Bonus — Meaning, Types & the Payment of Bonus Act, 1965

What Is a Bonus?

Statutory Bonus Under the Payment of Bonus Act, 1965

• Applies to establishments employing 20 or more persons and to employees earning wages up to a notified threshold.
• Minimum statutory bonus is 8.33% of annual salary/wages; maximum can go up to 20%, depending on the company's 'allocable surplus' as defined under the Act.
• Must generally be paid within 8 months of the close of the accounting/financial year.
• Applies irrespective of whether the company made a profit, subject to the minimum bonus provisions and specific exemptions for new establishments in their early years.

Types of Bonuses Paid by Indian Companies

• Statutory bonus — mandated under the Payment of Bonus Act for eligible employees
• Performance bonus — discretionary, tied to individual or team KPI/goal achievement
• Festival/ad hoc bonus — often paid around Diwali or other festivals, common in many Indian workplaces as a goodwill gesture
• Sign-on/joining bonus — a one-time payment to attract candidates, sometimes with a clawback clause if the employee exits early
• Retention bonus — paid to encourage a key employee to stay through a critical business period

How Bonus Differs from Incentive Pay

A bonus is generally a discretionary or statutory lump-sum payment, often annual, while incentive pay is typically a pre-defined, formula-driven payout tied directly to specific, measurable performance targets, often paid more frequently (monthly/quarterly).