1. Basic statutory formula

Under Sections 10 and 11 of the Payment of Bonus Act:

• Minimum bonus: 8.33% of salary/wage earned during the accounting year, subject to the statutory conditions.
• Maximum bonus: 20% of salary/wage earned during the accounting year.
• Where allocable surplus is sufficient, bonus is distributed proportionately according to salary/wages, subject to the 20% ceiling. 

A simplified formula is:

Bonus = Salary/Wage for statutory calculation × Applicable bonus rate

Example:

If the relevant annual salary/wage is ₹2,40,000:

• At 8.33% → approximately ₹19,992
• At 10% → ₹24,000
• At 15% → ₹36,000
• At 20% → ₹48,000

The actual statutory calculation must, however, account for the applicable statutory ceiling and the employee's qualifying salary/wage under Section 12.

2. Calculation where salary exceeds the statutory ceiling

Section 12 limits the salary/wage that is taken into account for calculating statutory bonus. Therefore, the employee's actual salary is not necessarily the figure used for bonus calculation.

The calculation is broadly:

Bonus = Statutory calculation salary × applicable percentage

Thus, a person receiving ₹50,000 per month cannot simply calculate statutory bonus by multiplying ₹50,000 × 12 × 8.33%.

The statutory ceiling applicable to the relevant period must first be identified. The statutory framework has been amended over time, so the applicable accounting year is important.

3. Gross profit → available surplus → allocable surplus

For establishments covered by the Act, calculation proceeds through several stages.

Step 1 — Gross profit

Gross profit is calculated under Section 4:

• Banking companies: First Schedule.
• Other establishments: Second Schedule. 

Step 2 — Available surplus

Broadly:

Available Surplus = Gross Profit − permissible deductions under Section 6

The statutory formula therefore does not simply distribute the employer's accounting profit. Certain deductions and statutory adjustments have to be made.

Step 3 — Allocable surplus

The Act then identifies the portion of available surplus that becomes allocable surplus for bonus purposes.

For many establishments, the relevant statutory proportion is 60%, while for certain companies the Act provides 67%. The exact statutory category must therefore be examined before calculation.

Step 4 — Determine bonus percentage

The allocable surplus is compared with the amount necessary to provide minimum and maximum bonus.

If the available allocable surplus is insufficient, the statutory minimum applies subject to the Act.

If it is sufficient, the bonus rate can rise above 8.33%, but cannot ordinarily exceed 20% under Section 11.

4. Set-on and set-off formula

The Payment of Bonus Act does not necessarily treat every accounting year in isolation.

Section 15 establishes the set-on/set-off mechanism.

Set-on

If allocable surplus exceeds the amount required to pay maximum bonus, the excess can be carried forward as set-on, subject to the statutory rules.

Set-off

If the allocable surplus is insufficient in a subsequent year, the earlier set-on can be used to meet the statutory bonus requirement.

The Fourth Schedule illustrates how this mechanism operates across accounting years.

Therefore:

Current-year bonus entitlement ≠ necessarily current-year surplus alone

The historical set-on/set-off position can affect the amount payable.

5. Proportionate reduction for incomplete working year

Section 13 deals with employees who have not worked all the working days in an accounting year.

The statutory minimum bonus can be proportionately reduced in the circumstances specified by the Act.

The calculation therefore requires consideration of:

Eligible bonus × applicable proportion of qualifying working days

However, the definition of “working days” is itself governed by Section 14, and statutory deemed-working days can affect the calculation.

6. Eligibility must be established before calculation

Section 8 generally requires an employee to have worked for at least 30 working days in the accounting year.

Thus, a calculation should proceed in this order:

1. Is the establishment covered?
2. Is the person an eligible employee?
3. Has the employee satisfied the minimum working-day requirement?
4. Is the employee disqualified under Section 9?
5. What salary/wage figure is legally relevant?
6. What is the allocable surplus?
7. Is there set-on/set-off?
8. What bonus percentage results?
9. Is the amount below the statutory minimum or above the statutory maximum?

The Supreme Court has emphasized that statutory bonus is not merely an employer's voluntary bounty once the statutory conditions are satisfied.

7. Six important case laws

1. The New Maneck Chowk Spinning & Weaving Co. Ltd. v. Textile Labour Association

1961 (Supreme Court)

The Supreme Court examined the principles underlying bonus calculation and the determination of available surplus. It emphasized that bonus calculations historically required determination of the surplus remaining after legitimate prior charges.

