Diwali Bonus Payment Rules in India: Eligibility, Calculation & Compliance

Diwali Bonus Payment Rules in India: Eligibility, Calculation & Compliance

Diwali is one of India's most significant festivals, and many employers celebrate the occasion by providing bonuses or financial rewards to their employees. A Diwali bonus can help employees manage festival expenses, improve workplace morale, and strengthen the relationship between employers and their workforce.

However, employers must understand the difference between a customary festival bonus, a performance incentive, an ex-gratia payment, and a statutory bonus payable under applicable labour laws.

The payment of a Diwali bonus is not automatically compulsory for every employer. The legal obligation depends on the applicable statutory provisions, the establishment's coverage, employee eligibility, and any contractual, settlement-based, or customary entitlement.

With the implementation of the Code on Wages, 2019, effective from 21 November 2025, employers should also review the applicable bonus provisions when planning their festival bonus payments.

This article explains the important Diwali bonus payment rules in India, statutory bonus requirements, eligibility criteria, calculation principles, and HR and payroll compliance measures.

1. Is Diwali Bonus Mandatory for Employers in India?

Whether an employer must pay a Diwali bonus depends on the nature of the payment and the applicable legal requirements.

Employers should distinguish between the following categories.

A. Statutory Bonus

Statutory bonus is payable to eligible employees in establishments covered by the applicable bonus legislation.

From 21 November 2025, the relevant provisions of the Code on Wages, 2019, including its bonus chapter, have come into force. Employers should assess their obligations under the Code and applicable rules and notifications.

Statutory bonus is linked to the prescribed eligibility conditions and calculation requirements. It is not dependent solely on whether the employer chooses to celebrate Diwali.

B. Customary or Festival Bonus

Some organisations have a long-standing practice of paying employees a bonus during Diwali or another festival.

Depending on the facts, established practice, contractual terms, or applicable settlements, such payments may create obligations that employers need to examine before changing or discontinuing them.

Employers should review previous payment records, appointment letters, settlements, and applicable policies before deciding whether a customary Diwali bonus is payable.

C. Ex-Gratia or Special Festival Payment

An employer may voluntarily provide an additional festival payment to employees as a gesture of goodwill.

Such a payment may be separate from statutory bonus. However, employers should clearly document its nature and determine whether any amount can legally be adjusted against statutory bonus.

Important: Calling a payment a "Diwali bonus" does not automatically make it a statutory bonus. Its legal treatment depends on the applicable law and the actual circumstances.

2. Applicable Law: Payment of Bonus Act, 1965 and Code on Wages, 2019

Historically, statutory bonus in India was governed by the Payment of Bonus Act, 1965.

The Act prescribed important requirements concerning establishment coverage, employee eligibility, minimum bonus, maximum bonus, calculation, disqualification, and payment deadlines.

The relevant provisions of the Code on Wages, 2019 came into force on 21 November 2025, including Sections 26 to 41, which address bonus and related matters.

Consequently, employers planning Diwali bonus payments in 2026 should review the Code on Wages, 2019, together with applicable government notifications, rules, and transitional requirements.

The Payment of Bonus Act, 1965 remains important for understanding the historical statutory framework and for assessing matters relating to earlier accounting periods where relevant.

3. Key Provisions of the Payment of Bonus Act, 1965

The following provisions of the former Act are important for understanding statutory bonus compliance.

For present-day compliance, employers should map these historical provisions to the corresponding provisions of the Code on Wages, 2019, rather than applying the repealed Act as if it were the current governing law.

4. Who Is Eligible for Diwali Bonus?

Employee eligibility for statutory bonus must be assessed under the applicable law.

Under the former Payment of Bonus Act, 1965, Section 8 required an employee to have worked for at least 30 working days in the accounting year.

The Code on Wages, 2019 also provides statutory conditions relating to bonus eligibility.

