A Quick Guide to Set-On and Set-Off

What Is Statutory Bonus?

• Bonus is a statutory payment made to eligible employees under Chapter IV of the Code on Wages, 2019.
• The bonus provisions came into force on 21 November 2025.
• The provisions consolidate the earlier law relating to payment of bonus.

Important: The law does not specify one particular company that pays the “highest” bonus. The amount depends on employee eligibility, wages and the establishment’s allocable surplus.

Who Is Eligible?

An employee generally needs to:

• Satisfy the applicable wage-ceiling requirement i.e. monthly ‘Wages’ not more than 21000/-
• Have worked for at least 30 days in the accounting year
• Meet the other conditions prescribed under the Code

How Much Bonus Is Payable?

• Minimum Bonus
  • 8.33% of wages earned
  • ₹100, whichever is higher
• Maximum Bonus
  • Up to 20% of wages earned.

The actual percentage depends on the allocable surplus and statutory calculations.

What Is Allocable Surplus?

The bonus calculation broadly follows:

Gross Profit → Available Surplus → Allocable Surplus → Bonus

• For a banking company: 60% of available surplus.
• For other establishments: 67% of available surplus.

What Is Set-On?

Set-On = Carrying Forward Excess Allocable Surplus

• Set-on applies when allocable surplus exceeds the maximum bonus payable.
• The excess can be carried forward to the following accounting years.
• The set-on amount is subject to a 20% limit of the total salary or wages of employees for that accounting year.
• Set-on can be carried forward up to and including the fourth accounting year.
• It can be used for payment of bonus in subsequent years.

Excess Surplus → Set-On → Carry Forward → Future Bonus

What Is Set-Off?

Set-Off = Carrying Forward Deficiency

• Set-off applies when there is no available surplus or the allocable surplus is insufficient to meet the minimum bonus.
• If sufficient set-on is not available, the minimum amount or deficiency is carried forward.
• The deficiency is carried forward for up to and including the fourth accounting year.
• It can be adjusted against the allocable surplus of subsequent years.

Insufficient Surplus → Set-Off → Carry Forward → Future Adjustment

Set-On vs Set-Off

Set-On	Set-Off
Excess allocable surplus	Deficiency in allocable surplus
Arises above maximum bonus requirement	Arises when minimum bonus cannot be met
Carried forward for future use	Carried forward for future adjustment
Subject to 20% limit	Applies to the qualifying deficiency
Maximum carry-forward: fourth accounting year	Maximum carry-forward: fourth accounting year

How Does Set-On Work?

Example:

• Allocable surplus: ₹6,00,000
• Maximum bonus requirement: ₹4,00,000
• Excess: ₹2,00,000
• The permissible excess is carried forward as set-on, subject to the statutory 20% limit.

Result:

₹2,00,000 → Set-On → Future Accounting Year

How Does Set-Off Work?

Example:

• Minimum bonus requirement: ₹4,00,000
• Available amount: ₹3,00,000
• Deficiency: ₹1,00,000
• Subject to Section 36, the deficiency is carried forward as set-off.

Result:

₹1,00,000 → Set-Off → Future Accounting Year

Four-Year Rule:

• Set-on is carried forward for up to the fourth accounting year.
• Set-off is also carried forward for up to the fourth accounting year.
• The amounts are not carried forward indefinitely.
• The earliest carried-forward amount is taken into account first.

Key Compliance Points:

Employers should:

• Calculate allocable surplus correctly.
• Determine the minimum and maximum bonus.
• Maintain separate set-on and set-off records.
• Apply the 20% limit for set-on.
• Track balances accounting year-wise.
• Use the earliest carried-forward amount first.
• Monitor the four-year carry-forward period.

Key Takeaway

Set-On:

Excess Allocable Surplus → Carry Forward → Future Bonus

Set-Off:

Bonus Deficiency → Carry Forward → Future Adjustment

The Set-On and Set-Off mechanism under Section 36 of the Code on Wages, 2019 balances bonus obligations across accounting years and is an important part of statutory bonus compliance.   

• Who gets the bonus?
  • The eligible employee gets the bonus.
  • The company/employer pays the bonus.
  • Set-On and Set-Off are used only for calculating the amount.
• Is it only for certain industries?
  • No, it is not limited to one industry.
  • It can apply to different businesses and establishments if they meet the legal conditions.
  • For example, manufacturing, automobile, pharmaceutical, textile and retail businesses may be covered.
• Why do we use Set-On and Set-Off?
  • They help when the company’s surplus changes from year to year.
  • Set-On means extra surplus is saved for a future year.
  • Set-Off means a shortage is adjusted in a future year
• Does the employee get Set-On or Set-Off separately?
  • No.
  • The employee does not receive a separate Set-On or Set-Off amount.
  • They are used by the employer while calculating the bonus.
• Why is it important?
  • It helps the employer calculate the correct bonus.
  • It keeps track of extra surplus or shortage from previous years.
  • It also helps ensure that the employee gets the bonus as required by law.