Statutory bonus explained: who gets it and how much

Every October a founder asks the same question: do we have to pay a Diwali bonus? For many employees the answer is yes, and it has nothing to do with Diwali. The statutory bonus is an annual payment the law requires for lower-paid employees in establishments of a certain size. The Payment of Bonus Act 1965 that governed it has been folded into the Code on Wages 2019, and in August 2026 the central government finally notified the wage figures that make the Code's scheme operational. Here is what a small company must pay, to whom, and by when.

Which establishments

The bonus chapter of the Code applies to every factory and to every establishment that employed twenty or more persons on any day in the accounting year. Once covered, always covered, even if headcount later falls. Establishments below twenty are outside it unless the appropriate government extends coverage by notification, which several states have done for smaller shops over the years; check your state.

A new establishment gets a transitional break: for its first five accounting years, bonus is payable only for a year in which it makes a profit, and the set-on and set-off rules do not apply. From the sixth year the full scheme applies regardless of profit.

Who is eligible

Two tests, both under Section 26 of the Code:

The employee's wages must not exceed the eligibility ceiling. For the central sphere, the Ministry of Labour notified ₹21,000 a month on 25 August 2026 (S.O. 4711(E)), with retrospective effect from 21 November 2025, the day the Code came into force. States are the appropriate government for most private shops and offices and may notify their own figure; where a state has not, the central figure is the reference everyone is using.
The employee must have worked at least 30 days in the accounting year.

Apprentices are excluded. Employees dismissed for fraud, violent misconduct or theft can be disqualified for that year. There is no distinction between permanent and fixed-term staff.

"Wages" here is the Code's definition: basic, DA and retaining allowance, with the rule that excluded allowances cannot exceed half of total remuneration. An employee with ₹15,000 basic and ₹20,000 of allowances has Code wages of ₹17,500, not ₹15,000, and is still within the ceiling.

How much

Item	Rule
Minimum bonus	8.33 percent of wages earned in the year, or ₹100, whichever is higher, payable even in a loss year
Maximum bonus	20 percent of wages, when the allocable surplus supports it
Calculation ceiling	For an employee whose wages exceed ₹7,000 a month, bonus is computed as if wages were ₹7,000 or the minimum wage for that employment, whichever is higher (S.O. 4710(E), 25 August 2026)
Pro-rating	Wages earned, so an employee who joined in October gets bonus on the months worked

The percentage between 8.33 and 20 depends on the allocable surplus, computed from the year's profit with set-on and set-off carried across years. Most small companies pay the minimum unless a settlement or policy promises more. If you already pay a performance or festival bonus, it counts toward the statutory amount only if the terms say so; otherwise the statutory bonus is payable on top.

Worked example. An employee earns Code wages of ₹18,000 a month and worked the full year. They are eligible (₹18,000 is under ₹21,000). Bonus is computed on ₹7,000 a month, or the minimum wage if higher. Taking ₹7,000: annual bonus wages are ₹84,000, and the minimum bonus is 8.33 percent of that, ₹6,997. If the applicable minimum wage for the job is ₹12,000 a month, the base becomes ₹1,44,000 and the minimum bonus ₹11,995. This is why the minimum wage matters even for employees paid well above it.

When to pay

Section 39 of the Code requires bonus to be credited to the employee's bank account within eight months of the close of the accounting year. For an April to March year, that is 30 November. Many companies pay it in the October payroll so it lands before Diwali, which is why the two are confused. The government can extend the eight months on application, up to two years in total, but a small company should not rely on that.

Bonus is taxable as salary in the year it is paid. Deduct TDS on it like any other component and show it as its own line on the payslip.

Records and registers

The Code's rules require a register showing the computation of allocable surplus, the set-on and set-off, and the bonus due and paid to each employee. Keep the computation sheet with the payroll records for the year. Inspectors ask for it, and so do auditors when the provision in the accounts does not match the payout.

What to decide this month

Count your headcount on every day of the year, including contract staff on your rolls. If it touched twenty, you are in.
List every employee with Code wages at or below ₹21,000 and at least 30 days worked.
Decide the percentage. If it is the minimum, say so in a one-line policy note so nobody expects 20 percent next year.
Schedule the payout for a payroll before 30 November, and configure it as a separate earning so the payroll run handles TDS and the register entry.

Sources

This article describes general legal provisions and common practice, not legal advice. Bonus coverage and ceilings depend on which government is the appropriate government for your establishment and on state notifications; confirm specifics with a professional.