Sections 40 and 41 of the Code on Wages, 2019: Public Sector Establishments and Non-applicability of Bonus Provisions
Sections 40 and 41 form part of Chapter IV of the Code on Wages, 2019, which deals with payment of bonus. Section 40 specifies when the bonus provisions apply to a public sector establishment, while Section 41 identifies categories to which the Chapter does not apply and states the general employment threshold for its application.
- Section 40 applies the bonus Chapter to a qualifying public sector establishment when it competes with a private sector establishment and the specified competitive income is at least 20% of its gross income for the accounting year.
- Except for the situation covered by Section 40(1), the bonus Chapter does not apply to employees of public sector establishments.
- Section 41(1) contains specific exclusions, including LIC employees, specified seamen, certain government and local-authority establishments, RBI employees and other listed categories.
- Subject to those exclusions, Section 41(2) applies the Chapter to an establishment employing, or having employed, 20 or more persons on any day during an accounting year.
Section 40: Application of Chapter IV to Public Sector Establishments
Section 40 creates a limited exception to the general exclusion of public sector establishments from the bonus provisions. Its focus is on public sector establishments carrying on commercial activity in competition with private sector establishments.
Statutory text of Section 40
40. (1) If in any accounting year an establishment in public sector sells any goods produced or manufactured by it or renders any services, in competition with an establishment in private sector, and the income from such sale or services or both, is not less than twenty per cent. of the gross income of the establishment in public sector for that year, then, the provisions of this Chapter shall apply in relation to such establishment in public sector as they apply in relation to a like establishment in private sector.
(2) Save as otherwise provided in sub-section (1), nothing in this Chapter shall apply to the employees employed by any establishment in public sector.
Meaning and effect of Section 40
For Section 40(1) to operate, the public sector establishment must sell goods produced or manufactured by it, render services, or do both in competition with a private sector establishment. In addition, the income from those competitive sales or services must be at least 20% of the public sector establishment's gross income for that accounting year.
When these conditions are satisfied, Chapter IV applies to the public sector establishment in the same manner as it applies to a comparable private sector establishment. Section 40(2) provides the converse rule: unless Section 40(1) applies, employees of a public sector establishment remain outside this bonus Chapter.
Section 41: Non-applicability of Chapter IV
Section 41 sets out express exclusions from the bonus Chapter. These exclusions operate even though other provisions of Chapter IV may otherwise appear applicable.
Statutory text of Section 41
41. (1) Nothing in this Chapter shall apply to -
(a) employees employed by the Life Insurance Corporation of India;
(b) seamen as defined in clause (42) of section 3 of the Merchant Shipping Act, 1958;
(c) employees registered or listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948, and employed by registered or listed employers;
(d) employees employed by an establishment under the authority of any department of the Central Government or a State Government or a local authority;
(e) employees employed by -
(i) the Indian Red Cross Society or any other institution of a like nature including its branches;
(ii) universities and other educational institutions;
(iii) institutions including hospitals, chamber of commerce and social welfare institutions established not for purposes of profit;
(f) employees employed by the Reserve Bank of India;
(g) employees employed by public sector financial institution other than a banking company, which the Central Government may, by notification, specify, having regard to -
(i) its capital structure;
(ii) its objectives and the nature of its activities;
(iii) the nature and extent of financial assistance or any concession given to it by the Government; and
(iv) any other relevant factor;
(h) employees employed by inland water transport establishments operating on routes passing through any other country; and
(i) employees of any other establishment which the appropriate Government may, by notification, exempt having regard to the overall benefits under any other scheme of profit sharing available in such establishments to the employees.
(2) Subject to the provisions of sub-section (1) and notwithstanding anything contained in any other provisions of this Chapter, the provisions of this Chapter shall apply to such establishment in which twenty or more persons are employed or were employed on any day during an accounting year.
How Sections 40 and 41 Work Together
| Provision | Rule | Practical effect |
|---|---|---|
| Section 40(1) | Specified public sector establishments competing with private sector and meeting the 20% income test are covered. | Chapter IV applies as it would to a like private sector establishment. |
| Section 40(2) | Other public sector employees are excluded. | Bonus provisions in Chapter IV ordinarily do not apply to them. |
| Section 41(1) | Lists categories expressly excluded from Chapter IV. | The statutory exclusions must be checked before applying the Chapter. |
| Section 41(2) | Subject to Section 41(1), establishments with 20 or more persons employed on any day in an accounting year are covered. | Provides the general establishment-size threshold for Chapter IV. |
Important Terms and Legal Context
Accounting year: The Code contains a specific definition of "accounting year" for purposes of its bonus provisions. The applicable accounting period should therefore be determined with reference to the Code rather than ordinary commercial usage alone.
Appropriate Government: The Code allocates functions between the Central Government and State Governments depending on the nature and control of the establishment. This is relevant to the exemption power under Section 41(1)(i).
Chapter IV: Sections 26 to 41 deal with payment of bonus, including eligibility, minimum and maximum bonus, allocable surplus, computation rules, set-on and set-off, time for payment, public sector application and exclusions.
Official Reference and Commencement
The Code on Wages, 2019 is Central Act No. 29 of 2019. The Central Government notification dated 21 November 2025 brought Sections 1 to 41, among other provisions, into force from that date. Readers dealing with a particular establishment should also check applicable notifications, rules and exemptions issued by the appropriate Government.
Read the Code on Wages, 2019 on the Ministry of Labour and Employment website.
Read the 21 November 2025 commencement notification.
Note: This page reproduces and explains the statutory provisions for general legal information. Notifications and rules applicable to a particular establishment should be verified before acting on the information.