How to Manage Bonus in a Company Complete Guide for India (2026)

Every October, as Diwali approaches, HR teams across India face the same question: “What bonus are we giving this year?”

The answer can be more complicated than it looks. There are actually two different types of bonuses a company may need to deal with. The first is the statutory bonus a legal requirement under the Payment of Bonus Act, 1965, for eligible employees. It comes with specific rules, timelines, and penalties for non-compliance.

The second is a discretionary bonus, such as a performance bonus, festival bonus, profit-sharing bonus, or retention bonus. This is usually based on the company’s policy, employment terms, or management’s decision rather than a statutory requirement.

These two bonuses should not be treated as the same thing.

A company needs to understand when a statutory bonus applies, how it is calculated, and when it must be paid. At the same time, any additional bonus should be clearly defined and recorded according to the company’s policy.

This guide explains both types of bonuses, how they differ, and what employers need to keep in mind when calculating and paying them.

What Are Different Types Of Bonuses

The most common mistake is assuming that a Diwali goodwill payment automatically counts as the statutory bonus. It doesn’t.

If the company wants to treat a festival payment as the statutory bonus, it should clearly state this in writing and ensure the payment meets the applicable legal requirements. A verbal assurance is not enough, especially during a labour inspection. Businesses should keep proper records showing what the payment was for and how it was treated for statutory purposes.

Statutory Bonus: What Employers Need to Know

The Payment of Bonus Act 1965 is the governing law. It applies to every factory (regardless of headcount) and every other establishment with 20 or more employees on any day in the accounting year. Once you cross 20, you’re covered even if headcount later drops below that.

Who is eligible

• Salary threshold: Employees earning ₹21,000/month or below in basic+DA qualify. Above that, they’re not eligible under the Act.
• Minimum working days: Must have worked at least 30 days in the accounting year.
• Includes: Probationers, part-time employees, and seasonal workers if they meet the above two conditions.
• Excludes: Apprentices, employees of certain categories like LIC and some government-adjacent bodies.

How much Bonus Companies have to pay

Minimum: 8.33% of annual wages. Maximum: 20%. The percentage between those two depends on the company’s allocable surplus, essentially the profits available for bonus distribution after deducting certain items. Most SMEs pay the minimum 8.33% because calculating allocable surplus is complex and the minimum is already a significant amount.

There are two separate wage ceilings that confuse a lot of people:

• Eligibility ceiling ₹21,000/month. If basic+DA is above this, the employee is not eligible for statutory bonus.
• Calculation ceiling ₹7,000/month (or applicable minimum wage, whichever is higher). Even if an eligible employee earns ₹18,000, the bonus is calculated on ₹7,000 not their actual salary. This is the most commonly miscalculated part.

The formula worked example

When to pay it

Deadline: 30 November 2026 for FY 2025–26 (8 months from the close of the April–March accounting year). Most companies pay during Diwali which falls before the deadline that’s not coincidental. Missing 30 November is a compliance violation with penalties.

What happens in a loss year

Even if the company made a loss, the minimum 8.33% bonus is still payable. The Act has a ‘set-off’ mechanism if the company can’t pay from current profits, the obligation is carried forward against future surplus. The employee still gets paid. The company recovers it later from profits. Saying ‘we didn’t make money this year so no bonus’ is not legally valid for eligible employees under the Act.

Filing requirements

• Form C: Employee-wise record of bonus paid amount, date, any deductions
• Form D: Annual return filed with the labour office within 30 days of payment
• Forms A and B: Internal registers for allocable surplus computation produced on inspection, not filed proactively
• Retention period: Keep all records for 8 years that’s the standard inspection window

How To Manage Bonuses Fairly

Performance bonuses, joining bonuses, retention bonuses, profit-sharing these are company decisions, not legal mandates. How you structure them matters more than most companies think, because poorly designed bonus policies are a significant source of employee disputes.

Performance bonus

Performance bonuses are the most common type of discretionary bonus. They are usually linked to individual or team targets and paid quarterly or annually. The key is to set clear criteria before the performance period begins. Employees should know what they’re being measured on, how the bonus will be calculated, and when it will be paid.

Simply saying “at management’s discretion” is not a clear bonus policy.