For employers, the principal checks include:

1. Whether the establishment falls within the applicable statutory coverage.

2. Whether the employee meets the applicable wage eligibility limit.

3. Whether the employee has completed the required minimum working days.

4. Whether any legally recognised disqualification applies.

5. Whether the employee's service period affects the amount payable.

6. Whether any applicable settlement, employment contract, or other legal entitlement provides additional benefits.

Wage Eligibility Limit

For the Code on Wages, 2019, employers must consider the applicable government notification specifying the wage ceiling for bonus eligibility.

The Central Government issued Notification S.O. 4711(E), dated 25 August 2026, specifying a monthly wage ceiling of ₹21,000 for the relevant provision of Section 26(1), with effect from 21 November 2025.

Employers should verify the applicable notification and any relevant state-specific requirements before finalising eligibility.

HR compliance tip: Maintain an employee-wise eligibility sheet showing wages, joining date, working days, eligibility status, and the basis used for the bonus calculation.

5. What Is the Minimum and Maximum Statutory Bonus?

Under the former Payment of Bonus Act, 1965, the statutory framework prescribed:

• Minimum bonus: 8.33% of the applicable salary or wages.

• Maximum bonus: 20% of the applicable salary or wages.

These limits were subject to the Act's calculation provisions and other applicable conditions.

The Code on Wages, 2019 contains corresponding provisions governing minimum and maximum bonus.

Employers should apply the current Code and relevant notifications when calculating bonus for the applicable accounting year.

It is also important to distinguish between the minimum statutory bonus and a higher festival payment offered voluntarily by the employer.

For example, an employer may choose to pay a Diwali incentive above the statutory amount. However, that additional payment should be evaluated separately to determine whether it can be adjusted against the statutory liability.

6. How Is Diwali Bonus Calculated?

The amount payable as statutory bonus depends on the applicable wage ceiling, the employee's eligible wages, the accounting year, and the statutory calculation rules.

Employers should not automatically calculate statutory bonus on an employee's entire gross salary.

Under the former Payment of Bonus Act, 1965, Section 12 prescribed a calculation basis for employees whose salary or wages exceeded the specified limit.

The Code on Wages, 2019 contains its own applicable calculation provisions. Employers must use the current statutory framework and relevant notifications.

Illustrative Example

Assume that an eligible employee has an applicable monthly bonus calculation base of ₹7,000 and has worked throughout a 12-month accounting year.

Annual calculation base:

₹7,000 × 12 = ₹84,000

Illustrative minimum bonus at 8.33%:

₹84,000 × 8.33% = approximately ₹6,997.20

Illustrative bonus at 20%:

₹84,000 × 20% = ₹16,800

These figures illustrate the percentage calculation only. They are not a determination of the amount legally payable to a particular employee in 2026.

The actual amount must be calculated using the applicable statutory wage base, eligibility conditions, accounting-year requirements, and other relevant provisions.

Important Calculation Checks

Before processing the Diwali bonus, employers should verify:

• The employee's eligible wages.

• The applicable calculation ceiling.

• The employee's qualifying service period.

• The relevant accounting year.

• The minimum statutory amount.

• The applicable maximum bonus and allocable surplus provisions.

• Any permissible adjustment of interim or customary bonus.

• Any lawful deductions applicable to the employee.

7. Minimum Wages and Diwali Bonus: What Employers Must Check

Minimum wages are an important consideration when calculating statutory bonus and reviewing payroll compliance. Employers must ensure that employees receive at least the applicable minimum wages prescribed by the appropriate government.

Under Section 5 of the Code on Wages, 2019, employers cannot pay wages below the applicable minimum wage. Separately, Section 26(2) addresses the calculation of statutory bonus for eligible employees whose wages exceed the prescribed bonus eligibility ceiling.

Importantly, Section 26(2) provides that the bonus calculation should use the notified eligibility amount or the minimum wage fixed by the appropriate government, whichever is higher, subject to the applicable statutory requirements and notifications.

