Bonuses are payments given to employees in addition to their base salaries. Such payments may include additional pay or compensation over their usual salary.
The company can award bonuses to entry-level employees and senior-level executives. In addition to giving bonuses to prospective employees, companies can distribute bonuses among shareholders.
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What is bonus pay?
An employee receives compensation in addition to their base salary. Bonus pay is a way for companies to show appreciation to employees or teams that have achieved crucial goals. Companies present bonuses to boost employees’ morale, motivation, and productivity. The annual income comprises the base salary and any bonuses.
The Payment of Bonus Act, 1965, is the primary law in India governing how employers should pay bonuses to workers.
The Payment of Bonus Act applies to all factories and businesses with at least 20 people on their payroll on any given day during the accounting period. Even if the number of employees in a company drops to less than 20, the act states that bonus payments remains mandatory.
How does bonus pay work?
Bonuses can be provided in various forms. Although bonuses are typically based on performance, that is, a company gives out bonuses based on how well an employee or group of employees help the team or company reach its goals. The manager decides to give out bonuses, which indicates that the bonus is not dependent on a specific quota, level, or performance. Instead, the manager is at a discretion to decide who should get a bonus and the amount of the bonus. Typically, the clause of non-discretionary bonuses is included in an employee’s offer letter or contract.
Calculation of bonus payable
According to changes to the Payment of Bonus Bill passed in 2015, employers must give bonuses to workers whose gross income is less than Rs. 21,000. The bonus is calculated as follows:
- If the salary of an employee is less than or equal to Rs. 7000, the bonus calculation is calculated using the formula: Bonus = Salary x 8.33/100.
- If the salary of an employee is more than Rs. 7000, the bonus calculation is based on Rs. 7000 using the formula: Bonus = Rs. 7,000 x 8.33/100.
Note: Salary = Basic salary + Dearness Allowance
Examples
If Gita’s Salary (Basic + DA) is Rs. 2,000, then the bonus payable is calculated as follows:
2,000 x 8.33 / 100 = Rs. 166.6 per month (Rs. 2,000 per year)
If Babita’s Salary (Basic + DA) is Rs. 10,500, then the bonus payable will be as follows:
7,000 x 8.33/100 = Rs. 583 per month (Rs. 6,996 per year)
Types of bonus payments
Some bonuses are distributed quarterly, whereas other bonuses are distributed yearly. Bonuses may be a one-time payment or recurring payment. Among many other factors, bonuses depend on your job, the level you are working on, what you bring to the table, how you lead, and what kind of company you work for. The following are the most common types of bonuses:
Annual bonus
Annual bonuses typically depend on how well the company performs as a whole. Therefore, the size of your bonus depends on how successful your company was that year and your role in the success of the company. Thus, annual bonuses are akin to ‘sharing the profits’
Spot bonus
Employees receiving spot bonuses go above and beyond what the company expects from them. Such tasks involve providing services that are not part of their job description. Such bonuses are typically a one-time payment depending on the budget, priorities, and how well the work is done.
Signing bonus
Signing bonuses are one-time payments disbursed when an employee starts a new job. When an employee moves to a new city for a job, and the company wants to pay some of the costs, employees are paid a signing bonus. Employers can also use the bonus to make up for salary demands they cannot satisfy.
Retention bonus
A retention bonus is similar to a signing bonus. The company grants this bonus to retain ‘Good’ employees or employees showing loyalty. This bonus is typically given when a company buys another company or merges with another company or to entice an employee to stay longer if he/she were about to leave.
Referral bonus
Employees are granted a referral bonus if they refer people to work at their firm. This bonus is subject to hiring of the referred employee and working at the company for a few months (usually 3-6 months).
Holiday bonus
A holiday bonus is another way for employers to appreciate the hard work of employees and help them monetarily during a tough time of the year. This bonus is typically a set percentage of the annual salary of the employee (anywhere from 5% to 10%).
Conclusion
The Payment of Bonus Act was passed in 1965 to regulate the practice of paying bonuses by various establishments. The act is a fair method to determine the bonus based on how much money was made and how much work was done. The act allows workers to earn more than their minimum wage or salary. This act has different rules for businesses, such as banks, public organisations, and businesses that are not companies or corporations. This act regulates bonus payment so that people achieve pay parity.
FAQ's
How are bonuses paid if an employee leaves a company before the end of the fiscal year?
When an employee leaves before the end of the financial year, the employee should get a pro-rated bonus as part of the settlement.
How are bonuses calculated?
A company sets aside a certain amount. A typical bonus percentage would be between 2.5% and 7.5% of payroll, but it can be as high as 15%
Does the salary include bonuses?
A bonus is typically calculated as a percentage of your base salary. Therefore, a higher base salary typically lead to higher bonuses.
Is bonus taxation different from salary taxation?
Bonuses are taxable but are not just added to your income and taxed at your highest marginal tax rate. Instead, a bonus is an additional income and is taxed by the federal government at a flat rate of 22%.
What part of wages is used to calculate bonus?
Only the basic salary and dearness allowance are considered for bonus calculations
