Bonuses are payments given to employees in addition to their base salaries, the additional pay or compensation an employee receives over their usual salary.
The company can award bonuses to entry-level employees and senior-level executives. Besides giving bonuses to prospective employees, companies can distribute them to shareholders.
Table of Contents
What is bonus pay?
An employee gets compensation in addition to their base salary. Bonus Pay is a way for companies to show appreciation to employees or teams that have reached crucial goals. The companies give 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 that governs how employers should pay bonuses to workers.
The Payment of Bonus Act applies to all factories and businesses that hire at least 20 people on any given day during the accounting period. Even if the number of employees in a company drops below 20, the act says they must still make the bonus payments.
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How does bonus pay work?
Bonuses come in different forms. Although, usually, they are based on performance which means that a company gives them out based on how well an employee or group of employees help the team or company reach its goals. It is at the manager’s discretion to give out bonuses which means that it is not dependent on a specific quota, level, or performance. Instead, it’s up to the manager to decide who should get one and how much they should get—most of the time, the clause of non-discretionary bonuses in an employee’s offer letter or contract.
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Calculation of bonus payable
According to a change to the Payment of Bonus Bill, passed in 2015, employers must give bonuses to workers whose gross income is less than Rs. 21,000. Here’s how to calculate the bonus:
- If the salary is less than or equal to Rs. 7,000, the bonus calculation is done using the formula: Bonus= Salary x 8.33 / 100.
- If the salary is more than Rs. 7,000, the bonus calculation will be based on Rs. 7,000 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 will be:
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:
7,000 x 8.33 / 100= Rs. 583 per month (Rs. 6,996 per year)
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Types of bonus payments
Some bonuses are distributed quarterly, and others are distributed yearly. It may be a one-time or may be recurring. It all depends 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 (among many other factors). Tthe most common types of bonuses are:
Annual bonus
It usually depends on how well the company does as a whole. So, the size of your bonus will depend on how successful your company was that year and how big a part you played in that success. In other words, Annual Bonuses are like “sharing the profits.”
Spot bonus
Employees who receive spot bonuses are the ones who go above and beyond what the company expects from them. It usually involves doing something that is not part of their job description, and it is usually a one-time thing depending on the budget, the priorities, and how well the work gets done.
Signing bonus
When you start a new job, you get this one-time bonus. When an employee moves to a new city for a job, and the company wants to help pay for some of the costs, they often get a signing bonus. Employers can also use it to make up for salary demands they cannot meet.
Retention bonus
A retention bonus is similar to a signing bonus. ‘Good’ employees or those who have shown loyalty by staying with the company receive this. It is usually given when a company buys another or merges with another, or to make someone stay longer if they were going to leave.
Referral bonus
Employees get a referral bonus if they find great people to work at their company and tell them about it. It’s usually given to someone hired and worked there for a few months (usually 3-6 months).
Holiday bonus
A holiday bonus is another way to show employees how much you appreciate their hard work and give them a little extra help during a tough time of the year. It is usually a set percentage of your annual salary, but not always (anywhere from 5 per cent to 10 per cent).
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Conclusion
The Payment of Bonus Act, passed in 1965, seeks to regulate the practice of paying bonuses by different establishments legally. It gives a fair way to determine the bonus based on how much money was made and how much work was done. It allows the 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 aren’t companies or corporations. Along with the process, this Act also establishes an intense way for people to get justice.
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 needs to get a pro-rated bonus as part of the settlement.
How much are most bonuses?
A company sets aside a certain amount. A typical bonus percentage would be between 2.5 and 7.5 per cent of payroll, but it can go as high as 15 per cent.
Does the salary include bonuses?
A bonus is usually calculated as a percentage of your base salary. As a result, a higher base salary will 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 counts as extra income and is taxed by the federal government at a flat rate of 22%.
What part of wages is used to calculate bonus?
The bonus payment only takes into account the basic salary and DA.
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