Key Compliance Points for Employers

1. Verify minimum wages: Check the applicable minimum wage notification based on the employee's state, skill category, industry, and other relevant classifications.

2. Review bonus eligibility separately: Meeting the minimum wage requirement does not automatically make every employee eligible for statutory bonus. The applicable eligibility ceiling and other statutory conditions must also be checked.

3. Use the correct bonus calculation base: Do not automatically calculate statutory bonus on the employee's full gross salary. Apply the relevant provisions of Section 26 of the Code on Wages, 2019, and applicable notifications.

4. Review wage structures: Ensure that the salary structure complies with minimum wage requirements and the applicable statutory definition of wages.

5. Reconcile payroll records: Compare employee-wise wage records, attendance, bonus eligibility, and bonus calculations before processing payments.

Why Is This Important for Diwali Bonus?

Employers sometimes focus on the festival payment while overlooking underlying wage compliance. However, a Diwali bonus payment does not compensate for a shortfall in minimum wages.

HR and payroll teams should therefore verify minimum wage compliance independently and then calculate statutory bonus using the applicable legal provisions.

Employer takeaway: Check minimum wages, bonus eligibility, and the statutory bonus calculation base separately before finalising Diwali bonus payments.

Is an Employer Required to Pay Statutory Bonus Before Diwali?

Not necessarily.

The statutory payment deadline and the festival date are separate considerations.

Under Section 19 of the former Payment of Bonus Act, 1965, bonus was generally payable within eight months from the close of the accounting year, subject to the statutory provisions concerning disputes and extensions.

Section 39 of the Code on Wages, 2019 provides the applicable statutory time limit for bonus payments under the Code.

Therefore, employers should distinguish between:

Statutory bonus deadline: The legally prescribed payment deadline for the relevant accounting year.

Diwali bonus date: The date selected by the employer for distributing a festival payment or making an early statutory bonus payment.

An employer may decide to pay eligible employees before Diwali. However, the festival date does not independently determine the statutory deadline.

Where an employer pays statutory bonus in advance or makes an interim payment, the payroll and accounting records should clearly identify the payment and any lawful adjustment against the final bonus liability.

Employers should not assume that a voluntary festival payment automatically satisfies the statutory bonus obligation.

8. Can an Employer Pay Diwali Bonus as an Advance?

An employer may consider making an advance payment against statutory bonus where permitted by the applicable law and circumstances.

However, the payment should be properly documented.

Recommended practices include:

1. Clearly identify the payment as an advance against statutory bonus, where that is its actual and legally permissible nature.

2. Record the accounting year to which the advance relates.

3. Maintain employee-wise payment records.

4. Reconcile the advance with the final statutory bonus calculation.

5. Record the balance payable, if any.

6. Ensure that any adjustment is legally permissible and supported by appropriate documentation.

A separate festival gift or ex-gratia payment should not automatically be treated as an advance against statutory bonus.

The employer must establish the actual nature of the payment and the legal basis for any adjustment.

9. What About Employees Who Join or Leave During the Year?

Employees joining or leaving during an accounting year require an individual eligibility and calculation review.

Under the former Payment of Bonus Act, 1965, Section 13 provided for proportionate reduction in specified circumstances.

The Code on Wages, 2019 contains applicable provisions for calculating bonus and addressing relevant circumstances.

HR and payroll teams should therefore review:

• The employee's joining date.

• The last working date, where applicable.

• The number of qualifying working days.

• The employee's eligible wages during the accounting year.

• The applicable statutory calculation method.

• Any final settlement obligations.

An employee should not be excluded merely because they joined after the beginning of the accounting year or left before its end. Eligibility must be determined under the applicable statutory provisions.

10. Can Statutory Bonus Be Withheld for Poor Performance?

Poor performance alone should not automatically be treated as a ground for disqualification from statutory bonus.

Under Section 9 of the former Payment of Bonus Act, 1965, specified forms of dismissal, including dismissal for fraud, riotous or violent behaviour on the establishment's premises, or theft, misappropriation, or sabotage of establishment property, could disqualify an employee.

