Bonus

Bonus: Meaning, Types, Statutory Bonus Rules & Calculation (2026)

A bonus is an extra payment made to an employee over and above normal salary, given for performance, tenure, a signing commitment, or as a statutory share of the employer’s surplus.  

In India, part of it is not optional: under the Code on Wages, 2019 (which replaced the Payment of Bonus Act, 1965 on 21 November 2025), covered employers must pay eligible employees a bonus of between 8.33% and 20% of their annual wages. Everything above that floor is a design choice. 

Bonus vs Incentive vs Commission vs Ex Gratia vs Variable Pay 

These terms get used as if they were synonyms in offer letters, and that is where many payout disputes start. 

Term	What it is	When it is paid	Statutory?	Tax treatment (India)
Statutory bonus	Annual bonus required by the Code on Wages, linked to allocable surplus but payable at a minimum of 8.33% even in a loss year	Within 8 months of the close of the accounting year	Yes, for covered employers and eligible employees	Salary income; TDS on payment
Performance bonus	Discretionary or policy-linked reward for results	Annual, half-yearly or quarterly	No	Salary income; TDS on payment
Incentive	Pre-agreed payout for hitting a defined target	On target achievement, often monthly	No	Salary income
Commission	A percentage of sales value booked by the employee	Per deal or per billing cycle	No	Salary income
Ex gratia	A goodwill payment with no legal obligation behind it	Festival season or one-off events	No	Salary income
Variable pay	The umbrella term for the whole at-risk portion of CTC	As per the plan document	No	Salary income

Read the table as a hierarchy of risk. Statutory bonus is a legal liability. Incentives and commissions are contractual once the number is achieved. Ex gratia is the only one an employer can stop without a legal argument, which is why festival payouts to employees outside the statutory bonus net are often labelled ex gratia. 

Statutory Bonus Under the Code on Wages 

Statutory bonus is now governed by Chapter IV (Sections 26 to 41) of the Code on Wages, 2019, which repealed the Payment of Bonus Act, 1965 from 21 November 2025.  

The core rules carried over: a minimum of 8.33%, a maximum of 20%, and the 30-day work requirement. 

Who Qualifies for Statutory Bonus? 

• Employer: factories and establishments employing 20 or more people are covered. 

• Employee: must have worked at least 30 days in the accounting year. 

• Wage ceiling: must earn wages within the ceiling notified by the government, currently applied as ₹21,000 a month. 

Employees can be disqualified from bonus if they are dismissed for fraud, riotous or violent behavior at the workplace, theft, misappropriation or sabotage of the employer’s property, or, newly under the Code, on conviction for sexual harassment. 

How Much Is Statutory Bonus? 

	Amount
Minimum	8.33% of wages earned in the year, or ₹100, whichever is higher, payable even if the employer made a loss
Maximum	20% of wages, depending on the employer’s allocable surplus
Calculation wage	Wages up to ₹7,000 a month or the applicable minimum wage, whichever is higher, as currently applied
“Wages”	Follow the Code on Wages definition: basic pay, dearness allowance and retaining allowance (plus any allowances counted back under the 50% rule)

Worked Example 

An employee earning ₹18,000 a month is within the ₹21,000 ceiling, so she qualifies. Her calculation wage is capped at ₹7,000 a month (assuming the minimum wage for her work is lower), giving annual calculation wages of ₹84,000. 

• At the 8.33% minimum: ₹6,997 

• At the 20% maximum: ₹16,800 

The same employee at ₹24,000 a month is above the ceiling, so any bonus she receives is contractual, discretionary or ex gratia, not statutory. 

When Is Statutory Bonus Paid? 

Within 8 months of the close of the accounting year. For employers with a financial year ending 31 March 2026, that means by 30 November 2026. 

Is Statutory Bonus Part of CTC? 

Often, yes. Many employers include statutory bonus in CTC, either as a separate annual line or spread across monthly pay. If your offer letter shows it, check whether it is paid monthly or as an annual lump sum. 

Will You Get Statutory Bonus If You Resign? 

Yes, if you qualified for the year. The entitlement depends on working 30 days in the accounting year, so a bonus proportionate to the wages you earned is usually payable even after you leave, unless you were dismissed on one of the disqualifying grounds above. 

Read the full bonus policy and your offer letter before relying on any summary, including this one. Pro-rata rules on resignation, probation exclusions and clawback windows sit in the policy document, not in the headline percentage. 

Types of Bonuses 

Each type solves a different problem. Pick by the behaviour you want, not by what the market pays. 

• Performance bonus: paid against individual, team or company KPIs. Best for roles with measurable output. 

• Annual bonus: a year-end share of company results, usually a fixed percentage of base pay. 

• Signing (joining) bonus: a one-time payment to close an offer, typically to cover a bonus forfeited or a notice period bought out at the previous employer. 

