Payment of Bonus Act 1965 Provisions, Background, and Importance

Published on 29 September 2025 by
Payment of Bonus Act 1965

In India, fair compensation goes beyond just wages. The Payment of Bonus Act, 1965 was introduced to ensure that employees receive an additional reward, called a bonus, based on the profits or productivity of the organization they work for. This Act not only motivates employees but also fosters a sense of shared growth between workers and employers, helping maintain industrial harmony and financial security for the workforce.

Payment of Bonus Act, 1965

Before the enactment of the Payment of Bonus Act, 1965, many workers were often left out of profit-sharing schemes, even when their efforts contributed directly to the success of the business. The Payment of Bonus Act provides a clear framework for eligibility, calculation, and distribution of bonuses, thereby promoting transparency and fairness in industrial establishments.

Background of the Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 was enacted by the Indian Parliament to provide a statutory right to employees for receiving a bonus. It came into force on 20th December 1965 and was aimed at regulating the payment of bonuses in factories and establishments with a specified number of employees. The law was introduced during a period when industrial growth in India was accelerating, and there was a pressing need to ensure equitable sharing of profits and maintain peaceful employer-employee relations.

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Objectives of the Act

The Act aims to promote fairness and protect workers’ financial interests by providing a clear legal framework for bonus payments.

  • Ensuring Fair Bonus Payments: The Act ensures that employees receive a minimum statutory bonus even if the organization’s profits are low, providing financial security and stability.
  • Linking Reward to Productivity: It establishes a system where employees’ bonuses are linked to the organization’s profits or productivity, creating incentives for better performance.
  • Industrial Harmony: By regulating bonus payments, the Act reduces potential disputes between employers and employees, fostering a harmonious work environment.

Applicability of the Act

The Payment of Bonus Act applies to establishments meeting certain workforce and wage criteria.

  • Eligible Establishments: The Act covers factories, shops, and other establishments employing 20 or more workers.
  • Employee Coverage: Employees earning wages up to a certain ceiling, which has been revised over time, are eligible for bonus payments.
  • Both Public and Private Sector: The Act applies uniformly to government and private sector establishments meeting the specified criteria.
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Key Definitions under the Act

The Act provides important definitions to clarify its scope and implementation.

  • Employee: Any person employed in a covered establishment, excluding certain managerial or supervisory staff, is entitled to bonus benefits under the Act.
  • Establishment: Includes factories, shops, and other industrial or commercial organizations employing the prescribed minimum number of workers.
  • Accounting Year: Refers to the period for which the profits of an organization are calculated to determine the bonus payable.
  • Bonus: Monetary reward payable to employees in addition to wages, based on profits or productivity, and governed by the minimum and maximum limits set in the Act.

Important Provisions of the Act

The Act contains several provisions regulating eligibility, computation, and payment of bonuses.

  • Eligibility for Bonus: Employees who have worked for at least 30 days in an accounting year are eligible to receive a bonus.
  • Minimum and Maximum Bonus: The Act prescribes a minimum bonus of 8.33% of annual wages and a maximum bonus of 20% for eligible employees.
  • Calculation of Bonus: Bonus is calculated based on the gross wages earned by the employee during the accounting year, excluding overtime.
  • Payment Timeline: Employers must pay the bonus within eight months from the end of the accounting year.
  • Authorities for Redressal: Employees can approach labour courts or tribunals in case of disputes regarding bonus payment.
  • Penalties for Employers: Failure to comply with the provisions of the Act can lead to fines and imprisonment for the employer.
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Amendments and Modern Relevance

The Payment of Bonus Act has been amended multiple times to enhance its coverage and make bonus payment rules more equitable.

  • Wage ceilings have been revised periodically to include more employees under the Act.
  • Calculation methods and payment timelines have been clarified for better compliance.
  • The Act remains relevant as it ensures that employees benefit from the success of the organization, promoting motivation, loyalty, and industrial peace.

Importance of the Act

The Payment of Bonus Act is crucial for maintaining fair treatment and financial security of workers in India.

  • Worker Protection: Guarantees a minimum bonus for eligible employees, preventing exploitation.
  • Industrial Harmony: Reduces disputes related to profit sharing and encourages cooperation between workers and management.
  • Incentive for Productivity: Ties employee rewards to organizational performance, motivating better performance.
  • Foundation for Wage Policy: Serves as a key piece of labour legislation that complements other wage-related laws in India.
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Relevance for UPSC EPFO and Other Exams

For aspirants preparing for UPSC EPFO, SSC, State PSC, and other competitive exams, the Payment of Bonus Act, 1965 is an important topic.

  • Questions often cover eligibility criteria, minimum and maximum bonus limits, calculation methods, and penalties.
  • Understanding this Act helps link wage-related laws with the Code on Wages, 2019, providing a broader perspective on labour reforms.
  • Knowledge of this Act highlights India’s approach to equitable profit sharing and industrial welfare, making it essential for exam preparation.

FAQs

1. What is the Payment of Bonus Act, 1965?
The Payment of Bonus Act, 1965 is an Indian labour law that mandates employers to pay a bonus to employees based on profits or productivity, ensuring fair remuneration and industrial harmony.

2. Who is eligible for bonus under the Payment of Bonus Act, 1965?
Employees who have worked for at least 30 days in a financial year in a covered establishment and earn wages below the prescribed ceiling are eligible for bonus payment under this Act.

3. What are the minimum and maximum bonus limits under the Act?
The Act specifies a minimum bonus of 8.33% of annual wages and a maximum bonus of 20%, depending on the employee’s earnings and the organization’s profits.

4. What is the time limit for payment of bonus to employees?
Employers are required to pay the bonus within eight months from the end of the accounting year. Delay in payment can lead to penalties and legal action.

5. Why is the Payment of Bonus Act, 1965 important for UPSC EPFO and other exams?
This Act is important for competitive exams as it covers key aspects of labour welfare, including eligibility, calculation, payment of bonus, and penalties, helping aspirants understand India’s wage regulation system.