Employers must assess any alleged disqualification under the applicable law and supporting evidence.

Performance-linked incentives and statutory bonus should also be distinguished. An employer may have different eligibility and performance conditions for a contractual incentive, but those conditions cannot simply replace statutory requirements.

Compliance recommendation: Before withholding statutory bonus, HR should review the facts, applicable provisions, relevant documentation, and legal implications.

11. Can Diwali Bonus Be Adjusted Against Statutory Bonus?

In some circumstances, a qualifying customary or interim bonus may be adjusted against statutory bonus.

Section 17 of the former Payment of Bonus Act, 1965 dealt with the adjustment of customary or interim bonus against the bonus payable under that Act.

Employers must assess the corresponding applicable requirements under the current Code on Wages, 2019.

The adjustment should not be based merely on the fact that the payment was made during Diwali.

The employer should maintain supporting documents showing:

• The nature of the payment.

• The accounting year concerned.

• The amount paid.

• The statutory basis for adjustment.

• The final bonus liability.

• The remaining amount payable, if any.

If the employer provides an additional festival gift or payment that is not legally adjustable, it should be accounted for separately.

12. Employer Compliance Checklist for Diwali Bonus

Before releasing the Diwali bonus, HR, payroll, and accounts teams should complete the following checks.

Statutory Applicability

• Confirm whether the establishment is covered by the applicable bonus provisions.

• Verify the applicable law, rules, and government notifications.

• Identify employees eligible for statutory bonus.

Employee Data

• Verify employee names and identification details.

• Review joining dates and qualifying working days.

• Confirm eligible wages and the applicable calculation basis.

• Check employees who joined or left during the accounting year.

Bonus Calculation

• Calculate the statutory bonus in accordance with applicable provisions.

• Verify the minimum bonus requirement.

• Apply the relevant maximum bonus and surplus rules.

• Review any legally permissible adjustment of advances or customary bonus.

• Obtain the required internal approval.

Payroll Processing

• Ensure the payment is processed through the appropriate payroll or accounting process.

• Reconcile employee-wise bonus calculations with the approved payroll data.

• Maintain evidence of payment.

• Record the accounting treatment correctly.

• Review any applicable tax and payroll reporting requirements.

Records and Documentation

• Maintain prescribed registers and statutory records.

• Retain the bonus calculation sheet.

• Keep approval records and supporting documents.

• Maintain evidence of payments and reconciliations.

• Verify the applicable payment deadline.

Final Review

Before closing the process, confirm that statutory bonus and any additional Diwali festival payment have been identified and accounted for separately wherever required.

13. Common Mistakes Employers Should Avoid

Employers should take care to avoid the following mistakes:

1. Assuming that every Diwali payment automatically qualifies as statutory bonus.

2. Treating a voluntary festival gift as a substitute for statutory bonus without checking the legal requirements.

3. Using gross salary automatically as the statutory calculation base.

4. Applying outdated eligibility or calculation limits without reviewing current notifications.

5. Excluding employees without checking their statutory eligibility.

6. Withholding bonus solely because of poor performance.

7. Adjusting a festival payment against statutory bonus without verifying whether the adjustment is permitted.

8. Ignoring employees who joined or left during the accounting year.

9. Failing to maintain employee-wise calculations and payment evidence.

10. Confusing the Diwali festival date with the statutory bonus payment deadline.

These errors may result in employee disputes, payroll discrepancies, and statutory compliance risks.

14. How MS Sankhla & Co. Can Help

Managing Diwali bonus payments requires coordination between HR, payroll, accounts, and statutory compliance teams.

Employers should review the applicable bonus provisions, verify employee eligibility, calculate statutory liabilities, reconcile festival advances, and maintain appropriate records.

MS Sankhla & Co. supports organisations with labour law consultancy, payroll management, and statutory compliance services.