The case is important for understanding the conceptual foundation of the bonus formula: gross profits cannot simply be equated with the amount available for distribution as bonus. Proper statutory/prior deductions must first be considered.

Principle: Calculation of available surplus precedes determination of the amount distributable as bonus.

2. Jabalpur Bijli Ghar Karamchari Panchayat v. Jabalpur Electric Supply Co. Ltd.

1972 AIR 70; (1971) 2 SCC 502

The Supreme Court considered principles concerning festival bonus and the calculation/distribution of bonus.

The decision is significant for understanding the distinction between different claims described as “bonus” and the method by which an industrial adjudicator determines a bonus claim in the context of available surplus.

Principle: The character and basis of a bonus claim must be examined before applying a particular calculation formula.

3. Metal Box Company of India Ltd. v. Their Workmen

The Supreme Court considered the computation of direct taxes for purposes of calculating the surplus available for bonus.

The case illustrates why statutory bonus calculation involves several accounting adjustments rather than merely taking a company's final commercial profit and multiplying it by a percentage.

Principle: Statutory deductions and the legally prescribed computation methodology are relevant to determining the surplus from which bonus is calculated.

4. Pappu v. Raja Tile & Match Works

1988

The Court dealt directly with the computational nature of a statutory bonus claim. It explained that the Payment of Bonus Act links bonus to wages and establishes the minimum and maximum statutory rates.

Where liability to bonus is already established and the relevant wages and applicable rate are known, determination of the amount can become essentially a mathematical computation.

Principle: Once entitlement and the applicable rate are established, bonus may be recoverable through a computation proceeding rather than requiring determination of an entirely new substantive entitlement.

5. C.S. Swaminathan v. Simpson & Company Ltd.

2001 (Madras High Court)

The case concerns calculation of bonus where an employee had periods of absence without pay. The reported principle is that calculation cannot mechanically deduct absence from the statutory salary ceiling in a manner inconsistent with Section 12.

Principle: The statutory ceiling and the actual salary/wages earned must be distinguished when calculating bonus; absence-related calculations must follow the statutory scheme.

6. Mumbai Kamgar Sabha v. M/s Abdulbhai Faizullabhai

(1976) 3 SCC 591

The Supreme Court considered the statutory framework governing bonus and the relationship between industrial adjudication and the Payment of Bonus Act.

The principle is particularly relevant where an industrial tribunal attempts to determine bonus beyond what the statutory scheme permits. Subsequent Supreme Court authority has relied on this line of reasoning in explaining that industrial adjudication must operate consistently with the statutory bonus framework.

Principle: Industrial adjudication cannot disregard the mandatory statutory scheme governing bonus.

8. Practical calculation example

Suppose an eligible employee has:

• Statutory salary/wage for calculation: ₹7,000 per month
• Accounting year: 12 months
• Annual statutory calculation base: ₹84,000
• Applicable bonus rate: 10%

Then:

₹84,000 × 10% = ₹8,400

If the applicable rate is 8.33%:

₹84,000 × 8.33% ≈ ₹6,997

At 20%:

₹84,000 × 20% = ₹16,800

The actual amount must still be checked against the employee's eligibility, working days, statutory ceiling, allocable surplus and any applicable set-on/set-off.

9. Formula for HR/payroll purposes

A practical statutory-bonus calculation can therefore be represented as:

Step 1: Determine eligible employee
↓
Step 2: Determine qualifying salary/wage
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Step 3: Apply statutory salary ceiling
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Step 4: Calculate annual salary/wage for bonus
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Step 5: Calculate establishment's gross profit
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Step 6: Deduct statutory prior charges
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Step 7: Determine available surplus
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Step 8: Determine allocable surplus
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Step 9: Apply set-on/set-off
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Step 10: Determine applicable bonus percentage
↓
Step 11: Apply minimum/maximum limits
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Step 12: Apply proportionate reduction where legally required
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Step 13: Calculate and pay the employee's bonus.

Key takeaway

The simplest employee-level formula is:

Bonus = qualifying salary/wage × applicable bonus percentage

But the legal formula is broader because the applicable percentage itself depends on the statutory computation of gross profit, available surplus, allocable surplus and set-on/set-off. The minimum is generally 8.33% and the maximum 20%, subject to the detailed provisions of the Act.

Note: The Payment of Bonus Act, 1965 has undergone amendments, and the statutory salary ceiling and related figures have changed over time. For an actual payroll calculation, the accounting year and applicable law for that year should be identified before applying the formula.