations are required to pay bonus irrespective of whether they are making a profit or loss.
Every employee, whether on probation, part-time, contractual, permanent, supervisor or manager, who is drawing ₹21000 (Basic + DA) per month or less and has completed 30 days in an accounting year, is eligible for the bonus. However, an apprentice is not eligible for the bonus as per the Apprenticeship Act.
When an employee is not eligible for the statutory bonus but the company wants to share the bonus, it can be given as ex-gratia.
Bonus is calculated on the basis of profits or on the basis of production or productivity. The percentage of the bonus will be the same for every employee of the company, irrespective of his/her position in the company.
Bonus is payable at a minimum rate of 8.33% and a maximum rate of 20%.
Calculation of bonus is done follows:
If Basic+DA is below Rs.7000 then bonus will be calculated on the actual amount, and
If Basic+DA is above Rs.7000 then the bonus will be calculated on Rs.700
Examples of calculation of bonus
If the Basic salary of the employee is less than or equal to Rs. 7,000
Manjeet is working as an engineer in a Company in Mumbai.
His basic salary is Rs. 6,500 per month.
Formula – Basic Salary*8.33% = Bonus per month
6500*8.33% = 541.45 per month
If the Basic salary of the employee is higher than Rs 7,000
Divya is working as a Sales officer in one of the shops in Chennai.
Her basic salary is Rs. 18,000 per month.
Formula – Basic Salary*20% = Bonus per month
7,000*20% = 1400 per month
Common mistakes HRs make
There is a common practice of paying a bonus monthly in many companies which is wrong because it is based on an assumption that the company will pay a bonus at the rate of 8.33%. One cannot assume that the bonus will be paid on the minimum slab only. The actual calculation should only be done after the finalizing of the balance sheet. Based on the balance sheet, the bonus can be as high as 20%.
Moreover, when a monthly bonus is paid, in such case, the bonus is liable for PF and ESI deduction and is not considered as a statutory bonus. To correct this, the bonus paid monthly can be shown as an advance bonus and at the year end actual calculation can be done and the difference can be paid when the balance sheet is finalised.
Bonus: We have made a detailed video about the fundamentals, applicability and calculation of Bonus. Click here to watch the video and get access to a Bonus Calculation Excel sheet with working examples.
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Editorial Team: Divyam Jain, Loveleen Kaur
Design: Anirudh Sharma