Very Important Q2Minimum Wages — Definition & Fixation
Very Important Q3Payment of Gratuity Act, 1972
Important Q4Deductions & Set-on/Set-off under Bonus Act
Important
The Payment of Bonus Act, 1965 provides for the payment of bonus to employees in establishments based on profits or productivity. The Act applies to establishments with 20+ employees. Every eligible employee drawing up to ₹21,000/month is entitled to a minimum bonus of 8.33% of salary (even if no profits) and a maximum bonus of 20%. The bonus is calculated based on available surplus derived from gross profits after deductions.
✅ Worked at least 30 days in the year
✅ Establishment with 20+ employees
❌ Apprentices excluded
❌ Dismissed for fraud/violence excluded
📈 Maximum: 20% of salary
🧮 Calculated on salary/wages up to ₹7,000/month
📅 Paid within 8 months of closing of accounting year
- Application: Applies to every establishment with 20 or more employees; once applied, continues even if employee count drops below 20.
- Eligibility (S.8): Every employee drawing salary/wages up to ₹21,000/month who has worked at least 30 days in the accounting year.
- Minimum Bonus (S.10): Every employer must pay 8.33% of salary as minimum bonus, even if there is no profit or the establishment incurs a loss.
- Maximum Bonus (S.11): Where allocable surplus exceeds minimum bonus, employer pays up to 20% of salary proportionate to available surplus.
- Calculation base: Bonus calculated on salary/wages up to ₹7,000/month or minimum wage, whichever is higher.
- Available Surplus (S.5): Gross profits minus prior charges (depreciation, development rebate, direct taxes, dividends at prescribed rates).
- Allocable Surplus: 60% of available surplus (67% for banking companies).
- Time of payment (S.19): Within 8 months of the close of the accounting year.
| Section | What It Says | Why It Matters |
|---|---|---|
| S. 1(3) | Applies to establishments with 20+ employees | Threshold for applicability |
| S. 4 | Computation of gross profits | Starting point for bonus calculation |
| S. 5 | Available surplus = gross profit − prior charges | Determines how much is available for bonus |
| S. 8 | Eligibility — ≤ ₹21,000 salary, 30+ days worked | Defines who gets bonus |
| S. 10 | Minimum bonus — 8.33% | Guaranteed even without profits |
| S. 11 | Maximum bonus — 20% | Upper cap on bonus payable |
| S. 19 | Payment within 8 months of year-end | Time limit for disbursement |
- 20+ employees → Act applies
- ₹21,000 → salary ceiling for eligibility
- 30 days → minimum working days
- 8.33% minimum (even in loss) → 20% maximum
- ₹7,000 or min wage (whichever higher) → calculation base
- 60% of available surplus = allocable surplus (67% for banking)
- 8 months → time limit for payment
- Muir Mills → Full Bench Formula for bonus calculation
The Payment of Bonus Act, 1965 provides for payment of bonus to employees as their share in profits. It applies to every establishment with 20 or more employees. Every employee drawing salary up to ₹21,000/month who has worked at least 30 days is eligible. Section 10 mandates a minimum bonus of 8.33% of salary, payable even if the establishment suffers a loss. Section 11 caps the maximum at 20%. Bonus is calculated on salary up to ₹7,000 or minimum wage, whichever is higher. The calculation begins with gross profits (S.4), from which prior charges (depreciation, development rebate, direct taxes) are deducted to arrive at available surplus (S.5). 60% of available surplus constitutes the allocable surplus (67% for banking). Bonus must be paid within 8 months of the close of the accounting year (S.19). Non-payment attracts imprisonment up to 6 months or fine (S.28). In Muir Mills Co. v. Suti Mills Mazdoor Union (1955), the Supreme Court recognized the "Full Bench Formula" for bonus calculation.
1. Introduction
The Payment of Bonus Act, 1965 was enacted to provide for the payment of bonus to persons employed in certain establishments on the basis of profits or productivity. The concept of bonus originated from the idea that workers contribute to the generation of profits and therefore are entitled to a share.
2. Application (S.1)
The Act applies to every factory and every establishment where 20 or more persons are employed on any day during the accounting year. Once the Act applies to an establishment, it continues to apply even if the number of employees subsequently falls below 20.
