Chapter IV - Payment of Bonus
Section 26 of the Code on Wages, 2019: Eligibility for Bonus, etc.
Section 26 lays down the core rules governing eligibility for annual bonus, the minimum and maximum bonus, the wage figure used for calculation, treatment of allocable surplus, productivity-linked bonus and special rules for newly established establishments.
Section 26 at a glance
| Who may qualify? | An employee drawing wages not exceeding the amount notified by the appropriate Government and who has worked for at least 30 days in the accounting year, subject to the Code and applicable notifications. |
|---|---|
| Minimum bonus | 8 1/3 per cent of wages earned during the accounting year or Rs. 100, whichever is higher, as stated in Section 26(1). |
| Maximum bonus | Where allocable surplus permits, bonus may rise up to 20 per cent of wages under Section 26(3). |
| Calculation ceiling | Where wages exceed the amount notified for calculation, Section 26(2) applies the notified amount or the applicable minimum wage, whichever is higher. |
| Production or productivity bonus | May be determined by agreement or settlement, but total bonus including minimum bonus cannot exceed 20 per cent of wages for the accounting year. |
Meaning and scope of Section 26
The Code on Wages, 2019 consolidates central law relating to wages and bonus. Section 26 is the principal eligibility and quantum provision in Chapter IV. It links bonus entitlement to the wage limit notified by the appropriate Government and to a minimum of 30 days of work in the accounting year.
The expression appropriate Government is defined by Section 2 of the Code and determines whether the Central Government or the relevant State Government is the authority for the establishment concerned. The expressions wages, employee, accounting year and allocable surplus should be read with the definitions and connected provisions of the Code.
Section 26 must also be read with the succeeding bonus provisions, including Section 27 on proportionate reduction, Section 28 on computation of working days, Section 29 on disqualification, and Section 36 on set-on and set-off of allocable surplus.
Text of Section 26 - Eligibility for bonus, etc.
26. (1) There shall be paid to every employee, drawing wages not exceeding such amount per mensem, as determined by notification, by the appropriate Government, by his employer, who has put in at least thirty days work in an accounting year, an annual minimum bonus calculated at the rate of eight and one-third per cent. of the wages earned by the employee or one hundred rupees, whichever is higher whether or not the employer has any allocable surplus during the previous accounting year.
(2) For the purpose of calculation of the bonus where the wages of the employee exceeds such amount per mensem, as determined by notification by the appropriate Government, the bonus payable to such employee under sub-sections (1) and (3) shall be calculated as if his wage were such amount, so determined by the appropriate Government or the minimum wage fixed by the appropriate Government, whichever is higher.
(3) Where in respect of any accounting year referred to in sub-section (1), the allocable surplus exceeds the amount of minimum bonus payable to the employees under that sub-section, the employer shall, in lieu of such minimum bonus, be bound to pay to every employee in respect of that accounting year, bonus which shall be an amount in proportion to the wages earned by the employee during the accounting year, subject to a maximum of twenty per cent. of such wages.
(4) In computing the allocable surplus under this section, the amount set on or the amount set off under the provisions of section 36 shall be taken into account in accordance with the provisions of that section.
(5) Any demand for bonus in excess of the bonus referred to in sub-section (1), either on the basis of production or productivity in an accounting year for which the bonus is payable shall be determined by an agreement or settlement between the employer and the employees, subject to the condition that the total bonus including the annual minimum bonus referred to in sub-section (1) shall not exceed twenty per cent. of the wages earned by the employee in the accounting year.
(6) In the first five accounting years following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, bonus shall be payable only in respect of the accounting year in which the employer derives profit from such establishment and such bonus shall be calculated in accordance with the provisions of this Code in relation to that year, but without applying the provisions of section 36.
(7) For the sixth and seventh accounting years following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, the provisions of section 36 shall apply subject to the following modifications, namely:-
(i) for the sixth accounting year set on or set off, as the case may be, shall be made, in the manner as may be prescribed by the Central Government, taking into account the excess or deficiency, if any, as the case may be, of the allocable surplus set on or set off in respect of the fifth and sixth accounting years;
(ii) for the seventh accounting year set on or set off, as the case may be, shall be made, in the manner as may be prescribed by the Central Government, taking into account the excess or deficiency, if any, as the case may be, of the allocable surplus set on or set off in respect of the fifth, sixth and seventh accounting years.
(8) From the eighth accounting year following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, the provisions of section 36 shall apply in relation to such establishment as they apply in relation to any other establishment.
Explanation 1.--For the purpose of sub-section (6), an employer shall not be deemed to have derived profit in any accounting year, unless--
(a) he has made provision for depreciation of that year to which he is entitled under the Income-tax Act or, as the case may be, under the agricultural income tax law; and
(b) the arrears of such depreciation and losses incurred by him in respect of the establishment for the previous accounting years have been fully set off against his profits.
Explanation 2.--For the purposes of sub-sections (6), (7) and (8), sale of the goods produced or manufactured during the course of the trial running of any factory or of the prospecting stage of any mine or an oil-field shall not be taken into consideration and where any question arises with regard to such production or manufacture, the appropriate Government may, after giving the parties a reasonable opportunity of representing the case, decide upon the issue.
(9) The provisions of sub-sections (6), (7) and (8) shall, so far as may be, apply to new departments or undertakings or branches set up by existing establishments.
Practical points under Section 26
1. Thirty days of work is the basic service condition
Section 26(1) requires at least 30 days of work in the accounting year. The computation of working days should be read with Section 28, while Section 27 deals with proportionate reduction of bonus in specified circumstances.
2. Minimum bonus is not dependent on allocable surplus
The statutory wording provides for the annual minimum bonus even where the employer has no allocable surplus during the previous accounting year, subject to the special provisions governing new establishments in sub-sections (6) to (9).
3. Bonus can increase up to 20 per cent
Where allocable surplus exceeds the amount needed for minimum bonus, Section 26(3) requires proportionate bonus subject to the statutory ceiling of 20 per cent of wages. Section 36 governs the related set-on and set-off mechanism.
4. Notified wage amounts must be checked
Section 26 does not itself insert a fixed monthly eligibility ceiling or calculation ceiling. It authorises the appropriate Government to determine the relevant amounts by notification. The applicable Central or State notification should therefore be verified before calculating entitlement.
5. New establishments receive special treatment
Sub-sections (6) to (9) phase in the ordinary bonus and set-on/set-off framework for new establishments, new departments, undertakings and branches. The first five accounting years are treated differently, followed by modified rules for the sixth and seventh years and the ordinary Section 36 framework from the eighth year.
Note: This page provides the statutory text and a general explanation. Bonus entitlement can depend on the applicable government notification, establishment, wage definition, accounting year and connected provisions of the Code.