• Retention bonus: paid for staying through a defined window, such as a merger, system migration or client transition. 

• Spot bonus: small, fast, and discretionary. It works because it arrives within days of the act, not at year end. 

• Referral bonus: paid when a referred candidate joins and clears probation; often the cheapest sourcing channel an enterprise has. 

Performance and annual bonuses shape ongoing behaviour and deserve the most design effort.  

Signing and retention bonuses are hiring instruments and are best budgeted from the hiring line, not the compensation line.  

Spot and referral bonuses need speed more than governance. For the difference between discretionary and contractual payouts, see discretionary bonus. 

What Is Ex Gratia? 

Ex gratia (Latin for “by favour”) is a payment made voluntarily, with no legal obligation. In Indian payroll, it is most often paid to employees who earn above the statutory bonus ceiling and so aren’t entitled to statutory bonus, usually around festivals.  

It can also be a one-off goodwill payment, for example on retirement or to a family after an employee’s death. Ex gratia paid to employees is taxed as salary income. 

How Is a Bonus Calculated? 

Three methods cover almost every plan in use, and the choice decides how predictable your payroll accrual is. 

1. Percentage of base salary. A manager on ₹20 lakh base with a 15% target bonus earns ₹3 lakh at full achievement. Simple and easy to communicate, but weak at differentiating performers. 

2. Target-based. Payout is the target amount multiplied by an achievement factor tied to defined goals (revenue, delivery milestones, quality scores). So, 120% achievement on a ₹3 lakh target pays ₹3.6 lakh. 

3. Tiered. Payout steps up at thresholds: say 50% of targets below 90% achievement, 100% at 100%, and 150% above 115%. This concentrates money on top performers and suits sales and collections roles. 

Across designs, the evidence points out the same way: employees respond more to a payout rule they clearly understand than to the size of the pot. Publish the rule, not just the number. 

How Is a Bonus Taxed in India? 

Any bonus is taxed as salary income in the year it is received. TDS is deducted at the employee’s applicable rate in the month of payout; there is no separate flat bonus tax rate in India. 

This is why a bonus month often shows a sharp jump in TDS. Under the new tax regime, salaried employees pay no tax on income up to ₹12.75 lakh a year; a bonus that pushes annual income past that limit can make tax payable for the whole year, and the employer recovers it from the remaining months’ salary. 

Two practical points for payroll teams: 

• A joining bonus paid to a mid-year joiner can lead to over-deduction if TDS is projected on a full-year basis; the excess is refunded when the employee files their return. 

• A bonus declared in one financial year but paid in the next is generally taxed in the year of payment. 

Signing and Retention Bonuses as Hiring Levers 

From the recruiter’s side of the table, a signing bonus does one job well: it neutralises a loss. A candidate three months from a ₹4 lakh annual payout at her current employer isn’t weighing your base pay; she’s weighing what she’ll forfeit. Match the forfeited amount and the offer moves. 

• Size the signing bonus to the forfeiture, not to the band. Ask what is being left behind and when it would have vested. 

• Stage retention bonuses. Two or three tranches across 12 to 24 months hold people through the window you care about; a single payout at month 12 tends to produce exits in month 13. 

• Write the clawback in plain language. For example: if the employee resigns or is terminated for cause within 12 months of the payout date, the gross joining bonus is repayable on a pro-rata basis and may be adjusted against the full and final settlement. Vague wording is hard to enforce and sours the exit. 

Different recruitment teams see this play out differently by sector. 

In tech and product hiring, forfeited stock and bonus cycles dominate the negotiation. In BFSI, variable pay structures make the annual bonus the real compensation conversation. High-volume manufacturing and frontline hiring rarely needs a signing bonus; referral and joining incentives go further for the same rupee. 

Designing a Bonus Policy That Holds Up 

1. Define eligibility before the cycle, not after. State the probation rule, the mid-year joiner rule, the notice-period rule, and the pro-rata formula in writing. 

2. Say whether each bonus is discretionary or contractual. That one line decides whether you can reduce the pool in a weak year. 

3. Keep statutory bonus separate. Pay it to every eligible employee by the deadline, whatever the performance outcome. 

4. Communicate with the calculation, not just the number. Employees accept a lower payout they can reconstruct; they contest a higher one they can’t. 

5. Review annually against market data. Benchmarks move fast in tech and BFSI, and a stale target percentage quietly becomes a retention problem. 

On pro-rata rules: statutory bonus is earned by working 30 days in the accounting year, so it is due for the wages earned even after resignation.  

Discretionary performance bonuses commonly require the employee to be on the rolls on the payout date. These are two different rules in the same policy, and employees often confuse them. 

FAQs 

If your offers are losing candidates at the acceptance stage or your new joiners are leaving within the first year, the bonus structure is often part of the diagnosis.  

Talk to Taggd about building offers and retention economics into your hiring process.