3. Eligibility (S.8)
Every employee who draws a salary or wages not exceeding ₹21,000 per month and has worked in the establishment for not less than 30 working days in the accounting year is entitled to bonus. Apprentices under the Apprentices Act are excluded.
4. Disqualification (S.9)
An employee is disqualified from receiving bonus if dismissed for fraud, or riotous or violent behaviour on the premises, or theft, misappropriation, or sabotage of property.
5. Minimum Bonus — Section 10
Every employer is bound to pay a minimum bonus of 8.33% of the salary or wages earned during the accounting year, or ₹100 (whichever is higher), irrespective of whether the employer has any allocable surplus or not. This is a statutory obligation even in years of loss.
6. Maximum Bonus — Section 11
Where the allocable surplus exceeds the amount of minimum bonus, the employer shall pay bonus up to a maximum of 20% of the salary or wages, proportionate to the available surplus.
7. Computation of Bonus
a) Gross Profits — Section 4
The starting point is the computation of gross profits of the establishment for the accounting year, calculated as per the First Schedule (for banking companies) or Second Schedule (for other establishments).
b) Available Surplus — Section 5
From gross profits, the following prior charges are deducted under Section 6: depreciation allowable under the Income Tax Act, development rebate, investment allowance, direct taxes calculated as payable, and dividends at prescribed rates. The balance is the available surplus.
c) Allocable Surplus
60% of the available surplus is the allocable surplus for distribution as bonus. For banking companies, it is 67%.
8. Set-on and Set-off (S.15)
Where the allocable surplus exceeds the maximum bonus (20%), the excess is carried forward for set-on in the following years (up to 4 years). Where it falls short of the minimum bonus (8.33%), the deficiency is set-off against surplus in subsequent years.
9. Time of Payment — Section 19
Bonus must be paid within 8 months from the close of the accounting year. The appropriate government may extend this by a further period on the employer's application.
10. Penalty — Section 28
Contravention of the Act is punishable with imprisonment up to 6 months or fine up to ₹1,000 or both.
11. Conclusion
The Payment of Bonus Act ensures that employees receive a fair share of the establishment's profits. The statutory minimum of 8.33% provides a guaranteed floor, while the 20% cap balances employer interests with workers' right to participate in profits.
The Minimum Wages Act, 1948 empowers the appropriate government to fix and revise minimum wages for employees in scheduled employments. The Act provides two methods for fixation: the Committee Method and the Notification Method. Minimum wages must include basic rate of wages and a cost of living allowance (VDA), and must be revised at intervals not exceeding 5 years. The Act is a landmark social welfare legislation implementing Article 43 of the Constitution.
🟡 Notification Method (S.5) — Government publishes proposals in Official Gazette → invites objections (≥2 months) → finalises after considering objections
2️⃣ VDA (Variable Dearness Allowance)
3️⃣ Value of concessions for essentials (if any)
📅 Revision every 5 years maximum
- Scheduled Employment: The Act applies only to employments listed in the Schedule to the Act. Governments can add new employments to this schedule.
- Section 3 empowers the appropriate government to fix and revise minimum wages for scheduled employments, with revision at intervals not exceeding 5 years.
- Section 4 defines components: basic rate of wages (with or without cost of living allowance), Variable Dearness Allowance (VDA), and value of concessions.
- Section 5(1)(a) — Committee Method: Government appoints committees/sub-committees with equal representation of employers and employees + independent persons.
- Section 5(1)(b) — Notification Method: Government publishes proposals in the Official Gazette and allows minimum 2 months for objections before finalising.
- The Supreme Court in PUDR v. Union of India held that paying below minimum wage = forced labour under Art 23.
- Section 22 prescribes penalty of imprisonment up to 6 months or fine up to ₹500 or both for paying below minimum wages.
