India has a number of labour laws meant to protect the rights of employees and promote fair labour practices. Among them, the Payment of Bonus Act, 1965, often comes up around festival times — especially Diwali — because of its relevance to “bonuses” paid by employers. Below, we explain what this Act is about, how it applies, and what people often misunderstand, particularly in the context of the Diwali Bonus.
For more detailed legal commentary and compliance help, see Sankhla Consultants’ primer: “Unveiling the Indian Payment of Bonus Act.”
What is the Payment of Bonus Act, 1965?
The Payment of Bonus Act ensures that certain employees receive a statutory bonus from their employer, based on profits or production, under specified conditions. It aims to share the prosperity of business operations with employees, creating some fairness in income distribution.
Here are some key points:
- Eligibility:
Employees who have worked at least 30 working days in a year, and whose salary or wages do not exceed a specified ceiling (this ceiling is periodically updated; when the Act was written the limit was ₹21,000/month in many references) are eligible. - Minimum and Maximum Bonus:
The Act mandates a minimum bonus (at least 8.33% of wages or salary, or a fixed minimum amount whichever is higher), even in years when the employer does not make profits. The maximum bonus is 20%, provided there is sufficient “allocable surplus” under the Act. - Allocable Surplus & Other Concepts:
Allocable surplus is the portion of the available profits after certain deductions that can be used for paying bonuses. There are rules around “set-on” (carry-forward of surplus) and “set-off” (adjusting deficits) over multiple accounting years. - Time Limit & Mode of Payment:
Bonus must be paid within eight months from the close of the financial year. The mode of payment can be cash, cheque, or bank transfer. - Disqualifications:
Employees can be disqualified if they are dismissed for misconduct (fraud, theft, sabotage etc.). Also, certain employees (depending on their salary or nature of employment) may be outside the purview. - Penalties:
If an employer fails to comply (does not pay bonus, or pays late, or keeps inadequate records) there are legal consequences including fines or in some cases other sanctions.
What Is the “Diwali Bonus”? Is It Same as the Statutory Bonus?
“Diwali Bonus” is a phrase commonly used, especially in everyday speech, to refer to bonus payments given around the Diwali festival. But legally it’s not always a distinct separate law — rather, in many cases the statutory bonus under the Payment of Bonus Act may be disbursed just before Diwali, hence the name. Also, some employers give an additional bonus purely as a festival incentive.
Here are important distinctions and facts:
| Feature | Statutory Bonus (Payment of Bonus Act) | Diwali Bonus / Festival Bonus |
|---|---|---|
| Mandated by law? | Yes, for eligible employees under the Act. | Not always – may be discretionary unless employer’s policy or contract requires it. |
| Timing | Within 8 months of accounting year-end. | Often timed just before Diwali (Oct–Nov). |
| Amount | Between 8.33% and 20% (depending on profits, salary etc.). | Varies: could be fixed, performance-based or tied to statutory bonus. |
| Eligibility | Works who satisfy wage/salary ceiling, 30 days work etc. | May be broader or narrower depending on employer or sector. |
So in many private companies, what people call “Diwali bonus” might simply be the statutory bonus (paid before Diwali), or might be something extra on top of it. Government employees sometimes have separate rules or bonus schemes tied to festival periods.
How the Act Helps Employees During Festivals
Festivals like Diwali often entail many additional expenses — gifts, clothes, travel, puja, etc. For many workers, receiving a bonus around this time is not just tradition but a financial necessity. The Payment of Bonus Act ensures:
- Even in lower-profit years, eligible employees cannot be deprived of at least the minimum bonus.
- Employers cannot arbitrarily deny bonuses to those who meet the eligibility criteria.
- There is a legal timeframe for payment, preventing prolonged delays.
These features help in ensuring that festivals don’t become financial burdens or sources of stress for employees eligible under the law.
Common Misconceptions & Practical Challenges
While the law provides a framework, in practice there are often gaps or confusion:
- Misunderstanding if salary ceiling applies — Some employers or employees are not sure whether high salary employees are eligible. Because the Act only covers employees below a certain threshold, those above may not get statutory bonus but could still get discretionary ones.
- What counts as salary — The definition of “salary or wages” for bonus calculations excludes some types of allowances/benefits; misunderstandings occur about what should be included.
- Delayed payments — Even though law provides time limits, enforcement is weak in some areas.
- Records and accounting of surplus — Proper calculation of allocable surplus, set-off etc. require correct accounting and transparency; smaller firms may struggle with this.
- Sectoral variations — In government, PSUs, or for employees under different state governments, the rules for festival bonuses, ad-hoc bonuses etc. vary a lot.
What Should Employers & Employees Know / Do
For employers:
- Ensure clarity in policy: if you plan to pay a Diwali bonus, define whether it is over and above the statutory bonus or exactly that.
- Maintain transparency in how bonus is calculated (gross profit, surplus, deduction, whether maximum limit is met).
- Make sure records are kept properly (salary, wages, working days, surplus accounting etc.).
- Ensure timely payment and compliance to avoid legal risk.
For employees:
- Check if you meet eligibility (salary ceiling, working days etc.).
- Ask for a detailed breakdown of how bonus is computed.
- Know that even if profits are low, under the Act you may still be entitled to the minimum bonus.
- If bonus is not paid timely, you have legal recourse (labour courts or appropriate authorities).
Recent Developments & Applicability
The Payment of Bonus Act has been updated from time to time. For example:
- The salary/wage ceiling (₹21,000) is revisited periodically; limits may change.
- Some states or sectors may have specific rules or notifications affecting eligibility or bonus rates.
- Courts and labour tribunals have issued interpretations about what counts as surplus, what allowances to include in “salary”, etc.
The Payment of Bonus Act, 1965 plays a pivotal role in ensuring that employees share in the success of their employers in a fair way. While “Diwali Bonus” is not always a separate legal entity, the festive period often brings into focus the importance of such bonuses — for morale, financial relief, and goodwill.
Both employers and employees should understand their rights and obligations under the Act. For any business seeking to comply, or for workers looking to know what they’re entitled to, reliable resources are essential. If you want to explore this in more depth, Sankhla Consultants’ article Unveiling the Indian Payment of Bonus Act is a helpful reference.