One practical problem: when a performance bonus is paid regularly every year at the same amount, employees start treating it as part of their fixed salary. When it’s reduced or skipped, they feel cheated even if the policy says it’s discretionary. Either design it to genuinely vary with performance, or build it into the fixed salary structure from the start.

Joining bonus

A one-time payment to attract a candidate, usually offered when the candidate is giving up unvested equity or a bonus they’d have received at their current company. Almost always comes with a clawback clause if the employee leaves within 12 or 18 months, the bonus is recovered.

Get the clawback clause in writing in the offer letter. A joining bonus without a documented clawback provision is a gift the employee can keep even if they leave after 3 months. Courts have upheld reasonable clawback clauses but only if they’re explicitly written into the employment agreement.

Retention bonus

Paid to ask a key employee to stay through a specific period usually a project, an acquisition, or a leadership transition. Structured as: stay until [date], receive [amount]. Typically paid at the end of the retention period, not upfront.

Document the retention agreement separately. Include what constitutes ‘continued employment’ what happens if the employee goes on extended leave, is put on a performance plan, or the company is sold during the retention period. These edge cases come up more often than expected.

Profit-sharing

More common in startups and manufacturing companies. A percentage of company profits distributed to employees either uniformly or based on grade/contribution. If you’re implementing this, decide upfront: is it pre-tax profit, post-tax, operating profit? The definition matters when profit numbers are calculated at year-end and someone challenges the computation.

The Tax Question All Bonuses Are Taxable

Every bonus statutory, performance, festival, joining is taxable as salary income. It’s added to the employee’s total annual income and taxed at their applicable slab rate. Under the new tax regime (default from FY2026-27), there are no deductions available against bonus income.

The practical implication for payroll: when a bonus is paid, it increases that month’s income and therefore the TDS for that month. If an employee’s annual income was sitting just below a slab boundary and a ₹50,000 bonus pushes them over, their TDS needs to be recalculated for the remaining months of the year. This is the step most payroll teams miss.

For the complete TDS calculation framework: How to Calculate Payroll in India (2026).

How Payroll Software Handles Bonus

Managing bonus manually across 30–50 employees statutory calculations with the ₹7,000 ceiling, TDS adjustments, pro-rata for part-year employees is genuinely error-prone. The two salary ceilings in the statutory bonus formula alone (one for eligibility, one for calculation) cause widespread miscalculation in manual payroll.

In Waggex’s payroll module, bonus amounts are added to the relevant month’s payroll run and TDS recalculates automatically for the affected employees. The bonus appears as a separate line item on the payslip, correctly attributed, and the Tax and Forms Management feature ensures the updated TDS figure feeds into the quarterly Form 138 filing correctly. The Reminder Management feature can be set to flag the 30 November statutory bonus deadline before it arrives because it’s the kind of date that gets remembered after the fact more often than it should.

Common Bonus Mistakes Worth Reading Before Diwali Holiday

• Paying a festival bonus and thinking it covers statutory bonus. It doesn’t unless it’s explicitly declared in writing as the statutory bonus payment.
• Calculating statutory bonus on the employee’s actual salary. It’s calculated on the lower of actual salary or ₹7,000/month (or applicable minimum wage). An employee on ₹15,000/month gets bonus calculated on ₹7,000.
• Paying bonus after 30 November and assuming a few days’ delay is fine. The deadline is fixed. Late payment invites a labour department notice.
• Not paying pro-rata bonus to employees who left mid-year. If an eligible employee worked 30+ days before resignation or termination, they’re entitled to pro-rata statutory bonus for the months they worked.
• Not adjusting TDS when a large bonus is paid. A ₹1 lakh performance bonus paid in October needs a TDS recalculation for the rest of the year. Missing this creates a shortfall that either the company or employee has to settle at year-end.
• No written policy for discretionary bonuses. ‘We’ll decide based on performance’ without criteria creates disputes. Document the policy, communicate it before the period starts.

Bonus management in India is two parallel tracks the legal one that follows the Payment of Bonus Act on a fixed schedule with fixed rules, and the discretionary one that follows company policy. Getting the first one wrong is a compliance problem. Getting the second one wrong is a trust and retention problem. Both are worth handling properly.