- Minimum wages can be fixed for different classes of workers, different localities, and different types of work — time-rate, piece-rate, or overtime.
| Section | What It Says | Why It Matters |
|---|---|---|
| S. 2(h) | Defines "scheduled employment" | Act only applies to listed employments |
| S. 3 | Fixation and revision of minimum wages | Government's power; revision max every 5 years |
| S. 4 | Components of minimum wages | Basic rate + VDA + concessions |
| S. 5(1)(a) | Committee Method | Committees with employer/employee representation |
| S. 5(1)(b) | Notification Method | Gazette notification + 2 months for objections |
| S. 22 | Penalty for paying below minimum wage | 6 months imprisonment or ₹500 fine or both |
- Two methods: Committee (S.5(1)(a)) + Notification (S.5(1)(b))
- Components: Basic rate + VDA + concessions
- 5 years max interval for revision
- 2 months minimum for objections in notification method
- PUDR case → below minimum wage = forced labour (Art 23)
- Bijay Cotton Mills → Act is constitutionally valid
- U. Unichoyi → employer difficulty doesn't invalidate fixation
- Penalty: 6 months jail / ₹500 fine
The Minimum Wages Act, 1948 implements Article 43 of the Constitution by empowering the government to fix minimum wages for scheduled employments. Section 4 states that minimum wages shall consist of a basic rate of wages and a Variable Dearness Allowance (VDA). Section 5 provides two methods of fixation: (1) Committee Method — government appoints committees with equal employer-employee representation to enquire and recommend wages; (2) Notification Method — government publishes proposals in the Official Gazette, allows minimum 2 months for objections, and then finalises. Section 3 requires revision at intervals not exceeding 5 years. In PUDR v. Union of India (1982), the Supreme Court held that paying below minimum wage amounts to forced labour under Article 23. In Bijay Cotton Mills v. State of Ajmer (1955), the Court upheld the Act's constitutional validity. Section 22 prescribes 6 months imprisonment or ₹500 fine for non-payment. The Act now stands subsumed under the Code on Wages, 2019 (not yet fully notified).
1. Introduction
The Minimum Wages Act, 1948 is one of the earliest and most important pieces of labour welfare legislation in India. It was enacted to prevent exploitation of workers, particularly in unorganised sectors, by ensuring a statutory floor of wages below which no employer can pay. It implements the directive principle contained in Article 43 of the Constitution.
2. Definition of Minimum Wages
Minimum wages are the wages fixed by the appropriate government under the Act for employees in scheduled employments. Section 4 provides that minimum wages shall consist of:
- A basic rate of wages and a special allowance (Variable Dearness Allowance — VDA) linked to the Consumer Price Index; or
- A basic rate of wages with or without the cost of living allowance; and
- The cash value of concessions in respect of supplies of essential commodities at concessional rates.
3. Fixation of Minimum Wages — Section 3
The appropriate government (Central or State) shall fix minimum wages for employees employed in scheduled employments. The government may fix different minimum wages for different scheduled employments, different classes of work, different localities, and for adults, adolescents, and children. Wages may be fixed by time-rate, piece-rate, or overtime rate.
4. Procedure for Fixation — Section 5
a) Committee Method — Section 5(1)(a)
The government appoints committees and sub-committees to hold enquiries and advise it in respect of fixation or revision of minimum wages. These committees must have equal representation of employers and employees and independent persons not exceeding one-third of the total.
b) Notification Method — Section 5(1)(b)
The government publishes its proposals in the Official Gazette for information of persons likely to be affected and specifies a period of not less than 2 months for receipt of representations. After considering representations, the government fixes or revises the minimum wages by notification.
5. Revision of Minimum Wages — Section 3(1)(b)
The appropriate government shall review and revise minimum wages at such intervals as it may think fit, but not exceeding 5 years.
6. Advisory Board — Section 7
The Central Government constitutes a Central Advisory Board and the State Government constitutes a State Advisory Board for coordinating the work of committees and advising the government on fixation and revision of minimum wages.
7. Judicial Pronouncements
- PUDR v. Union of India (1982) — Paying below minimum wage = forced labour under Art 23.
- Bijay Cotton Mills v. State of Ajmer (1955) — Act is constitutionally valid.
- U. Unichoyi v. State of Kerala (1962) — Employer's inability to pay is not a ground to challenge fixation.
8. Penalty — Section 22
Any employer who pays less than the minimum wage or contravenes the Act shall be punished with imprisonment up to 6 months or fine up to ₹500 or both.
