Diwali Bonus and Its Compliance Under the New Labour Codes in India
Published by: M.S. Sankhla & Co. | Labour Law Compliance & Advisory
Diwali is one of India’s most important festivals, and many employers celebrate the occasion by distributing bonuses, ex-gratia payments, or festive incentives to their employees. While a Diwali bonus can improve employee morale and strengthen workplace relationships, employers must also understand their statutory obligations regarding bonus payments under India’s labour law framework.
With the implementation of the four Labour Codes effective from 21 November 2025, employers need to review their bonus policies, employee eligibility criteria, wage calculations, payroll records, and payment timelines.
The Code on Wages, 2019 is particularly important because it consolidates the legal framework governing minimum wages, timely payment of wages, and statutory bonus. However, employers should understand the distinction between a statutory annual bonus and an additional festive bonus paid specifically for Diwali.
This article explains the key compliance requirements, employee eligibility, bonus calculations, and practical steps employers should follow.
1. Is Diwali Bonus Mandatory Under Labour Laws?
One of the most common questions among employers is whether every employee must receive a separate Diwali bonus.
The answer is not necessarily. The law distinguishes between statutory annual bonus and a discretionary or contractual festive payment.
Statutory annual bonus: Eligible employees are entitled to bonus in accordance with the applicable provisions of the Code on Wages, 2019.
Diwali or festive bonus: A separate payment specifically linked to Diwali is not automatically mandatory for every establishment merely because the festival is approaching. However, it may become payable under an employment contract, appointment letter, settlement, applicable service rules, established binding policy, or other enforceable commitment.
Ex-gratia payment: An employer may voluntarily provide an additional festive amount, subject to applicable legal and contractual requirements.
Therefore, employers should not assume that paying a Diwali bonus automatically satisfies their annual statutory bonus obligations. Similarly, the absence of a separate Diwali payment does not, by itself, establish non-compliance if all applicable statutory and contractual obligations have been met.
2. Legal Framework: Bonus Under the Code on Wages, 2019
The Code on Wages, 2019 consolidates provisions relating to bonus that were previously governed by the Payment of Bonus Act, 1965.
The principal provisions concerning statutory bonus are contained in Chapter IV, Sections 26 to 41, subject to the applicable commencement notifications, rules, and other relevant requirements.
Section 26 deals with eligibility and the calculation of bonus. Section 27 addresses the computation of bonus based on allocable surplus, while the remaining provisions cover matters such as eligibility restrictions, deductions, time limits, and related obligations.
The four Labour Codes became effective from 21 November 2025, according to the Ministry of Labour and Employment. Employers should therefore align their compliance processes with the operative Code provisions and the rules applicable to their establishments.
3. Employee Eligibility for Statutory Bonus
Under Section 26 of the Code on Wages, 2019, the following key eligibility conditions apply.
A. Monthly wage ceiling
The employee must fall within the monthly wage ceiling notified by the appropriate government.
The Central Government issued Notification S.O. 4711(E), dated 25 August 2026, determining a ceiling of ₹21,000 per month under Section 26(1), with effect deemed from 21 November 2025.
Employers must verify whether this notification applies to their establishment and check the relevant State Government notification where the State Government is the appropriate government.
B. Minimum period of service
An employee must have worked for at least 30 days in the accounting year to qualify under Section 26(1), subject to the other applicable statutory conditions.
C. Coverage and exclusions
Employers should examine the nature of the establishment, the applicable government jurisdiction, the employee’s wage level, and any statutory exclusions or disqualifications before finalising the eligible employee list.
The monthly eligibility ceiling and the wage amount used to calculate bonus are separate concepts. An employee's actual monthly wages may determine eligibility, while the statutory calculation may be restricted to a prescribed amount.
4. Minimum and Maximum Bonus Under the Code on Wages
Section 26 provides for a minimum annual bonus of 8⅓% of the wages earned by an eligible employee during the accounting year or ₹100, whichever is higher, subject to the statutory calculation provisions.
Where the allocable surplus permits a higher payment, bonus may be payable at a higher rate, subject to the Code's provisions and applicable limits. The maximum statutory bonus rate is generally 20% of the wages used for the statutory calculation.
Employers should not automatically calculate bonus as 8.33% of an employee's entire annual gross salary. The applicable statutory calculation ceiling and the definition of wages must be considered.
Illustrative example
Suppose an eligible employee has statutory bonus-calculation wages of ₹7,000 per month throughout the accounting year.
Particulars | Amount |
Monthly wages considered for calculation | ₹7,000 |
Annual wages for bonus calculation | ₹84,000 |
Minimum bonus at 8⅓% | ₹7,000 |
Bonus at 20%, if legally payable | ₹16,800 |
This example is illustrative only. The amount used for calculation must be verified against the applicable statutory ceiling, including the provision that refers to ₹7,000 per month or the applicable minimum wage, whichever is higher. Actual entitlement may also depend on service, wages earned, and other applicable statutory conditions.
5. Is Diwali Bonus in Addition to Statutory Bonus?
Employers should clearly distinguish between a statutory bonus payment and a festive incentive.
