What is Statutory Bonus? Meaning, Eligibility & Calculation

In India, work burnout and stress are common occurrences, agreed by 62% of working individuals. Employees hence need incentives for performing better and staying in a high-work spirit. Although many firms provide employee wellness insurance, many employees are not aware of the concept of statutory bonus. Let’s know what is statutory bonus, its application and the eligibility of claiming it.

Statutory Bonus Meaning

Those who have been working in the corporate sector for quite a while may be accustomed to the concept of statutory bonus. But those who are new, may not know its meaning, and should get through this blog. Many employees are not even aware of the idea of this bonus, and hence may miss claiming this.

What is statutory bonus?

In simple terms, a statutory bonus is the minimum amount that a company has to pay to its employees irrespective of their performance and their overall output. In addition to this, this obligatory bonus is paid besides the basic salary, so a statutory bonus is not treated as a part of the current salary or any allowance. In case an employee earns less than or equal to ₹21,000 (including Dearness Allowance), the company is liable to pay them a fixed sum as statutory bonus every month according to the Payment of Bonus Act, 1965. This obligatory bonus is treated more as an incentive and hence paid exclusively for the basic salary. The eligibility criteria to claim a statutory bonus will be explained in the later parts of this blog, keep on reading.

Reason for Paying Statutory Bonus

The main reason for paying a statutory bonus is to encourage the employees and retain talented skills. India hosts a multitude of firms, most of them operating in the private sector. Almost 69% of Indian employees have been reported to not being paid well, A statutory incentive ensures that employees feel they are being encouraged, and are being paid sufficiently aligned with their efforts.

Types of Bonuses

Let’s explore various types of bonuses that an organisation usually pays:

Statutory Bonus

A statutory bonus meaning is an exclusive bonus paid to all employees, based on their eligibility criteria. The sole purpose of paying statutory bonus is to encourage employees, and hence is paid out of the basic salary. However, this type of bonus is not paid to employees who are terminated because of misconduct.

Performance Bonus

A performance bonus is an additional pay based on a commendable performance of the employee, or because the employee has achieved the required target. There are various types of performance bonus, such as sales bonus which are paid when the employee has achieved more than the sales target. Few organizations often pay their employees a profit-sharing bonus, which directly arrives from the achievement of certain organizational goals.

Bonuses Based on Occasions

This type of bonus is paid on some festive occasions, or even during special occasions such as a company completing 25 years or 50 years. This is also known as a festive bonus and varies across organizations.

Fringe Bonuses

Some companies pay their employees in the form of stock options, leave allowance and even group health insurance.

Read more about group health insurance and how it can benefit employees in a wide range of ways.

Statutory Bonus Eligibility Criteria

The statutory bonus eligibility depends on certain criteria, let’s check on them here:

Income Bracket

The basic salary of the employee excluding all perks and allowances should not exceed ₹21,000 per month. In case an employee serves the government, or works at the Red Cross, governmental hospitals are not eligible for this bonus irrespective of their salary.

Minimum Number of Days Worked

The employee should have served at least 30 working days in the organisation. The number of days is directly counted in one accounting year and excludes the leaves applied for or taken by the employee. However it should be noted that factories or production capacities that employ employees on a seasonal basis are not eligible for paying a statutory bonus in salary.

Not blacklisted

The employee should not be blacklisted from the organisation, or terminated based on any behavioural misconduct or is not accused of any corporate fraud. The employee cannot claim a statutory incentive in case they have been appearing for any court trial due to workplace dishonesty or unethical workplace behaviour.

Possible Exceptions

Possible exceptions mean situations where the employee could not be present for work, yet are eligible to receive a statutory reward. Here are such scenarios: The employee has been physically disabled and has met with a workplace injury The employee is on maternity leave or paternity leave The employee is on sick leave or leave on pay

Applicability of Statutory Bonus in Salary

Let’s review statutory bonus applicability now. Every business or factory that has 20 employees or more is eligible to pay the bonus in salary according to the Payment of Bonus Act, 1965. In case the business loses employees and has less than 20 employees, it is still eligible to pay the statutory incentive. The minimum bonus is 8.33% of the salary, while the firm can pay a maximum bonus of 20% of the basic pay.

Statutory Bonus Calculation

Here is a statutory bonus calculation with a simplified example.

Calculation Formula

Total number of days worked in a given year x (Total salary/30). Here, the total salary is equivalent to the basic salary that an employee is withdrawing, and it does not include any additional allowances or perks that the employee may be entitled to.

Example

An employee is entitled to a basic salary of ₹15,000 monthly, including a Dearness Allowance. The bonus will be calculated based on the state-mandated minimum salary. If the minimum salary is ₹7,000 according to state minimum wage law, then the

• The minimum bonus will be: 7,000 x 8.33% = ₹583.10 monthly

• Maximum bonus will be: 7,000 x 20% = ₹1400 monthly

Method of Payment and Time for Payment

Method of Payment

The method of payment will be by cash, and firms cannot pay by any other medium such as any electronic payment mode or electronic transfer. This also means that a company cannot pay a statutory incentive as an allowance and claim a tax deduction on it.

Time for Payment

The mandated time of payment for this bonus is within 8 months from the date of the financial accounting period. For example, a company must clear the bonus by 31st November 2025 for the financial year ending on 31st March 2025.

Provisions For Startups

As for startups, there is a specific provision made that allows the startups to not pay statutory incentives for the first five years of operation. Startups also enjoy the provision of paying the bonus only during the specific periods when there is sufficient profit. This provision is solely designed to help startups achieve better financial growth and get stabilised before they can invest their financial resources into bonus payments. Moreover, this also allows the startups a headstart for postponing all bonuses only when the business has achieved a financial equilibrium.

Also, know how you can raise funds for your next startup business.

Key Differences Between Statutory Bonus and Performance Bonus

Types of Statutory Bonus Payment

There are usually 4 major ways by which statutory incentive can be paid to an employee. Here are they:

• Advance statutory bonus is a way when the bonus is paid to the employee as a part of the salary
• Advance payment in bulk is when the bonus is paid to the employee on a cumulative basis in advance of the financial year end. Usually in this type of payment, the employer pays a fixed proportion of the basic salary of the employee
• Ad hoc statutory incentive is paid when the employer has not made any payment of the salary and need to reimburse the payment
• Arrear statutory payment is made after March payroll is completed, and is a one-time payment for any employee

Exceptions of Statutory Bonus

There are certain exceptions which must be mentioned:

• Employee serving in a governmental institution, or in an industry or working faculty that is controlled or managed by the Central or the State government
• Employees working in Red Cross Society
• Employees working for Life Insurance Corporation
• Employees who are registered under the Dock Workers Act, 1948
• Employees working as a core team member or in any designation in the Reserve Bank of India
• Employees working in any financial institution under Section 3, or Section 3A under the State Financial Corporation Act
• Employees working in Inland Water Transport Establishment These employees mentioned in the above list are not eligible for receiving statutory incentives in any way.

Conclusion

A statutory bonus is the right of every employee, it needs to be claimed for any employee who meets the required eligibility criteria. This bonus forms a critical part of employee compensation, and is meant for providing the employee a means for improving better on the work. This blog critically focuses on areas such as the ways statutory incentive is paid, the eligibility to apply for it, and its types. Knowing in detail about this bonus can aid any employee to claim their equitable portion of compensation.

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