9. Conclusion
The Minimum Wages Act is a fundamental social welfare legislation that ensures a minimum standard of living for workers. The Supreme Court's elevation of minimum wage to a constitutional right (Art 23) has strengthened its enforcement. The Act is now subsumed under the Code on Wages, 2019 (awaiting full notification).
The Payment of Gratuity Act, 1972 provides for a one-time lump sum payment to employees upon superannuation, retirement, resignation, or death/disablement after completing 5 years of continuous service. It applies to establishments with 10+ employees. Gratuity is calculated as 15 days' wages × years of service, subject to a maximum of ₹20 lakh. Nomination provisions ensure payment to the nominee in case of death.
✅ Retirement / Resignation (after 5 years)
✅ Death or disablement (no 5-year requirement)
❌ Terminated for moral turpitude? → can be forfeited
💰 Maximum: ₹20 lakh
📅 Payable within 30 days of it becoming due
⏳ 5 years continuous service required
- Application: Every establishment with 10 or more employees — factories, mines, oilfields, plantations, ports, railways, shops, and other establishments.
- Eligibility (S.4): Employee must complete 5 years of continuous service; this condition is relaxed in case of death or disablement.
- Gratuity = Last drawn wages × 15/26 × completed years of service. For piece-rated employees, average of last 3 months' total wages.
- Maximum (S.4(3)): Gratuity payable shall not exceed ₹20 lakh (enhanced from ₹10 lakh by 2018 amendment).
- Nomination (S.6): Every employee must make a nomination within 30 days of completing 1 year; if family exists, must nominate family member.
- Payment (S.7): Employer must pay within 30 days of gratuity becoming payable; delay attracts simple interest.
- Forfeiture (S.4(6)): Gratuity may be wholly or partly forfeited if terminated for riotous conduct, moral turpitude, or act causing financial loss to employer.
- The Act overrides all contracts — no employee can be denied gratuity by agreement; gratuity is a statutory right.
| Section | What It Says | Why It Matters |
|---|---|---|
| S. 1(3) | Applies to 10+ employee establishments | Threshold for application |
| S. 4(1) | Gratuity payable on termination after 5 years | Triggering events: superannuation, retirement, resignation, death |
| S. 4(2) | Formula: 15 days wages × years ÷ 26 | Calculation method |
| S. 4(3) | Maximum ₹20 lakh | Upper ceiling for gratuity |
| S. 6 | Nomination provisions | Ensures payment to right person on death |
| S. 4(6) | Forfeiture for misconduct | Moral turpitude, riotous conduct, financial loss |
- 10+ employees → Act applies
- 5 years continuous service (relaxed for death/disablement)
- 15 days wages × years ÷ 26 = gratuity amount
- ₹20 lakh maximum (2018 amendment)
- 30 days → payment deadline + interest on delay
- Nomination within 30 days of completing 1 year
- Forfeiture → moral turpitude, riotous conduct, financial loss
- 4 yrs + 240 days = deemed 5 years (Lalappa case)
The Payment of Gratuity Act, 1972 provides for payment of a lump sum on superannuation, retirement, resignation, or death/disablement. It applies to establishments with 10 or more employees. Section 4(1) requires 5 years of continuous service (relaxed for death/disablement). Gratuity = Last drawn wages × 15/26 × completed years of service, subject to a maximum of ₹20 lakh (S.4(3), amended 2018). "Wages" means basic + DA. Section 6 mandates nomination within 30 days of completing 1 year of service. Section 7 requires payment within 30 days; delay attracts simple interest. Section 4(6) permits forfeiture if terminated for riotous conduct, moral turpitude, or acts causing financial loss to the employer. In Surinder Singh Bhatia v. UoI, the Supreme Court held that gratuity is a statutory right, not a bounty. In Lalappa Lingappa v. Laxmi Vishnu, 4 years and 240 days was deemed sufficient as 5 years.
1. Introduction
The Payment of Gratuity Act, 1972 provides for a scheme of compulsory payment of gratuity — a lump sum reward — to employees in establishments employing 10 or more persons upon their superannuation, retirement, resignation, death, or disablement. Gratuity is a social security measure recognizing long and meritorious service.
2. Application — Section 1(3)
The Act applies to every factory, mine, oilfield, plantation, port, railway company, and every shop or establishment in which 10 or more persons are employed on any day of the preceding 12 months.