For example, if an establishment distributes ₹5,000 to employees before Diwali, the employer should not automatically treat that payment as a substitute for statutory annual bonus. Whether a payment can be adjusted against a statutory obligation depends on the applicable legal provisions, the nature and purpose of the payment, and the relevant records.
A prudent approach is to maintain separate payroll descriptions, such as:
Statutory Annual Bonus
Diwali Ex-Gratia
Festival Incentive
Performance Bonus
The description should accurately reflect the nature of the payment. Merely changing a payroll label does not determine its legal treatment.
Where an employer has a written bonus policy, settlement, or established commitment, the terms should be reviewed before deciding whether a festive payment is discretionary or contractually due.
6. Important Compliance Requirements for Employers
Employers should implement a structured bonus-compliance process before making Diwali-related payments.
Step 1: Review employee eligibility
Prepare an employee-wise statement covering monthly wages, days worked, accounting-year service, and applicable statutory eligibility conditions.
Step 2: Verify the applicable wage ceiling
Confirm the relevant Central or State Government notification and the jurisdiction applicable to the establishment. Do not apply a wage ceiling without verifying the notification governing the particular employer.
Step 3: Calculate statutory bonus correctly
Identify the wages eligible for statutory calculation, apply the relevant calculation ceiling, determine the minimum bonus, and assess whether a higher bonus is payable based on the applicable provisions.
Step 4: Review existing policies and commitments
Examine appointment letters, HR policies, employment contracts, settlements, standing orders where applicable, and past bonus practices. Determine whether a separate Diwali payment has become contractually or otherwise legally enforceable.
Step 5: Make payment within the applicable timeline
Follow the statutory deadline for annual bonus and any separate deadline arising from a contract, policy, settlement, or applicable rule. A festive payment date does not automatically replace the statutory payment deadline.
Step 6: Maintain payroll and supporting records
Retain employee-wise calculations, eligibility records, wage details, approval documents, payment statements, bank-transfer evidence, and relevant registers or returns required by the applicable rules.
Step 7: Review contractor-related responsibilities
Where contract labour is engaged, verify the respective obligations of the contractor and the principal employer under the applicable law and rules. Contractual arrangements should not be assumed to eliminate statutory responsibilities.
7. Common Mistakes Employers Should Avoid
The following mistakes can lead to employee disputes, claims, or compliance risks:
Treating a festive gift as a replacement for statutory annual bonus without legal verification.
Assuming that every employee is automatically entitled to a separate Diwali bonus.
Using the employee's entire gross salary without checking the statutory calculation ceiling.
Applying the wrong eligibility wage ceiling or overlooking the applicable government notification.
Ignoring employees who meet the statutory eligibility conditions.
Delaying statutory bonus because the establishment distributes festive incentives later in the year.
Failing to maintain proper calculations and payment evidence.
Assuming that contractors alone are responsible for every bonus-related obligation involving contract workers.
8. Practical Diwali Bonus Compliance Checklist
Before finalising the festive payroll, HR and finance teams should confirm the following:
Identify employees eligible for statutory annual bonus.
Verify the applicable Central or State Government wage-ceiling notification.
Calculate the statutory bonus in accordance with Section 26 and related provisions.
Determine whether any separate Diwali bonus or ex-gratia payment is contractually or otherwise legally due.
Obtain appropriate internal approvals for discretionary festive payments.
Process payments within the applicable statutory and contractual deadlines.
Maintain employee-wise calculation sheets and payment evidence.
Review contractor-related responsibilities and relevant records.
Reconcile the bonus amounts with payroll and accounting records.
9. How M.S. Sankhla & Co. Can Assist
M.S. Sankhla & Co. provides labour law consultancy, statutory compliance, payroll management, and compliance advisory services to businesses.
Our support can help employers review bonus eligibility, examine applicable labour law requirements, verify wage calculations, assess payroll practices, and strengthen statutory recordkeeping.
Businesses should review their bonus policies before Diwali to minimise avoidable disputes and ensure that employee payments are handled transparently and consistently.
Conclusion
Diwali bonus payments are an important part of employee engagement, but festive goodwill should be supported by sound statutory compliance. Employers must distinguish between the annual bonus required under the Code on Wages, 2019, and any additional Diwali incentive offered under company policy or contractual arrangements.
A well-documented process covering eligibility, calculation, approval, payment, and recordkeeping helps employers meet their obligations while maintaining employee trust.
How HR Teams Can Improve Bonus Compliance
HR teams should establish a documented annual bonus review process instead of relying solely on customary Diwali payments. The process should include coordination between HR, payroll, finance, and compliance advisers.
Employers should also verify the government notifications and rules applicable to their establishment before finalising eligibility criteria and calculations. Where the legal position or applicability of a provision is unclear, professional advice should be obtained before processing payments.
A well-planned Diwali Bonus Compliance process supports accurate payroll administration, consistent employee communication, and better statutory recordkeeping. By reviewing bonus policies before the festive season, employers can address potential issues early and manage employee payments more confidently.
For professional guidance on bonus calculations, payroll compliance, and labour law requirements, visit www.sankhlaco.com.
Disclaimer: This article is intended for general information and compliance awareness. The applicability of bonus provisions depends on the operative legislation, relevant notifications, rules, establishment jurisdiction, and individual facts. Employers should obtain appropriate professional advice before making compliance decisions.