Our support can help employers review bonus-related compliance requirements, strengthen payroll processes, identify documentation gaps, and improve the accuracy of employee payments.

For professional assistance with labour law and payroll compliance, visit the official website of Sankhla Corporate Services at www.sankhlaco.com.

Illustrative Example: How Minimum Wages Affect Diwali Bonus Calculation

Consider a company operating in India that is reviewing its payroll before Diwali 2026. The HR team wants to verify minimum wage compliance and calculate statutory bonus for an eligible employee.

Assumed employee details:

Note: These figures are illustrative only and do not represent the applicable minimum wage or statutory limits for any particular state or accounting year.

Step 1: Verify Minimum Wage Compliance

The employer must verify whether the employee's wages satisfy the applicable minimum wage notification.

In this example, the employee receives ₹18,000 per month, compared with an assumed applicable minimum wage of ₹15,000 per month.

The employee's monthly wages are ₹3,000 above the assumed minimum wage.

However, actual compliance must be determined using the applicable wage notification, employee category, and legally relevant definition of wages.

Step 2: Check Statutory Bonus Eligibility

The employer must separately determine whether the employee qualifies for statutory bonus under the applicable provisions of the Code on Wages, 2019.

This involves checking establishment coverage, the applicable bonus eligibility ceiling, qualifying service, and other statutory conditions.

Important: Receiving wages above the minimum wage does not automatically establish eligibility for statutory bonus.

Step 3: Determine the Applicable Bonus Calculation Base

For this illustration, assume that ₹7,000 is the applicable monthly bonus calculation base under the relevant statutory provisions.

The employee's annual calculation base would be:

₹7,000 × 12 = ₹84,000

The actual calculation base must be determined using the applicable law and notifications. The employer should not automatically use the employee's full gross salary or minimum wage as the bonus calculation base.

Step 4: Calculate the Illustrative Minimum Bonus

Assuming a full accounting year of qualifying service and a minimum bonus rate of 8.33%:

₹84,000 × 8.33% = approximately ₹6,997.20

The illustrative minimum bonus would therefore be approximately ₹6,997.

The final amount payable must be calculated in accordance with the applicable statutory provisions, including any relevant rounding and calculation requirements.

Step 5: Review the Final Diwali Bonus Payment

Before releasing the payment, the employer should:

• Verify minimum wage compliance independently.

• Confirm the employee's statutory bonus eligibility.

• Validate the applicable bonus calculation base.

• Check the minimum and maximum bonus requirements.

• Reconcile any permissible advance or interim bonus payments.

• Maintain the employee-wise calculation sheet and payment records.

Key Compliance Takeaway

Minimum wages and statutory bonus are separate compliance obligations. Paying an employee above the applicable minimum wage does not automatically establish statutory bonus eligibility, and paying a Diwali bonus does not compensate for any minimum wage shortfall.

Employers should review both requirements independently to maintain accurate payroll records and reduce labour law compliance risks.

Conclusion

Diwali bonus is an important part of employee engagement, but employers must distinguish between statutory bonus and voluntary festival payments.

The former Payment of Bonus Act, 1965 established important principles concerning eligibility, minimum and maximum bonus, calculation, adjustment, and payment deadlines. The relevant provisions of the Code on Wages, 2019 came into force on 21 November 2025, making it important for employers to review the current statutory framework and applicable notifications.

Before processing a Diwali bonus, employers should verify establishment coverage, employee eligibility, the applicable wage limits, the calculation method, payment deadlines, and the documentation required.

A structured bonus compliance process helps organisations maintain accurate payroll records, reduce disputes, and ensure that employees receive the amounts legally due to them.

For reliable labour law consultancy and payroll compliance support, connect with MS Sankhla & Co.

Disclaimer: This article is intended for general information and compliance awareness. The applicable legal position should be verified against the Code on Wages, 2019, relevant government notifications, applicable rules, and the specific facts of the establishment before making a bonus payment or adjustment.