3. Eligibility — Section 4(1)
Gratuity is payable to an employee on the termination of employment after he has rendered continuous service of not less than 5 years on account of:
- Superannuation (reaching retirement age)
- Retirement or resignation
- Death or disablement due to accident or disease (5-year condition relaxed)
4. Calculation of Gratuity — Section 4(2)
The gratuity is calculated as: Last drawn wages × 15/26 × completed years of service. "Wages" means the basic pay plus dearness allowance. For piece-rated employees, it is the average of total wages for the last 3 months. A fraction of a year exceeding 6 months is counted as a full year.
5. Maximum Amount — Section 4(3)
The gratuity payable shall not exceed ₹20 lakh (enhanced from ₹10 lakh by the Payment of Gratuity (Amendment) Act, 2018).
6. Nomination — Section 6
Every employee shall make a nomination within 30 days of completing one year of service, conferring the right to receive gratuity upon the nominee in the event of death. If the employee has family, the nomination must be in favour of one or more family members.
7. Payment — Section 7
The employer must determine and pay gratuity within 30 days from the date it becomes payable. If the employer does not pay within this period, he shall pay simple interest at such rate as the government may notify.
8. Forfeiture — Section 4(6)
Gratuity may be wholly or partly forfeited if the services of the employee have been terminated for:
- Any act of riotous or disorderly conduct or violence on the premises
- Any act constituting an offence involving moral turpitude, provided he is convicted
- If the act has caused loss, damage, or destruction to employer's property — forfeited to the extent of such loss
9. Conclusion
The Payment of Gratuity Act provides an important social security benefit for workers upon the termination of their employment. It is a statutory right that cannot be denied by contract and ensures financial security for workers and their families.
Under the Payment of Bonus Act, 1965, bonus is calculated from the allocable surplus which is derived after deducting prior charges from gross profits. Section 6 specifies deductions (depreciation, development rebate, direct taxes, dividends). The set-on and set-off mechanism under Section 15 ensures that surplus years compensate for deficit years, creating a 4-year carry-forward system that balances employer obligations across accounting years.
2️⃣ Development rebate / investment allowance
3️⃣ Direct taxes payable
4️⃣ Dividends payable at prescribed rates
➡️ Gross profit − these = Available surplus
📉 Set-off (Deficit year): Allocable surplus less than min 8.33% → deficiency carried forward and set-off against future surplus
⏳ Carry-forward limit: 4 years
- Gross Profits (S.4): Computed as per First Schedule (banking) or Second Schedule (others). This is the starting point.
- Prior charges / Deductions (S.6): Depreciation, development rebate/investment allowance, direct taxes payable, and dividends at prescribed rates are deducted from gross profits.
- Available Surplus (S.5) = Gross Profits − Prior Charges (S.6).
- Allocable Surplus = 60% of available surplus (67% for banking companies). This is the pool from which bonus is paid.
- Set-on (S.15, Fourth Schedule): When allocable surplus exceeds the maximum bonus (20%), the excess is carried forward and "set-on" against future years (up to 4 years).
- Set-off (S.15, Fourth Schedule): When allocable surplus falls short of minimum bonus (8.33%), the deficiency is carried forward and "set-off" against future surplus (up to 4 years).
- The Fourth Schedule provides the detailed mechanism for computing set-on and set-off year by year.
- This mechanism ensures equitable distribution — surplus years supplement deficit years, and vice versa, over a rolling 4-year window.
| Section | What It Says | Why It Matters |
|---|---|---|
| S. 4 | Computation of gross profits | Starting point — Schedule I (banking) or II (others) |
| S. 5 | Available surplus | Gross profit minus prior charges under S.6 |
| S. 6 | Deductions: depreciation, taxes, dividends | Prior charges that reduce the bonus pool |
| S. 15 | Set-on and set-off mechanism | 4-year carry-forward of surplus/deficit |
| 4th Schedule | Detailed set-on/set-off computation | Year-by-year calculation framework |
- Flow: Gross Profit (S.4) → minus Deductions (S.6) → = Available Surplus (S.5) → × 60% = Allocable Surplus
- S.6 deductions: Depreciation, dev rebate, direct taxes, dividends
- Set-on: Surplus > 20% max → excess carried forward (4 years)
- Set-off: Surplus < 8.33% min → deficiency carried forward (4 years)
- 60% allocable surplus (67% banking)
- Fourth Schedule = detailed computation method
- Muir Mills → Full Bench Formula for prior charges
Under the Payment of Bonus Act, 1965, bonus is computed from the allocable surplus derived from gross profits. Section 4 provides for computation of gross profits as per the Schedules. Section 6 provides for deductions (prior charges) from gross profits: (1) depreciation allowable under the Income Tax Act, (2) development rebate/investment allowance, (3) direct taxes payable, and (4) dividends at prescribed rates. The balance is the available surplus (S.5), of which 60% (67% for banking) constitutes the allocable surplus. Section 15 read with the Fourth Schedule provides the set-on and set-off mechanism: when the allocable surplus exceeds maximum bonus (20%), the excess is "set-on" (carried forward up to 4 years). When it falls short of minimum bonus (8.33%), the deficiency is "set-off" against future surplus (up to 4 years). This mechanism ensures equitable treatment across good and bad financial years, so workers receive fair bonus even in loss years while surplus years compensate for deficiencies.
1. Introduction
The Payment of Bonus Act, 1965 provides a systematic framework for computing bonus based on the profits of the establishment. The key concepts in this computation are deductions from gross profits, available surplus, allocable surplus, and the set-on and set-off mechanism.
2. Computation of Gross Profits — Section 4
Gross profits are the starting point of bonus computation. They are calculated as per the First Schedule (for banking companies) or the Second Schedule (for all other establishments) to the Act.
3. Deductions from Gross Profits — Section 6
From the gross profits, the following prior charges are deducted under Section 6:
- Depreciation admissible under Section 32(1) of the Income Tax Act, 1961.
- Development rebate or investment allowance or development allowance deductible from income under the Income Tax Act.
- Direct taxes (income tax, super tax) computed as payable by the employer for the accounting year.
- Such further sums as are specified in respect of the employer including dividends payable at prescribed rates.
4. Available Surplus — Section 5
Available surplus = Gross Profits − Prior Charges (S.6). This is the amount from which bonus is actually distributable. If the available surplus is nil or negative, the employer must still pay the minimum bonus of 8.33% under Section 10.
5. Allocable Surplus
The allocable surplus is 60% of the available surplus in the case of other establishments and 67% in the case of banking companies. This is the actual pool from which bonus is distributed to eligible employees.
6. Set-on and Set-off — Section 15
a) Set-on (Carry Forward of Surplus)
Where the allocable surplus exceeds the maximum bonus payable (20%) to all eligible employees, the excess shall not be distributed immediately. Instead, it is carried forward to the succeeding accounting years (up to and including the 4th year) and is known as "set-on". In subsequent years, this set-on is added to the allocable surplus of that year.
b) Set-off (Carry Forward of Deficiency)
Where the allocable surplus falls short of the minimum bonus (8.33%), the deficiency shall be carried forward to the succeeding accounting years (up to the 4th year) and is known as "set-off". In subsequent years, this set-off is deducted from the allocable surplus of that year before distributing bonus.
c) Fourth Schedule
The Fourth Schedule of the Act provides the detailed year-by-year computation mechanism for set-on and set-off, showing how excess and deficiency are carried forward and adjusted.
7. Illustration
Year 1: Allocable surplus = ₹50 lakh; Max bonus (20%) = ₹30 lakh → Excess ₹20 lakh = Set-on carried to Year 2.
Year 2: Allocable surplus = ₹10 lakh; Min bonus (8.33%) = ₹15 lakh → Deficiency ₹5 lakh covered by Set-on from Year 1. Remaining set-on ₹15 lakh carried to Year 3.
Year 3: Allocable surplus = ₹5 lakh; Min bonus = ₹15 lakh → Deficiency ₹10 lakh. Set-on ₹15 lakh from Year 1 covers it. Remaining ₹5 lakh set-on carried forward.
8. Conclusion
The deductions, set-on, and set-off mechanism under the Payment of Bonus Act creates a balanced framework that protects both employer and employee interests. The 4-year carry-forward window ensures that bonus obligations are distributed equitably across profitable and loss-making years.